The Significance Of Credit Management In Business Organization

Project and Seminar Material for Business Administration and Management BAM

The Significance Of Credit Management In Business Organization


Proposal


This project is to enlighten, motivate and give understating on the significance of Credit management in business organization, the Chapter One aspect will give details in background of study, statement of problems objectives, scope of study, definition of the terms, the working hypothesis, history review shall emphasis on the need for credit management, credit policy, collection, level of risk, historical standard for credit worthness indicators, account of sales and credit insurance.

The chapter three involve the research methodology, research design, determination of population and sample size, processing data, reliability of data and validity of data, Chapter four is concern with presentation, analysis an interpretation of data.

The Chapter five at the project will design the summary, conclusion, literature, recommendation, references and questionnaire of the project.


Table of Contents


  • Title page
  • Certification page
  • Dedication page
  • Acknowledgements
  • Abstract
  • Table of contents

Chapter One

Introduction

  • 1.1 Background of the study
  • 1.2 Statement of problem
  • 1.3 Objective of the study
  • 1.4 Significance of the study
  • 1.5 Scope of the study
  • 1.6 Definition of terms
  • 1.7 The working hypothesis
  • 1.8 History of the company
  • 1.9 Administration of a global soap

Chapter Two

2.1 Literature Review

  • 2.2 The Need for credit management
  • 2.3 Credit policy, credit control procedures and credit reporting
  • 2.4 Collection and deciding acceptable level of risk
  • 2.5 Collection policies and procedures
  • 2.6 Accounts receivable, account payable and reconciliation of accounts
  • 2.7 The role of debtors statement terms of sales
  • 2.8 Selecting a credit worthy customer
  • 2.9 Credit insurance

Chapter Three

3.0 Research Methodology

  • 3.1 Research design
  • 3.2 Types and method of data collection
  • 3.3 Determination of population and samples size
  • 3.4 Questionnaire design and administration
  • 3.5 Processing of data
  • 3.6 Questionnaire assumptions
  • 3.7 Reliability of data
  • 3.8 Validity of data

Chapter Four

4.0 Presentation, Analysis and Interpretation of Data

  • 4.1 Analysis procedures
  • 4.2 Testing hypothesis

Chapter Five

5.0 Summary of the Major Findings, Conclusion and Recommendation of the Study

  • 5.1 Summary of the major findings
  • 5.2 Conclusion
  • 5.3 Limitations of the study
  • 5.4 Recommendation of the study
  • Appendix
  • References
  • Questionnaire

Chapter One


Introduction

1.1 Background of the Study

In some years back, cash management has become the most important sector of the financial management in many trading organization. This is because without adequate cash, a business can not exist. For this reason, cash is often des cribed as the life blood of a business and it controls the means of maintaining commercial health. This serves. To emphasis one vital message that liquidity is a pre-requisite for commercial life and cash management is as natural as staying alive.

For single purpose of securing sales, credit is extended to customers, credit sales, therefore, has been an essential tool of modern competitive economic systems. It is an important marketing tool to aid sales of goods.

Generally, it is made on open account (i.e. no formal acknowledgement, of debt. Obligation through a financial documents) but in order to achieve its aim of securing sales, it is essential therefore, that it achieves this and that it does so profitably.

Credit management is the term given to this, failure to apply such control, often leads to emergency collection of debts, and since total debtors are more in value and nature with the daily change in business there is no substitute for a proper credit management system many business that gives credit to its customers.

A carefully considered credit policy is needed by any company that sells goods or provides services on credit. The state of development that this policy has reached will obviously vary from one organization to another. In some companies goods may be sold on credit because competitors provide generous credit facilities and as a result no real consideration may have been given to the circumstances in which credit would be given or not. In not more efficient company, however credit policy will almost certainly have been considered much more seriously very often as part of the overall aims and objectives of the organization.

This is because credit policy can have a significance influence upon sales, credit policy provides framework to determine whether or not to extend credit to a customer and how much credit to extend. It operates through the credit standards and credit analysis. Credit standard gives the basic criteria for the extension of credit to a customer.

This is done through some various mean like.

  1. Credit rating; looking into past records through agencies and deducing the credit worthiness.
  2. Credit reference: data of the prospective debtors as gather by bank, old customers e.t.c

On the other hand, credit analysis involves procedures for evaluating credit applicants

This will be proceeded by the collection of information. The services of information may be through

Financial statement: at the time of prospective sales the seller may request a financial statement as one of the most desirable sources of information for credit analysis. Having collected the credit information, be firm will make a credit analysis of the applicants.

