ABSTRACT
CHAPTER ONE
1.0
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
According to Oyadonghan and Bingilar
(2014), marketing experts have long established that granting credit is one of
the tools employed by an organization to expand the volume of sales. It
provides a vital marketing link for the movement of goods from production
through distribution stages to a large number of customers who do not have
immediate payment capacity. Trade credit creates an account receivable under
current assets in the firm’s statement of financial position, which the firm
expects to receive in the future. Apart from increased sales volume, Companies
grant credit to customers for specific reasons such as to acquire a good share
of the industry market, achieve envisaged level of profit, command customers’
loyalty, and retain them in the firm (Pandey, 2010).In credit sales, the
economic value in goods passes immediately at the time of purchase while the
seller expects an equivalent amount to be received on a later date. The partial
or full payment delay at the time of sales might impose some element of
liquidity risk to the seller(Kaitibi1, Ganawah, Yokie1, Jalloh1, & Koroma,
2018).Therefore, credit sales imply both now and future transactions, which
involves a receivable risk that should be cautiously analyzed and adequately
managed. Although in every business circle, credit is unavoidable but remains a
threat to the financial stability and performance of any business (Agu &
Basil, 2013; Nwanna & Oguezue, 2017).
Previous studies have shown that low
liquidity to initiate viable investments leading to reduced profitability level
to continue operations were responsible for the failure of many quoted
manufacturing organizations in Nigeria (Owolabi & Obida, 2012;
Ifurueze,2013). A good number of the liquidity problem were traced to bad debts
from customers who could not pay for the goods sold to them on credit when due.
Some manufacturing companies allow a lot of credit to customers to expand sales
volume and control a fair share of the industry market at the detriment of
liquidity. Adequate liquidity enables a company to meet its short term
operating obligations to creditors when due and invest in viable projects. The
result of appropriate investments such as in projects with positive net present
value, as well as prompt creditor’s payment and cash discount advantage would
positively affect profitability (Eljelly, 2004).A prolonged credit without
appropriate credit policy to manage debts will negatively affect liquidity and
profitability (Olagunju, David, & Samuel, 2012). Therefore, an organization
should employ credit analytical tools and strategies developed by credit
professionals to measure, manage credit, and avoid bad debts. In a bid to solve
the problem of a firm’s bad debts and improve cash inflow, management employs
sound credit sales to increase debt collection, achieve economy of credit
costs, and extend credit only to creditworthy customers. Also, Companies should
develop competitive credit terms to beat the competition (Ofoegbu, Duru, &
Onodugo, 2016).
Owolabi and Obida (2012) recommended
that management should control credit to ensure adequate liquidity by
developing appropriate credit model that would provide a collection of
receivables at the due date. The strategy includes credit terms and customers’
risk assessment, credit collection, and enhanced debt recovery at low cost.
Ifurueze (2013) noted that adequate liquidity has a significant moderating
influence on the profitability of an organization. This assertion has led to a
question of how does credit management strategies influence the level of
liquidity and consequential profit? The answer to this research question has
been omitted in the quoted chemical and paint manufacturing subsector in
Nigeria. Therefore, further research is needed to assess the impact of credit
management strategies on the Companies’ liquidity and profitability. The
general objective of this study is to investigate the effect of credit
management strategies on the liquidity and profitability of quoted chemical and
paint manufacturing Companies in Nigeria. To achieve the main objective, the
subsidiary objectives include: to explore the effect of credit terms and risk
assessment on the customer’s ability to pay; to examine the influence of debt
recovery strategy on the level of bad debt; and to evaluate the impact of
credit collection policy on the company’s cash flow.
A company's credit policy refers to
the actions taken by a business to grant, monitor, and collect the cash for
outstanding accounts receivable (Maysami, 2010). The credit policy of a typical
organization contains the following variables: collection policy, cash
discount, credit period and credit standard, while Miller (2008), classified it
as credit limits, credit term, deposits, customer information and
documentation. And each of the components of a company's credit policy is used
as a tool for monitoring account receivables which is the outcome of credit
sales; it covers from the kind of customers that credit may be extended to when
actual collections would be made.
