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Cashflow Test
Balance Sheet Test

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The Balance Sheet Test

The balance sheet test includes contingent and prospective liabilities. This is confusing because if you take this definition in its literal form, there will be few companies - after having taken account of future rents due - that are solvent. 

However - for simplicity's sake - assume that if the prospective liabilities (say rent) generate positive cashflows (rather than cash outflows) then the prospective liability need not to be taken into consideration. But... if the reverse is true, then you should include the prospective liability.

The illustration below demonstrates the "Balance Sheet Test"

Total assets
x x x x x x
Total liabilities
(including contingent and prospective liabilities)
(x x x x x x)
If NEGATIVE you are insolvent on a Balance Sheet test basis (x x x x x x)

Remember......it is vital to take professional advice from a specialist in insolvency.

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