Collection policy undertakes the combination of collection procedure it also includes the expression of credit terms. These are the terms and condition on which trade credit will be made available. It stipulates the repayment terms of receivables. Credit terms involve both the length of the credit period and the discounts given. This is essential control that no business could afford to ignore. It takes the liquidity problem of the business as its credit system and hence, the significance of credit management is necessary to be studied.


1.2 Statement of Problem

This research work is aimed at finding out the significance of credit management in business organization.

Therefore, the research work looks into the under listed problems which might be facing the organization in order to draw inferences on the best solution to problem these are:

  1. Whether credit extension have any effects on turnover
  2. Whether credit extension influence the stay of customer in a particular organization
  3. Whether credit extension have any positive or negative effect on the overall performance of the organization
  4. Whether credit extension is the cause of cash shortage i.e. liquidity problem

1.3 Objectives of the Study

Sales is not complete until cash is in the bill, therefore, the control of debtors in an organization needs to be examined to know whether the aim of granting a credit might be achieved after all. Hence, the main objectives of this research is to examine the significance of credit management in business organization, others are

  1. To find out the extent to which granting of credit increase sales.
  2. To know the problem(s) encountered as a result of credit sales due to violation of credit period.
  3. To the effect of credit sales in the overall performance of the organization
  4. To examine the relationship of credit management to the liquidity ratio of the organization
  5. To find out the extent to which granting of credit influences the relationship between customers and the organization

1.4 Significance of the Study

The recent inflationary condition which has many organizations into liquidity problem is the concern of researcher. It has become more important than ever before to get money promptly from trade debtors, but in most case this has probed to be a difficult task, especially, where debtors have traditionally had little difficulty in obtaining substantial periods of credit, what surprise the researcher really was. His experience during his industrial attachment in global soap and detergent

The study is of immense important to all and sundry, as a result, the research work will.

  1. Broaden the scope of the research of the researcher on the significant of credit management in business organization
  2. It will be of significance to any future researchers, who may want to carry out further study on this typical area
  3. It will enable the company to realize the impact of credit management in the overall performance of the company.
  4. The study will establish the fact that trade credit is advantageous to companies

1.5 Scope of the Study

Theoretically, this study is limited to finding out the significance of credit management in business organization. It considers how credit management can effectively help the organization to achieve its aims and objectives.

Geographically, the study will be limited to Global soap and Detergent Nigeria Limited and its vendors.

Though, I deally, the whole of Nigerian is expected to be covered but due to the problems of time and cost, therefore the findings is particular to all business organization in Nigeria.


1.6 Definition of Terms

Significance:

This simply means the importance of something

Credit:

This is the ability to buy or borrow in consideration of promise to pay within a Stipulated period time, sometimes loosely specified following delivery.

Management:

Is the executive authority the combined field of policy and administration, a team of ten employees as a correlative decision making.

Business Organisation:

Simply denotes a trading environment with the division of work, and the allocation of duties, authority and responsibility for the purpose of making profit.


1.7 The Working Hypothesis

Hypothesis is a proposition of theory put forward to account for and order a body of facts.

In scientific contexts, hypothesis are seldom capable of direct test but are tested indirectly by deducing consequences that are directly test.

There is null and alternative hypothesis

Null hypothesis (HO) is the assumption that there is no difference between the hypothesis and the sample result while the alternative hypothesis (Hi) described explanations not covered by the null hypothesis (Ho)

In other words, null hypothesis (Ho) is that, that is rejected in order to accept alternative hypothesis (Hi) and vice versa as the case may be.

Based on the statement of the problem, the following hypothesis have therefore been formulated for empirical study.

  1. Ho: That credit extension does not increases study
    Hi: That credit extension increases sales
  2. Ho: That credit extension does not help in keeping/maintaining customer
    Hi: that credit extension help in keeping/ maintaining customer
  3. Ho: that overall performance of company operating credit system does not depend on its credit management
    Hi: That overall performance of company operating credit system depend on its credit management
  4. Ho. That credit management does not help to avoid liquidity problem in organization
    Hi: That credit management helps to avoid liquidity problems of organization

1.8 Historical of the Global Soap and Detergent Limited

Global soap and detergent industries limited is a member of Doyin group of companies and its first wholly indigenes in soap and detergent manufacturing company in Nigeria. It was in corporated on the 8th October 1984 with its Head office in lagos and the factory situate along As a-Dam road Ilorin Kwara state. The company currently runs 18 depots through out Nigeria owned by courageous and experience industrialist prince (Dr) Samuel Adedoyin who had for many years been championing indigenous technology, backward integration and use of local raw material in Nigeria the company was established in response to the call of kwara state government on indigenes to join hands with the state government to industrialized the state.


