ABSTRACT
Debt
can be talked of when group of societies economic positions suffer
inefficiency. It is the state or time measure of the organization or individual
economic position. At the down of the modern economic life, it has been
observed that one can be debtor and get stands to meet his current liabilities
provided it is well managed. This research work drives into the business
meaning of debt, analyzing its management in business organizations. The
success of its efficient management in an organization. The research did not
relent in their effort to point out where and why the impact of debt is felt
mostly in business life. It has found that the debt exist through the life of
the time of a business organization from the initial capital outlay in the time
of further expansion in daily transaction of either with the supplier or the
cessation or liquidation. A close look at the 7up bottling company plc, Lagos,
the research has employed both primary and secondary sources of data. Primary
sources involves oral interview, the use of practical or personal observation
form sources documents while secondary sources on the other hand are the data
sources form published textbooks, journals, national duties. Observation also
reveals that one can be a debtor as well as a creditor. A good financial
manager can source fund by debt, invest it to make a profit before the maturity
of the debt. To do this, some speculative factor can be considered and handled
so that balance or breakeven of the risk and return can be sought for and a
fairly equilibrium is met.
TABLE OF CONTENTS
Title page
Certification --- -- --- --- --- --- --- --- i
Dedication --- -- --- --- --- --- --- --- --- ii
Acknowledgement --- -- --- --- --- --- --- --- iii
Table of Content --- -- --- --- --- --- --- --- iv
Abstract--- -- --- --- --- --- --- --- --- --- viii
CHAPTER ONE: INTRODUCTION
1.1 Background
of the Study --- --- --- --- --- --- 1
1.2 Statement
of the Problems --- --- --- --- --- --- 5
1.3 Research
questions--- --- --- --- --- --- --- 7
1.4 Objective
of the Study --- --- --- --- --- --- 8
1.5 Statement
Hypotheses --- --- --- --- --- --- --- 9
1.6 Scope
of the Study --- --- --- --- --- --- --- 10
1.7 Significance
of the Study --- --- --- --- --- --- 10
1.8 Limitation
of the Study --- --- --- --- --- --- 11
1.9 Operation
of Definition of Terms --- --- --- --- --- 12
CHAPTER TWO: LITERATURE REVIEW
2.1 Meaning
of Debt Management --- --- --- --- --- 14
2.2 Analyzing
Debt Management in Relation to Organization
Working Capital --- --- --- --- --- --- --- 15
2.3 Cost
of Capital in Relation to Debt Management Technique --- 16
2.4 Different
School of Thought in Debt Management --- --- 23
2.5 Different
Types of Debt Management --- --- --- --- 25
2.6 Debt
a Management in Financing Organization Capital
Structure --- --- --- --- --- --- --- --- --- 32
2.7 Cost
of Debt Capital in Business Organization --- --- --- 32
CHAPTER THREE: RESEARCH METHOD
3.1 Research
Design --- --- --- --- --- --- --- 34
3.2 Population
of the Study --- --- --- --- --- --- 34
3.3 Samples/Sampling
Technique --- --- --- --- --- 34
3.4 Instrumentation
--- --- --- --- --- --- --- --- 35
3.5 Method
of Data Collection --- --- --- --- --- --- 35
3.6 Method
of Data Analysis --- --- --- --- --- --- 36
CHAPTER FOUR: DATA PRESENTATION ANALYSIS
AND DISCUSSION
4.1 Data
Presentation --- --- --- --- --- --- --- 37
4.2 Test of Hypotheses
--- --- --- --- --- --- --- 44
CHAPTER FIVE: SUMMARY CONCLUSION
AND
RECOMMENDATIONS
5.1 Summary
--- --- --- --- --- --- --- --- --- 47
5.2 Conclusion
--- --- --- --- --- --- --- --- 48
5.3 Recommendations
--- --- --- --- --- --- --- 49
5.5 Suggestion
for Further Research --- --- --- --- --- 49
Reference
Appendix
CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study
In modern-day business setting, debt is seemingly
inevitable sometimes it emanates from short fund convenience with the
prevailing trade terms. Debt does not occur only when money is borrowed. It
equally occur where there is exchange of goods and services with a deserved
payment so each time goods or services are exchanged with a different of its financial
obligation there is incidence of debt.
A good business may not always write to finances the
commencement of his business from his personal savings, if he does, so many
things may happen. Either that the business is under financed or the business is
foregone, likewise a business firm for one version or the other may not finance
through equity aware only. The management may wish to source the fund through
debt. Event extra fund for expansion or for speculative purposes. Hence, this
project work looks into the analysis of debt in a dual perspective.
I.
In the accumulative of fund, either for
the commencement or expansion and
II.
In trading relationship (trade debt)
i.
At the commencement of a consciences
organization, the owners try to maintain a favourable capital structure
ordinarily, it is normal for the business owners (equity holder) to finance the
business. But more often the funding of a business goes beyond that. The choice
of the capital structure and the funding technique is left at the mercy of the
financial managers. On doing so however, he doesn’t overlook or neglect the
major organizational objectives, maximization of the owners wealth.
ii.
