| LIQUIDITY VERSUS PROFITABILITY: THE DILEMMA | | | | arises in deciding whether to favor liquidity or |
| OF THE FINANCE MANAGER | | | | profitability. It is not possible to favor both in one |
| Written By: Shafii Ndanusa Abuja, Nigeria. | | | | single decision. The more liquidity you keep, the less |
| The global economic crisis left in its wake a string of | | | | profitability you achieve. Likewise, the less liquidity |
| corporate failures across the different economies of | | | | you decide to keep, the more financial resources you |
| the world, regardless of the stage of economic and | | | | are able to channel to fixed capital investments which |
| political developments that different nations are faced | | | | eventually leads to more profitability. More of both |
| with. One of the worst industries hit is the financial | | | | choices are thus desirable, but mutually excluding. |
| industry which has led to a plethora of different | | | | Once a major asset allocation decision is to be made, |
| reform initiatives designed to reduce the undesirable | | | | there is need for the finance manager to strike a |
| impacts of the crises. From the Americas to Europe, | | | | balance between liquidity and profitability. Striking this |
| Africa and Asia, the ripple effects are still being felt | | | | balance is instinctively one of the major roles of the |
| by individuals, enterprises, industries and nations. This | | | | finance manager in any organization. Good practice |
| scenario provided an excellent opportunity for most | | | | takes cognizance of the context in which the decision |
| business and corporate analysts to conclude that the | | | | is to be made in addition to the peculiar |
| business failures were more as a result of the global | | | | circumstances of the enterprise as well as the short, |
| economic crisis rather than the conventional | | | | medium and long-term objectives of the enterprises' |
| management mistakes that has often been adduced | | | | management.The pattern of investments in fixed |
| as the chief reason for corporate failure. | | | | assets and current assets is usually a reflection of |
| Since the dawn of civilization when businesses | | | | management's preference for either profitability or |
| became more organized and strategic, when detailed | | | | liquidity. |
| records of financial transactions began to emerge, | | | | Overall, some of the factors affecting managers' |
| specifically with the advent of what is known today | | | | preference for either liquidity or profitability include |
| as the Balance Sheet, finance managers had come | | | | the individual managers' attitude to risk, the industry |
| face to face with a dilemma. It did not matter | | | | peculiarities, the general investment climate, cost of |
| whether there was a general economic downturn, | | | | borrowing both long and short-tem funds and the |
| each business enterprise needed to survive, grow | | | | current levels of return on the various classes of |
| and prosper well into the future. Each time a major | | | | fixed capital investment in the firms' portfolio, |
| investment decision had to be made, technically there | | | | amongst others. |
| is always a dilemma in choosing between keeping | | | | It is obvious that excessively high levels of liquidity |
| more or less liquidity or desiring less or more | | | | will not do any organization any good, particularly in |
| profitability. | | | | the long run as such an organization may be losing |
| For organizations that are purely profit-oriented, it is | | | | out on worthwhile investment opportunities. Low |
| easier to see the interplay of conflicting preferences. | | | | liquidity levels may limit an organizations' ability to |
| While for organizations that are non-profit, the desire | | | | respond to business emergencies. Low profitability |
| for profitability can be equated to the desire for | | | | levels may lead to slow speed of corporate growth |
| value-for-money in service delivery. The metrics for | | | | and may even affect a firms' market rating. One of |
| measuring value-for-money are as varied as their | | | | the probable dangers of high profitability levels is that |
| objectives hence a bit more difficult to fully | | | | it can create a false impression that an organization |
| appreciate. However, for all enterprises that wish to | | | | has fully matured and reached a comfort zone. The |
| operate in perpetuity, such enterprises must manage | | | | resultant effect is that the management of such |
| their financial resources in a way and manner that | | | | enterprises ends up becoming less strategic, less |
| ensures that they do not go under or become | | | | proactive and thus prone to corporate drift. |
| extinct. | | | | Corporate drift itself may end up leading to |
| The business environment around the world has | | | | corporate failure. |
| become increasingly competitive. Just like in any | | | | In summary, a proactive, vigilant and purposeful |
| venture, to succeed you have to find a way to have | | | | approach to the management of enterprises' financial |
| the best of resources in people, strategy, finance, | | | | resources is the key to corporate survival, growth |
| products and market niche. With respect to the | | | | and prosperity in the long run. |
| management of financial resources, a challenge usually | | | | |