1.9 Organization Structure of Glocal Soap and Detergent Industrials Limited

The organization chart of this industry (global soap and detergent industries limited) was determined by the top management of the company it formulate the policies, and coordinates finance, production and distribution. They carryout the objectives and policies, which have been determined by the administration the chart was drawn up in 1995 and it is still used today the chart is shown bellow.


Chapter Five


Summary of the Major Findings, Conclusion and Recommendation of the Study

5.1 Summary of the Major Findings

The overall objective of this research study is to produce an increased awareness in the business community about the importance of efficient credit management.

In the past, far too many business executive have regarded trade credit as a relative costless item, the terms of which have been varied according to the importance of the individual customers. In the recent past, the cost of finance increased at a rapid rate and credit granted must now be regarded as most important investment on which a proper return must be obtained.

In chapter one a brief introduction of the topic, objectives, significance, scope of choice of the subject and the formulated hypothesis which were based on the statement of the problems. Also, a brief history of the company used as case study was written.

Relevant literature in relation to credit management were thoroughly reviewed in chapter two.

Chapter three contains the research methodology, various methods used in the collection of data were identified and explained. In addition, sample size was determined for corporate respondent on whom the questionnaire were administered.

The four hypothesis formulated in chapter one were tested statistically with the use of student ‘t’ distribution and interpretation and findings were given to them in the chapter four.

Finally, chapter five contains the summary of the research study conclusion and recommendation of the research.


5.2 Conclusion

The recent high rate of inflation has created liquidity problems for many business organization. As a result of this, the subject of credit management has become increasingly important to those person who are responsible for getting money promptly from trade debtors.

It has been revealed that customer enjoy credit extension, therefore, there is rapid increase in credit sales. Then one can reasonably conclude that an efficient credit department is needed in business organization.

This department needs to work out its polly well in order to maintain the customers and attract a new one. A slack credit management can discourage customers and since credit extension is generated to all industries, customers may shift to other company (s) is the industry.

With the outcome of the test of hypothesis three, one can conclude that a good periodic report should be sent to the management always. This will allow the management to plan for the achievement of the organization goals, which lies more on the activities of the credit management.

The ability of a business to meet its short term liability as they fall out of its short term assets in which trade debtors is a major one, is indicated by networking capital current ratio and acid test or quick asset ratio. Therefore, trade debtors being a major current assets need to the taken care of in order for the company to be liquid.


5.3 Limitations of the Study

There is a limit to which the project was carried out, which can be put as the problems encountered in the course of this project work.

To start with, researcher could not get an accurate information needed from the company visited while were not released for security detrimental to the corporate existence of the company in given out such information because of the competitors activities in raising funds through credit management. This gives a limit of which researcher could go. More over, financial and time factor also contributed to the limitation on experienced by the researcher in carrying out the research work.


5.4 Recommendations of the Study

The findings from this study based on the data analysed and hypothesis tested, the following recommendations are considered useful to the business organization, especially, Global soap and detergent Nigeria Limited.

Every credit granting business organization should have a careful thought out credit policy which should preferably be part of the overall aims and objectives of the firm.

The policy should be the responsibility of the general management, although discussions should take place before finalizing all interested parties e.g. accounting, credit and sales personnel discussions should take place regarding responsibility for all aspects of credit policy.

In most situation credit arrangement is part of the accounting/finance function, although there may be special circumstances in which credit should be regarded as part of the sales department responsibilities.

It is essential that there should be awareness within the organization of the cost of granting credit. It will seldom be possible to calculate credit cost with any precision, but on attempt should nevertheless be made to pass the information that will be of value in assessing the overall effectiveness of credit management.

A large number of settlement problem are caused by delay in the dispatch of invoices and statements.

Everything possible should therefore be done to get invoice quickly especially, towards the end of the accounting month.

It is essential that regular reports regarding credit performance should provide for management purpose. In the past, there has been a concentration on the debtor’s age analysis report, together with information regarding the average collection period. This material can be very useful, although it is possible that some report of this nature may be misleading, if there are significant fluctuations in sales figures from one month to another. This material should supplement and not replace the age analysis report.

Lastly, in the past, only a small number of firms have insured against bad debts on trade credit transaction. In period of inflation, there will inritably be, many liquidity problems and it would therefore, seem to be advisable for companies to carry out a detailed survey of the cost and benefits of credits insurance, especially if a larger amount of business is transacted with a small amount


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