Business organizations usually strive to
achieve a number of objectives. These corporate objectives provide a set of
criterial upon which financial decisions organization seek to achieve by
obtaining fund from various sources and investing some reasonably. It is import
to recognize that various types of funds raised has its own cost and each has
certain risks. For example, loans(secured and unsecured), debentures,
preferences and ordinary shares. Loans raised by the security organizations
asset trends to have fairly low rates of interests although they imply certain
risks. Failure to meet the terms of the loan on the due date would empower the
tender to confiscate the said assets with potentially catastrophic consequence
for the borrower.
iii.
In contrast, an unsecured loan on which no
assets is pledged, though escaped the last cited risk cost higher. It has
higher cost than the former preference share on the other hand, may have a
relatively annual rate but its payment is binding irrespective of whether
profits are made or not ordinary share however has no fixed charge as such, it
dividend depends on the periodic business profit yet excessive use of equity
shares is determine to the organizational control, it is not technically
handled when the equity share is used in marginal funding of the firm, it is
only advisable when the return from the issue is such that share prices would
increase. One would not expect an issue of share to be made with an expectation
that share price would fail since that would reduce shareholders wealth. So it
can be said that the minimum return required from a new issuer is that which
would leave the share price at its present level since it is one of the
organizational objectives to maximize the equity holders, wealth and random use
of ordinary shares tantamount this. The management would have no option than to
restart to debt financing to complement equity. This is one of the reasons why
debt financing is most inevitable in the capital structure of a business
organization of today. Then with the attendant risk and return relationship,
the financial manager always seek for a fair equilibrium to the best interest
of the firm for its survival and for attainment of its set objectives.
iv.
Trade Debt: With the exception of most types of retaining commercial
sales are usually made on credit. This means that cash settlement legs
sometimes behind the delivery of the goods or the consumption of the service to
which the payment relates. The main reason for these practices are attributed
to the present commercial tradition for convenience and to the buyers and even
to the sellers. This trading terms heads to debt but it is encouraged for the
following reasons
a)
The recipient will need to assure himself
that the goods are satisfactory prior to payment
b)
Additional safeguard will need to be
introduced with regards to the cash collected.
Even when and where it would be reasonable practicable
to pay on delivery, customers are reluctant to forgo the traditional credit
period. Since they do so, it would increase their own financing costs.
The practice of allowing credit has thus come to be
widely accepted as normal. The use of credit however has certain costs
associated with it and the analyzing debt management requires a clear
identification and balancing of these various costs. To achieve this however,
the financial manager and the management had to consider the costs under two
categories:
a)
Cost of allowing credit
b)
Cost of refusing credit
1.2 Statement
of the Problems
Debt has implication in the life of every business
organization. Poor analysis of debt management affects a firm adversely. It
could be recalled that the effective capital structure of a firm emaciate from
the ability of a financial manager and the management to blend debt with
equity. It is pertinent to note that many businesses have gone into compulsory
liquidation due to poor analysis, which leads to poor debt management. The cost
of capital therefore shall be bargained with critical consideration of the
organization Internal Rate of Return (IRR). On the sale relationship, the
credit term shall be determined with an absolute review of the overall business
environmental factor. While resisting debt for its risks, the goodwill of the
customer shall not be overlooked entirely. This work tends to deal with debt in
its relation with a business organization. it brings about a number of problems
which includes among others:
I.
The cost of capital in financing market is
an extra charge to the business organization. Such a cost eats deep into the
owners fund.
II.
Secured debts do not only affect the
liquid assets of the firm but also dare to extend its effects into the fixed
assets of the firm.
III.
Preference share has a fixed periodic
charge, which accumulates in considerate of whether a profit is made or loss
suffered. This gives a firm an adverse concern especially during an unfavorable
business atmosphere.
IV Inability
to meet the financial obligation of a business organization eventually lead to
the organizational liquidation, which is an economic death of the firm as an
entity. In the business tending policy, a firm tries as much as possible to
minimize credit for the following reasons:
a)
It brings about bad debt, which is a
deadly disease to a business.
b)
Later settlement of debt in beating the
stipulated credit return destabilizes the liquid stability on the firm and
eventually leads to bad debt.
c)
Protected debt denies the business organizations
the chance of using their business opportunities as they fall due.
This project is not pessimistic to debt at all neither
does it intend to criticize debt and anything about it, rather it delves into
the problems and consequences of debt and analyzing its management situation.
Despite the above cited deaneries, debt has a number of merits. In the optical
structure, some financial managers commend debt financing for the following
reasons:
I.
Difficulties in raising ordinary share
capital.
II.
Peoples reluctance to spearhead risks
III.
For expansion and speculative purpose,
that debt funding is preferable since further use of equity may dilute the
control of the firm.
IV.
It may even affect the price of the stock
properly handled.
On
the transactional terms, absolute refusal of credit for debt aversion has its
own averse effects:
a)
It reduces the sales volume and hence the
profit prospects.
b)
It affects the goodwill of the business
hence firms in the face of its customer and degrades its inedibility in market
scene.
c)
The firm can only stand in an absolutely
monopolistic market and tis is verily obtainable.
