Impact of Credit Management On The Profitability Of A Manufacturing Firm
(A Case Study Of Unilever Plc Aba, Nigeria)
Effective credit management plays a critical role in shaping the financial performance of a manufacturing firm. By efficiently managing credit, companies can mitigate risks associated with bad debt while optimizing cash flow, thus directly influencing profitability. Through meticulous assessment of creditworthiness and establishing appropriate credit terms, a manufacturing firm can minimize instances of default and late payments, thereby enhancing revenue streams. Moreover, implementing robust credit policies and monitoring systems allows for proactive identification and resolution of potential issues, fostering long-term customer relationships and bolstering sales. Additionally, streamlined credit management practices contribute to cost reduction by minimizing administrative expenses related to debt collection and legal proceedings. Consequently, prudent credit management strategies not only safeguard the financial health of the manufacturing firm but also pave the way for sustainable growth and profitability in the competitive market landscape.
The aim of this research work is to appraise “The impact of credit management on the profitability of a manufacturing firm focused on Unilever Nigeria Plc Aba”. This is because; trade credit is a short term source of finance and sometimes take the form of bills payable. The statement problem of this research banks about the poor level of credit management and also the problems which the firms encounter as a result of high-rate of bad debts. The objective of this research study is to highlight the effects of the credit management on the profitability of the company as well as to highlight the advantages of effective and efficient management of trade credit amongst others. Furthermore, this research work will be of immense significance to the staff of Unilever Nig. Plc Aba as well as the students and the researcher since it aims at providing effective means of reducing default in collection of accounts. Also, research questions like; could a company’s liquidity problem be attributed to bad debt? On the average, how long do you allow credit to customers? Etc. research instrument used were questionnaires for the purpose of obtaining the desired result. In treating and analyzing the data collected, an extensive use of tabular information and percentages were of great importance. In the light of the findings and conclusions of this work, the following recommendations are put up: that then should be a regular review of credit policies to suit the changes in the business environment and that an enquiry unit should be established to take responsibility for prospective credit’s assessments amongst others.
Title page
Approval Page
Dedication
Acknowledgement
Abstract
Table of contents
CHAPTER ONE
1.0 Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Formulation of Research Hypotheses
1.5 Research Questions
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitations of the Study
1.9 Definition of Terms
CHAPTER TWO
2.0 Literature Review
2.1 Reasons for granting credit
2.2 Setting credit policy and Regulation
2.2.1 Credit Standards
2.2.2 Credit Terms
2.2.3 Collection Efforts
2.3 Credit Policy Goals
2.3.1 Optimal Credit Policy
2.4 Credit Policy Variable Analysis
2.4.1 Credit Analysis
2.4.2 Credit Scoring
2.4.3 Collection Policy and Procedures
2.4.4 Establishing Internal Collection Procedure
2.4.5 Other Collection Procedures
2.4.6 Monitoring Receivables
References
CHAPTER THREE
3.0 Research Methodology
3.1 Research Design
3.2 Area of Study
3.3 Sources of Data
3.4 Population of the Study
3.5 Instrument of Data Collection
3.6 Validation of the Instrument
3.7 Reliability of the Instrument
3.8 Method of Data Analysis
3.9 Sample Design and Determination of Sample Size
CHAPTER FOUR
4.0 Presentation, Analysis and Interpretation of Data
4.1 Analysis and Interpretation of Data
4.2 Test of Hypotheses
4.3 Test of Hypothesis
CHAPTER FIVE
5.0 Summary of Findings, Conclusion and Recommendations
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
Bibliography
Appendix 1
Appendix II
1.0 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.
BRIEF HISTORY OF UNILEVER NIGERIA PLC ABA
Unilever Nigeria Plc is a public liability company quoted on the Nigerian
stock exchange since 1973 with Nigerian’s currently having 49 percent of
equity holidays established in Nigeria. Unilever Nigeria Plc started as a soap
manufacturing company and is today’s one of the eldest surviving
manufacturing organization in Nigeria. The company changed its name to
“Unilever Nigeria Plc” in 2001.
