Bathtub Test

The Bathtub Test is a way to evaluate whether a financial organization, like a bank or insurance company, has enough cash and assets to cover its short-term obligations. Imagine filling a bathtub: the water level represents available assets, and the drain represents liabilities or payments due. The test examines if, under normal circumstances, the organization’s assets (water) are sufficient to meet its upcoming debts (drainage). If the water level stays high enough without overflowing, the organization is considered financially healthy and able to meet its obligations promptly.