Credit Management And Liquidity Of Manufacturing Company

Project and Seminar Material for Accountancy / Accounting

Abstract

The study examined credit management and liquidity of manufacturing company. The objectives of the study includes to examine the relationship between average collection period a firms liquidity, to examine if there is a significant relationship between average payment period and the liquidity of a firm, to find out how debt affects the liquidity of a firm and to establish if there is a significant relationship between credit policy and liquidity of a firm. A sample of fifty companies was selected and data generated from the annual financial reports. The findings obtained were that debtors collection period enhance liquidity of quoted manufacturing firms in Nigeria and was observed to be significant and positively associated with liquidity (current ratio) and creditors payment period was found to reduce liquidity in Nigeria and is negatively correlated with liquidity of quoted manufacturing firms. It is therefore suggested that the overall state of liquidity should be improved so as to have a favourable impact on the profitability of the company and also, the establishment of cash conversion period which has the potential to improve profitability.

Chapter One

Introduction

1.1 Background of the Study

Credit management is a term used to identify accounting functions usually conducted under the umbrella of accounts receivables. Essentially, this collection of processes involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on a customer invoice. When functioning efficiently, credit management serves as an excellent way for business to remain financially stable.

Competent credit management seeks to not only protect the vendor from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner.

Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit. This may include; gathering data on the potential customer’s, current financial condition including the current credit score..

1.2 Statement of the Problem

There are many problems companies encounter as a result of poor credit management. Thus, the problems inherent in this research study as investigated are as follows:

There is a high rate of bad debts because some corporations take advantage of the credit that is extended to them and find themselves not able to pay debt later.
The poor level of trade credit management is reflected in the liquidity and profitability position of the firm.
The inability of business policy makers to certainly say how effectively, credit management other makes or mars the performance of the business in terms of profitability.
Furthermore, lack of experienced staff or officers to tackle onerous and vital duties of managing debts appropriately.
Also, limitation and inadequate training opportunities for key treasury or supporting staff.
Finally, failure to comply with the agreed terms of agreement with the company upon when paying the debt.

1.3 Objective of the Study

The main objective of this study is to appraise the impact of credit management on the profitability of manufacturing firms and also providing effective means of reducing default in collection of accounts.

Other objectives include the following:

To appraise the effects of the credit management on the profitability of the company.
Identifying the problems associated with credit management in manufacturing firms.
To investigate the advantages of effective and efficient management of trade credit.
To also show how to reduce losses caused by bad debt through the use of effective and sound collection policy and procedures.
It is also very necessary for a firm to critically evaluate the individual account of the customers to enable it obtain the necessary credit
information about them and to devise appropriate collection procedures for effective collection of account.
To examine whether the credit management principles applied by the firm is appropriate and effective.
To encourage staff to always be at an alert in respect of knowing who their debtors are.

1.3 Formulation of Research Hypotheses

The following hypotheses are formulated for the purpose of this research work.

Ho: Firm’s do not make some profits when trade credit questions
H1: Firm’s do make some profit when they extend credit to customers.
Ho: Its credit information about customers does not help in reducing bad debt losses.
H2: Its credit information about customers help in reducing bad debt losses.
Ho: Firms that sale on credit to their customers do not make more sales than those who sale in cash.
H3: Firm’s that sale on credit to their customers do make more sales than those who save in cash.

1.4 Research Questions

Base on the problems which this research work is aimed at finding solutions to, the following questions are put forward in finding solutions to the problems.

Does credit management have any effect on the profitability of a company?
Can trade credit be phased out completely from a company’s business dealing?
How can a firm enforce collection of it’s over due debts?
Has any company through the aid of trade credit facility achieved high profit index?
Can the liquidity and profitability objectives of the company be achieved through the use of credit facilities?

1.5 Significance of the Study

This research work will be of great significance to the staff of Unilever Nigeria Plc. It will go a long way in enlightening them on the concept of credit management accounting as well as the best strategies to be adopted to monitor debts. This research work will as well be of benefit to students and researchers because it would widen their scope from the information contained in this research work and lastly, it will also be of help to the entire nation by also enlightening them on the importance of managing debt and finding the best possible measures in settling debts as at when due.

