Pay critical attention to liquidity and solvency - Andani urges businesses
The Chief Executive of Stanbic Bank Limited, Mr Alhassan Andani has said that companies must pay critical attention to solvency and liquidity issues in their operations since they are respectively the heart and soul of every business.
Mr Andani described liquidity as the heart of a business, while solvency can be likened to the soul. Therefore, if a company was insolvent, he said it was virtually dead – ‘the soul of the company is gone’Follow @Graphicgh
“If you are illiquid’, you are very sick, but you can be cured. When you are insolvent it means that your liabilities exceed your assets so you either need a bailout or your creditors will run over you,” he said.
Mr Andani explained however that strong internal controls could lead to an effective solvency and liquidity management system for every organisation.
He charged owners and directors of businesses, especially banks, to understand the intricate interplay between the assets and the liabilities especially taking into consideration the tradeable assets in order not to run into a mismatch.
Mr Andani explained this to the paper ahead of the GRAPHIC BUSINESS/Stanbic Bank Breakfast Meeting on May 15 at the Labadi Beach Hotel.
On the theme: “Liquidity and solvency management – boosting the health of banking in Ghana,” the meeting will be the second of four to be organised this year by the two institutions for experts to deliberate on key issues affecting the economy.
The discussion will be led by the Governor of the Bank of Ghana, Dr Ernest Addison. Other panelists at the forum include the Senior Country Partner of PricewaterhouseCoopers (PwC), Mr Vish Ashiagbor, and Mr Andani.
Last year, the Bank of Ghana revoked the licences of former UT and Capital banks, which it described as being deeply insolvent.
The liabilities of the two defunct banks had outstripped their assets and the owners and managers of UT and Capital banks were unable to increase the capital of the banks to address the insolvency.
Again, on March 20 this year, the BoG announced that uniBank, which had been facing insolvency and liquidity challenges over the past two years, had been placed under the management of auditing and accounting firm, KPMG as the official administrator.
Solvency and liquidity
“Banks by their role of financial intermediation create significant assets so they must pay daily attention to their liquidity and solvency position. Most of the turmoil that we have in the market is because we don’t pay critical attention to liquidity and solvency positions,’ he explained.
“Indeed, this is not just about banks but also with other businesses because illiquidity is when the current claims on your business exceed the cash being generated so when that happens and you are not able to meet your short-term obligations then you are in for trouble.”.
In furtherance to the above, he indicated that liquidity was a company’s ability to meet with all current maturing liabilities when they fall due.
“When your maturing current liabilities cannot be met out of the cashflow, it means you’re illiquid. Being illiquid means you may have lots of assets but cannot be sold,” he stated.
He added that it was not just enough to see the balance sheet of a company and think that everything was satisfactory, because the assets had grown, however, the important question still remained; how liquid are those assets? “Once that question can’t be answered then there is a problem”.
He said too much success could also lead to illiquidity and insolvency and vice versa.
“Even when your business is prospering, you can run into trouble because everybody wants to buy your product, without checking yourself, you go and stock your warehouse which would eventually create a huge inventory just because there is demand.
“ If you’ve created those assets, your creditors will come in knocking for their funds, what do you do? A lot of receivables not collected then all of a sudden a very successful business goes bust, he indicated”