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.
Krueger, (2005) credit policy is
designed to minimize costs associated with credit while maximizing the benefits
from it. Credit policy refers to guidelines that spell out how to decide which
customers are sold on open account, the exact payment terms, the limits set on
outstanding balances and how to deal with delinquent accounts According to
(Pandey, 2007; Atkinson, Kaplan & Young, 2007 and Brigham, 1985) credit
policy is defined in the manner as the combination of such terms as credit period,
credit standards, collection period, cash discounts and cash terms. Therefore,
despite the fact that organizations have different credit policies, the content
of these policies must touch on credit period, credit standards, collection
period and credit terms.
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.
Due to the speed in which technology
is changing and the dynamics in business caused by changes in their internal
and external environment, the ways in which businesses are conducted today
differ significantly from yester years. Therefore, for a credit policy to be
effective it should not be static (Szabo, 2005 & Ojeka, 2012). Credit
policy requires to be reviewed periodically to ensure that the organizations
operate in line with the competition. This will ensure further that sales and
credit departments are benefiting. While most companies have their own
policies, procedures and guidelines, it is unlikely that any two Companies will
define them in a similar manner. However, no matter how large or small an
organization is and regardless of the differences in their operations or product,
the effects of credit policies usually bring about similar consequences.
Effects of a credit policy are either good enough to bring growth and profits
or bad enough to bring declination and losses. This similarity is as a result
of the aim of every manager which is to collect their receivables efficiently
and effectively, thus maximizing their cash inflows (Ojeka, 2012).
BRIEF HISTORY OF NIGERIAN BREWEIES PLC ENUGU
Nigerian Breweries Plc was
founded in 1946 and since then has matured to become the absolute pinnacle of
corporate Nigeria.
Today, Nigerian Breweries most recent
extension, the new Ama Brewery, has taken the company into a new chapter in its
history. Nigerian Breweries: more than
half a century of efforts to achieve world class status in
Over a period of slightly more than fifty
(50) years, Nigerian Breweries has had success after success and has succeeded
in anchoring itself firmly in the Nigerian beer market, the business community
and indeed in the very hearts of Nigerian themselves.
The “Rising Star” or Nigerian Breweries has,
for many decades now, been synonymous with success, quality and
commitment. The organization can boast a
wide portfolio of brands that cover the three segments of the Nigerian beer
market (Larger, Stout and Malt): Star,
Gulder, Heineken, Legan Extra Stout, Maltina, and Amstel malta.
In 1949, three years after its foundation,
the first bottles of star were being filled on the bottling line of the brand
new brewery in Lagos.
Three more breweries have been founded since
then: Aba, Kaduna and Ibadan.
For decades, Nigerian Breweries had tow large
shareholders, one of which, Heineken had always focused on providing the
breweries with technical support. In
year 2000, Heineken seized the opportunity of acquiring a 54.2% majority
interest in Nigerian Breweries, a decision which underlined Heineken’s
commitment to the African continent.
Thanks to the process of democratization that
started to emerge towards the close of the 1990s, plus the brewery’s alert
anticipation of what would happen in the new situation. Nigerian Breweries successfully managed to
accelerate a growth in sales from 2.5 million hectoliter in 1998 to 5.5 million
hectoliter (hi) in 2003. This was so successful
in fact that a luxury problem arose: the
demand for Star, Gulder, and Maltina started to outstrip actual supply. Nigerian Breweries and Heineken therefore
started up the LAKIE output optimization project (
An investment of 280 million euros in new
bottling lines and brewing plants substantially increased the capacity of these
breweries.