The company is into the manufacture and marketing of household
toiletries and favorites which are manufactured in their various factory
locations in Nigeria. This is because they are so deeply committed to meet the
everyday needs of people everywhere in Nigeria. Such factors are located at
Lagos, Agbara, Oregun and Aba. Its staff strength is about one thousand eight
hundred (1,800) employers. They also have indirect employees like contract
staff and others who range from our forty thousand employees throughout the
country.
The company has also made provision for assistance in fields of health,
education, children welfare and potable water hygiene as part of its social
responsibility programme in the Nigerian communities.
Conclusively, Unilever Nigeria Plc from research has been found to be
involved in both credit and cash transactions with its customers.
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:
(1) 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.
(2) The poor level of trade credit management is reflected in the
liquidity and profitability position of the firm.
(3) 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.
(4) Furthermore, lack of experienced staff or officers to tackle onerous and
vital duties of managing debts appropriately.
(5) Also, limitation and inadequate training opportunities for key treasury
or supporting staff.
(6) 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:
(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 firms.
(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
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.
1.5 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 profitability 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 over due debts?
4. Has any company through the aid of trade credit facility achieved high
profit index?
5. Can the liquidity and profitability 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 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.
1.7 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.
1.8 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.
1.9 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 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.
Impact of Credit Management On The Profitability Of A Manufacturing Firm:
Credit management plays a significant role in the profitability of a manufacturing firm. Effective credit management involves the practices and strategies a company uses to extend credit to customers, collect payments, and manage its accounts receivable. Here’s how credit management can impact the profitability of a manufacturing firm:
- Cash Flow Management: Proper credit management ensures a steady cash flow by minimizing the time it takes to convert accounts receivable into cash. If a manufacturing firm’s customers consistently delay payments, it can strain the company’s liquidity and hinder its ability to cover operational expenses and investments.
- Reduced Bad Debts: Careful evaluation of potential customers’ creditworthiness and setting appropriate credit limits can help prevent bad debts or non-payments. Writing off bad debts can directly impact profitability, so managing credit effectively reduces the risk of losses.
- Working Capital Optimization: An efficient credit management system helps in optimizing working capital. By collecting payments on time, the manufacturing firm can maintain healthy levels of working capital, allowing it to cover short-term obligations and invest in growth opportunities.
- Profit Margins: Delayed payments and bad debts can erode profit margins, especially for manufacturers dealing with tight margins. Effective credit management safeguards profit margins by ensuring that revenue generation is aligned with the resources and efforts invested.
- Customer Relationships: While strict credit policies are necessary, a balanced approach to credit management also maintains positive customer relationships. By offering appropriate credit terms, a manufacturing firm can attract and retain customers, enhancing long-term profitability.
- Opportunity Costs: Excessive time spent on chasing overdue payments can divert resources away from more productive activities. Effective credit management reduces the time and effort spent on collection activities, allowing employees to focus on value-added tasks.
- Growth Opportunities: A manufacturing firm with a strong credit management strategy can extend credit to reliable customers without compromising financial stability. This can lead to increased sales and market share, driving overall profitability.
- Interest Costs: If a manufacturing firm relies on borrowing to cover cash flow gaps caused by delayed payments, it may incur interest costs. Effective credit management minimizes the need for external financing and reduces associated interest expenses.
- Credit Terms Negotiation: Well-managed credit practices can provide a manufacturing firm with negotiating leverage to secure favorable credit terms from suppliers. This, in turn, can positively impact overall costs and profitability.
- Financial Health: Sound credit management contributes to the financial health and stability of the manufacturing firm. This enhances the company’s creditworthiness in the eyes of lenders and investors, potentially leading to better financing options and terms.
In conclusion, credit management is a crucial aspect of a manufacturing firm’s financial operations. By effectively managing credit, a firm can maintain a healthy cash flow, minimize bad debts, optimize working capital, safeguard profit margins, nurture customer relationships, and seize growth opportunities. All of these factors collectively contribute to the overall profitability and sustainability of the manufacturing business.