An individual’s or organisations credit score and net worth are both very essential calculations, which have a huge impact on the lives of the person or business. They are both independent of each another yet they are not mutually exclusive.
There are many numbers one should know to understand whether or not one is in good financial shape, including cash flows, credit score and monies saved for retirement.
Credit rating can be a deciding factor on whether a company or individual would qualify to receive loans from financial institutions. Favourable ratings can permit enterprises and governments to borrow from public debt markets and institutions.
There are many factors, which are considered when determining personal credit ratings including a history of taking loans, balances as well as payment history.
Investors mostly decide upon whether to purchase or invest in a bond or stocks, based on the accounts of the firm, most importantly the company's credit rating.
If we are to look at the larger picture and focus on the nation, countries with good credit ratings have a greater likelihood to pull international bond purchasers in the form of foreign capital.
Individuals, corporations or governments must focus on improving credit ratings. One does not necessarily have good credit rating simply by having high net worth, likewise, everyone with excellent credit, unfortunately, is not wealthy. But what is net worth?
One important figure individuals must be aware of is their net worth. It is not a reflection on earning. It is the balance of assets and liabilities as at a particular point in time. Calculating the net worth accounts for all sources of wealth minus debts.
If you own a firm, the business value goes into the calculation of net worth as businesses are assets. Assets either liquid or illiquid are still assets; these include real estate, mutual funds, deposits, equity, businesses, precious metals, bonds, retirement funds and other fixed or current assets.
Liabilities include mortgage, loans, credit card debt, and any other debts. Net worth is the amount by which your assets exceed your liabilities. It works as a personal balance sheet. If one is to calculate the net worth of a company, the principal applied is the same, total assets minus total liabilities. In the case of companies, this is also known as shareholders equity.
A question we must ask is, in the calculation of net worth are we also accounting for the personal brand one carries? Some intangible assets such as personal brand or corporate brand/goodwill in the case of businesses, are not easily quantified.
We can witness from the Kenyan business news, many corporates who have issued corporate bonds have been defaulting on their payments. In the accounts presented by most banks, the provisioning and bad debts written off have also increased significantly over the past two years, what does this indicate about the credit rating of the defaulters?
It is often said “self-worth takes you further than net worth”, this being applicable on a personal, corporate and sovereign level.
Where do we stand with regards to credit rating as an economy? Kenya has a good track record of growth and macroeconomic stability. The government has also been focused on maintaining a favorable debt structure. But is this enough to counter the rising external and public debt levels, especially whilst the GDP per capita has been affected further since the onset of the Covid 19 pandemic?
Capital expenditure is expected to keep reducing as major national infrastructure projects such as the standard gauge railway are nearing completion. Nevertheless, the current expenditures will be high as the government follows through the post Covid-19 recovery plans.
As much as we are receiving loans and repayments are ongoing the borrowing is increasing. Timely repayments also work well towards maintaining the goodwill of the nation, which has a ripple effect and gives creditors confidence to issue possible further loans. We must constantly seek to improve our credit rating as well as personal brand whilst aiming at increasing our net worth by ensuring the growing assets outweigh growing liabilities.
The moral dilemma is, how many individuals, organisations or nations have increased their wealth at the expense of creditworthiness and by exploiting loopholes within the systems?