The experts were more than aware that an
expansion of the existing breweries alone would be insufficient to meet the
constantly increasing demand for Star and Gulder. And because of the rose-coloured prospects in
the medium term, early in 2001 Nigerian Breweries and large shareholder
Heineken decided to build an ultra-modern brewery fitted with the latest
innovations and the most up-to-date plant equipment. A world-class brewery befitting a world-class
company.
The entire brewing community is envious of
the new Ama brewery near Enugu. The
construction of a high-tech brewery, in corporating the absolute latest in
technological developments and major innovations in a rural tropical
environment is a feat which has never before been achieved in the brewery
industry.
Nigerian Breweries assigned Heineken
Technical Services to design and develop the new brewery and to supervise the
construction of this 220 million euro (30 billion naira) project.
There were frowns of concern when the first
plans for Ama were presented. Would it
be possible to operate such a high-tech, state-of-the-art brewery in
The second success factor is the actual
organizational structure. A
state-of-the-art brewery such as Ama calls for a small number of highly
professional employees; employees who perform at their best when working in a
hierarchically small operation consisting of only three layers. Work here is based on Total Productive
Management (TPM), which for Nigerian Breweries is a new concept introduced by
Wiggert Deelen, the Technical Director.
The brewery has an initial capacity of more
than 300 million litres of beer and can be extended even further. The average production is in excess of 1.1
million creates per week. The Ama
brewery uses only natural ingredients for the brewing process, the brewing
water being pumped up from five wells two hundred metres below the ground. This is excellent quality water and needs
very little correction to make it suitable for brewing.
The malted barley and hops used are imported
from Europe, the malted surghum and maize grits are produced by local farmers,
malters and millers. Ama brewery uses
51,000 tonnes of grain per year, 2,550 truck-loads in all.
The brewery has one brew-house that produces
twelve brews of 660 hectolitres high gravity wort per day. The brew-house is in operation 24 hours a
day, seven days a week.
After the boiled wort has been cooled down it
is mixed with the yeast and then pumped to the fermentation “celler”. While the celler is the traditional name for
the location where fermentation takes place, in the brewery the 30 fermentation
tanks of 5,000 hecto litres each are situated in a building above ground.
The beer is subsequently transported from
these tanks to the brewery’s bottling lines.
Here there are four bottling lines, two of
which are reserved for the popular brand, Star, and one for Gulder. Each bottling line has a filling capacity of
30,000 bottles per hour (60cl bottles).
The high level automation and the use of
ultra-modern technical equipment make it possible for the brewery to also
produce Heineken beer. Preparations were
started for the local production of Heineken beer only six months after the
first brew had left the production line.
1.2 STATEMENT OF THE PROBLEM
However, the research will
be specifically concentrated on the problems which arise when the brewery sells
beer to its customers for the purpose of receiving payment in future. In view
of these, the following critical questions demand answers:
1. What effects does credit
management have on liquidity position of Nigerian Breweries Plc, Enugu?
2. Does credit sales reduces
liquidity of this brewery?
3. Does credit sales increase
the profit level of the brewery?
4. Is there any relationship
between credit sales and liquidity position of this brewery?
5. Has the brewery’s credit
policy and credit terms any effect on its liquidity?
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to
appraise the effect of credit management on the liquidity of manufacturing
Companies and also providing effective means of reducing default in collection
of accounts.
Other objectives include the following:
(1)
To appraise the effects of the credit management
on the profitability of the company.
(2)
Identifying the problems associated with credit
management in manufacturing Companies.
(3)
To investigate the advantages of effective and
efficient management of trade credit.
(4)
To also show how to reduce losses caused by bad
debt through the use of effective and sound collection policy and
procedures.
(5)
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.
(6)
To examine whether the credit management principles
applied by the firm is appropriate and effective.
(7)
To encourage staff to always be at an alert in
respect of knowing who their debtors are.
1.4 FORMULATION OF RESEARCH
HYPOTHESES
In order to achieve the
above objective, the research will make the following hypothesis:
H0 Liquidity of
Nigerian Breweries Plc Enugu in a function of proper credit management.