1.6 Scope of the Study

This research work on the impact of credit management on the profitability of a manufacturing firm is focused on Unilever Nigeria Plc. Aba State.

1.7 Limitations of the Study

In the course of this research work, the researcher encountered some bureaucratic problems which are very peculiar to Nigeria firms.

These factors are as follows:

1. Time:

The time specified for submission for this research work was obviously too short and as such, was unable to go about Unilever Nigeria Plc thoroughly in carrying out this research.

2. Lack of Knowledgeable and Sincere Personnels:

Some of the officials employed in most manufacturing firms including that of Unilever Nigeria Plc has no knowledge on the ways of ensuring that credit management works effectively and they are also not approachable because they place themselves on a very high esteem and even when I was opportune to interview them, there were lots of shortcomings from the basis such as deliberate distortion of facts and amongst others.

3. Lack of Facilities:

Research facilities such as transportation make research easy and interesting. But it is often noted that Nigeria has a poor transportation system which greatly affected me in conducting this research.

1.8 Definition of Terms

For easy comprehension of this research work, the writer intends to define the following terms:

1. Accounts Receivable:

This is the total sum which is being owed to Unilever Nig Plc by its customers at any particular accounting period.

2. Bad debts:

They are losses which are incurred by Unilever Nig Plc when some of its customers fail to pay part or all the money being owed to the firm.

3. Trade credit:

Is any amount for goods and or resources which remain unpaid at the time of purchase of such goods or services but which is deferred for future use.

4. Liquidity:

This is used to describe the assets of firms which are easily convertible to cash.

5. Solvency:

We use this term to express a firm’s liabilities or obligations as they fall due or simply put a state of being able to pay debts as they fall due.

Chapter Five

Summary of Findings, Conclusion and Recommendations

5.1 Summary of Findings

From the responses gotten from the respondents, some interesting findings were made. The results of the researcher’s findings were collected from all the departments involved of Unilever Plc Aba Nigeria.

The findings of the study as deduced from the tables in chapter four reveal the following regarding credit management in manufacturing firm.

Major Findings

Firms maintain minimum investments in account receivable, giving short term credit as firms now prefer to trade on cash.
In Unilever Plc Aba, when a customer fails to pay at the due date, further supplies are withheld until payment is made. If he continues to be delinquent in his payment attitude, his distributorship license is revoked. Thus, depending on the materiality of the debt, a legal action may be instituted.
Also, credit practices are going down as a result of economic and political instability, poor liquidity condition of most customers, inherent fluctuation and uncertainty of business operation in Nigeria.
It was also discovered that the company maintains flexibility in their credit policies.
The company maintains adequate books of accounts for their customers (contributors).

More also, the three hypotheses formulated for the study was fasted. The test technique however was chi-square.

5.1 Conclusion

This research has gone to a reasonable extent to find out sources and problems associated with the management role in the profitability of manufacturing industries.

From the research carried out so far, the researcher was able to note that:

Firms who sale on credit do not make more profit than their counterparts who sale in cash.
Firms do not make any profit from credit extension to customers considering the time value of money and the average collection period including over due debts.
Effective management of trade can help in reducing bad debt.
Also credit information does not guarantee a bad debt free transaction as it relates to trade credit customers.
Since Unilever Plc. Aba maintains a flexible credit policy, there is likely to be a boost in sales resulting in an increase in revenue and profit of the company.

Hence, firms should manage trade credit well since it cannot be done away with.

5.2 Recommendations

After detailed examination of the impact of credit management in a manufacturing firm (Unilever Plc Aba). The investigator wishes to make the following recommendations which would benefit the company in the particular and the other manufacturing firms in general.

As credit sales is almost inevitable, a credit department should be established in the firm, handed by a credit controller and charged with the responsibility of implementing credit policies.
There should be a regular review of credit policies to suit the changes in the business environment.
A prospective creditor should be assessed properly to ascertain his credit worthiness possibly using the 5c’s of credit before extending credit to him.
An enquiry unit should be established to take responsibility for prospective creditor’s assessments.
For control purpose, relevant financial ratios should be computed at the end of each financial year for comparison purpose.