A type of insolvency that arises from lack of sufficient cash flows to meet obligations, though an entity has a good balance sheet. An entity might be tight in cash position, not having enough liquid assets to pay its debts and obligations when these fall due.

An entity might have sufficient assets in the form of investments, marketable securities, property. However, lack of sufficient cash flows means an entity will be unable to meet its short-term obligations. Non-cash assets and illiquid assets take time to sell or otherwise convert into cash. Unlike accounting insolvency (balance sheet insolvency), cash flow insolvency arises due an entity’s inability to properly and timely manage its cash flows.

A cash flow insolvent business is one that cannot make timely payment to its creditors such as lenders, suppliers, and vendors.

Cash flow insolvency may imply a situation of imminent or near-imminent insolvency. Inability of an entity to address the roots of the problem, this type of insolvency may mean immediate financial stress ahead, particularly when it reaches a point where it cannot change course. In certain instances of cash flow insolvency, an entity would have to take desperate measures, possibility ending up in liquidation. For entities with good balance sheet, operations may continue only after enough capital is injected to cover immediate liabilities. Otherwise, it would not be able to cover its liabilities, and so will be liquidated to make necessary repayments.

Cash flow insolvency is also known as equitable insolvency or ability to pay test.