H1 Credit sales do not
reduce liquidity of Nigerian Breweries Plc Enugu.
H2 Credit sales increase the
profitability of Nigerian Breweries Plc, Enugu.
1.5 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.
1.
Does credit management have any effect on the
liquidity of a company?
2.
Can trade credit be phased out completely from a
company’s business dealing?
3.
How can a firm enforce collection of it’s
overdue debts?
4.
Has any company through the aid of trade credit
facility achieved high profit index?
5.
Can the liquidity and objectives of the company
be achieved through the use of credit facilities?
1.6 SIGNIFICANCE OF THE STUDY
This research
work will be of great significance to the staff of Nigerian Breweries Plc
Enugu. 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.
1.7 SCOPE OF THE STUDY
This research work on the impact of credit
management on liability position of a manufacturing company is focused on
Nigeria Breweries Plc. Enugu State.
1.8 LIMITATIONS
OF THE STUDY
In a study like this type,
a lot of set-backs are bound to come up, this work is restricted by many
variables:
1.
Time: Since the research will be carried out at
student’s level, the researcher will have to allot his time such that the
demand for their courses will have to be met.
Moreover,
since the interview will be conducted during the working days of the work the
researcher will have to forfeit some of his lectures in order to successfully
conduct the study. The time that will be
lost in terms of lecture missed will be a substantial loss in itself.
2.
Lack of
knowledgeable and sincere personnels: Some of the officials employed in
most manufacturing Companies 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.
Finance:
Insufficient funds will be another
factor inhibiting this research project.
The work will be single-handedly sponsored by the researcher.
And
as a student, the project will be sponsored from his meager pocket money. As a result, he may find it difficult to
cover some inevitable expenses like transport, stationeries, typing and binding
labour and so on.
This in turn is bound to affect the sample
size and the geographical area of coverage of the study.
4. Respondent:
The inability of the officials
concerned to produce adequate and relevant information required for the
research project has been one of the most frequently encountered constraints by
researchers.
Apart from the fact that some of the staff
that will be required to give data are not technically skilful in the area of
study, many of them may think that the researcher is one of government
functionaries that come to question their activities or to assess them for tax
payment.
This may be due to the fact that the school
authority has been reluctant to introduce the researcher to the establishment
formally by issuing identity papers or introduction papers to the students.
5. General
Economic Problem: The last but not the least limiting factor is
this work will be the general economic problem facing the entire country as at
this point in time when the research will be carried out.
Considering the above constraints, the
researcher will concentrate on few areas of trade credit management that lead
to high profitability, optimum liquidity level and efficient utilization of all
the brewery’s financial assets. Such
areas include – historical overviews and origin of credit, trade credit and
credit management; credit policy; five Cs of credit; effects of credit on
liquidity and profitability, and important areas of trade credit management.
1.9 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 Companies 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.
6.
Credit Management: This is the process by which the brewery
properly maintains its credit sales so as to achieve optimum liquidity
level. Or, put in this way, credit
management is a way of controlling the brewery’s credit granting attitude in
order to maximize the brewery’s value of achieving a balance between risk and
profitability.
7.
Profitability:
This is the total net profit or gain made by the brewery from its selling
activities (both cash and credit sales).
8.
Optimum Liquidity:
This is the level of cash (at hand and/or in the bank) at which all the
brewery’s assets (resources) are efficiently employed and utilized.
9.
Company:
This is a legal person or entity created by the association of number of
persons in accordance with the law for the purpose of a defined objective.
10.
Management:
This is the process of allocating an organisation’s inputs (human and
economic resources) by planning, organizing, directing and controlling for the
purpose of producing outputs (goods and services) directed by its customers so
that organization objectives are accomplished.
11.
Credit Sales:
These are sales made by the brewery without immediate payment.
They are goods (beer) the
brewery exchanged for money but with the intention to receive the cash in the
future.