Solvency refers to a firm’s ability to obtain cash for business operations. Specifically, it refers to a firm’s ability to pay its debts as they become due. Solvency is necessary for a firm to be considered a “going concern.” Insolvency may result in liquidation and losses to owners and creditors. In addition, the threat of insolvency may cause the capital markets to react by increasing the cost of capital in the future; that is, the amount of risk is increased.