News of the week
IN 2019 President Cyril Ramaphosa took the bold step of placing our national carrier, South African Airways (SAA), under business rescue. This came after it emerged that the airline was being mismanaged, wasn’t making enough money and couldn’t pay its debts.
Mismanagement is when directors of a company or organisation make poor decisions, particularly with regard to money. The airline was also hit hard by the Covid-19 pandemic. SAA was unable to make money as travel ground to a halt when we went into lockdown.
What is business rescue?
It is a process put in place to support a company that’s financially troubled or distressed. While the company is under business rescue, specialists conduct investigations to decide whether it should continue operating, the aim being to prevent it from being liquidated or shut down.
Government officials, lawyers, accountants and SAA management were in ongoing discussions to come up with a plan to save the airline.
To reduce costs, SAA’s staff was cut by 80% and a portion of its debt, which runs into billions of rands, was reduced after negotiations with creditors. Last month it was announced that SAA was close to being “solvent and liquid”.
What is solvency and liquidity?
In business terms, solvency refers to a company’s ability to meet its longterm financial commitments to continue successfully operating in the future.
Long-term debts are monies that are payable over more than 12 months, such as a bond to pay off a property.
When a business becomes insolvent, it means it doesn’t have enough money to pay all its bills or meet its financial obligations (see Word of the Week).
Liquidity refers to its ability to pay its short-term commitments. These include bank loans, wages and salaries that are paid to staff.
When a company is pronounced solvent and liquid it helps investors to decide whether to continue putting money into it.
Investors are usually reluctant to invest in a company with these issues.
If a company’s debt is greater than its assets (things it owns such as shares, buildings, cash and equipment) it is usually a sign that it is not in good shape financially, and owes more money than it has.