What is solvency?
- By Book Keeping Pros
- Sources checked 16 Oct 2026
Definition
Solvency is the ability to pay all of your debts as each one falls due for payment, from supplier bills and rent to loan repayments. A person or business that can do this is solvent, and one that cannot is insolvent. The Corporations Act 2001 sets out the meaning of solvent in section 95A.
Solvency is about every debt, not only the ones that come to mind first. Supplier bills, rent, loan and lease repayments and credit card balances each have their own due date. Whether they can all be paid on time is answered from the records, so the records need to hold all of them.
Solvency and profit answer different questions. Profit compares income with expenses over a period, while solvency asks whether each debt can be paid on the day it is due, so a profitable year does not by itself show that the bills can be met.
In Australia
Section 95A of the Corporations Act 2001 sets the test for being solvent: being able to pay all of your debts as each one becomes due and payable. Under the same section, a person who does not meet that test is insolvent.
business.gov.au's page on recognising the signs of financial trouble says that a business unable to generate enough profit may not be able to meet its financial obligations or manage its debts.
Common mistakes
- Keeping no list of supplier bills until they are paid, so debts already owed are missing from the picture.
- Judging whether debts can be met from the year's profit rather than from what falls due and the cash expected to pay it.
- Leaving loan repayments, lease payments or credit card balances off the list of what the business owes.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Corporations Act 2001, section 95A
Federal Register of Legislation, Office of Parliamentary Counsel. Compilation No. 149, 19 September 2026, released 19 September 2026. Checked 16 October 2026.
Based on content from the Federal Register of Legislation at 15 October 2026. For the latest information on Australian Government legislation please go to https://www.legislation.gov.au. Licence: CC BY 4.0.
- Warning signs your business is in financial trouble
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.