1.3 Research
Questions
(i) How
does debt financing bring about an optimal capital structure in a business
organization?
(ii) Will
good analysis of trade debt management help measure an effective working
capital management in every business organization?
(iii)
What effort will be made to reach every
latent problems inherent in analyzing debt management in areas of
organizational capital structure?
(iv)
How does the important element in decision
about resources helps to finance the ambiguity surrounding concept of the cost
capital?
1.4 Objective
of the Study
From the view of things, it is self evident that
modern business can hardly survive and meet the objectives and expectations of
the interested parties without debt. Debt on the other hand cannot be purged on
its attendant merits and demerits. Since the impact of is being felt from the
inception of a business (from commencement) to the cessation date (the day it
is wound up). The financial manager starts his decisions on debt from the
settings of the capital structure. Sometimes the business may need additional
expansion or for speculative purpose. These came as an opportunity to the firm,
which the management may not like to miss. But very often, the retained
earnings may not be enough to carter for this as such the fund is sourced
externally.
In the trading activities of the firm, credit cannot
be eliminated completely. The firm can either be a recipient, a giver or both.
This is possible in its relation with its suppliers and customers. And wherever
there is a creditor, there must be a debtor so credit and debt are just like
two sides of a coin. So in an economic system, “what cannot be avoided must be
managed”. So this research will take a closer look into the strategies of
analyzing debt management situation, relate some to the contemporary business
environment in Nigeria with a particular overview or reference to 7up Bottling
Company PLC, Lagos, their trading terms collection period, the incidence of bad
debt and capital tied down as a result of delay in debt collection.
1.5 Statement
of Hypotheses
In a continued effort to reach an appreciable
equilibrium in the problems and consequences of debt and its effective
management, I (researcher) employed a selected statistical to enable reach a
fair conclusion.
In the light of the above, therefore the following
major hypothesis have been formulated. Hypothesis mean a tentative statement
made by researcher, subject to test with a view to forming basic study a
phenomenon. These hypothesis when tested, can equally place the researcher on
the solid ground of drawing his conclusion and a subsequent recommendation.
1.
Effective debt financing does not
bring about an optional capital structure in business organization.
2.
Good analysis of trade debt management is not
good measure of an effective working capital management in a business
organization.
1.6 Scope
of the Study
The scope of the study concerned was on debt
management and organization success with much concerned to 7 up bottling
company PLC Lagos however, for further reference and clarity, emphasis are made
from other reasons and these are considered vital, thus such emphasis are on
profitability, solvency, flexibility, conservation and control.
1.7 Significance
of the Study
The significance of analyzing debt management
situation is as broad as the scope of the business in question and its economic
environment and as length as the life of the business poor or financial
management in a business organization is first evidenced in its liquidation.
This is the reason why the researcher endeavours to look into a firm and
consequences of debts.
In the capital structure of a firm, the debts prospect
of the organization project is to be considered and a careful decision made to
avoid setting off with a long toot. These are the areas this work look into in
a trading business firm, the role marketing manager and financial manager of
deciding on the organizational credit policy is brought to light with dare
recommendation. This work tend to strike a fair balance in their turn and risks
of debt. This will be of great importance to the interest groups and
prospective scholars in the field. This is done through review of the past,
which is related to the present and employed in the recommendation for a better
future.
1.8 Limitation
of the Study
Analyzing debt management situation is not a shallow
topic to be handled haphazardly, it is not only technical but also sensitive
and broad.
For the purpose of this project, it is restricted to
the business organization. It excluded every non-business concern. Also for
what to time resources, 7up Bottling Company, Lagos is sampled out as base for
the research work. So many factors are deemed to militate against quicker and
easier completion of this work.
These among others:
Cost:
inadequate fund may stunt this work beyond our taste, lack of fund(money) may
also affect not only the period of the research but also its quality. To exult
everything about analyzing debt management and organization success and come
out of legacy for the posterity, one needs to travel far and near. At least one
ought to touch various industries in the four basic geographical area of the
country.
Time:
Time is as costly as money, it is ever easier facing financial problems than
time. Time lost as hardly regained. Financial markets do exist but time existed
for time. With school academic calendar, the period for the research work is
too short, putting other courses into the budget.
Sources Of Facts:
This research has convince me that so many authors share almost the same view
on the topic as such are going to a library having about five textbooks of
different authors, at least you find out that they are saying the same thing in
different tongue, invariably you are having a book or more.
Reluctant to Co-Operate:
The management of some business organizations are too reluctant to disclose the
required information and more so, when it comes to disclosing or exposure of
the organizational books record. The idea equally affected the quality of facts
given in the research. Some do paths pact to suit their firm.
1.9 Operational
Definition Of Terms
Debt:
Money or something owned by or someone – a liability or an obligation.
Management:
The process of planning, organizing, heading and controlling the work of
organization members and of using all available organization resources to reach
stated organizational goals.
Debtor:
One who owes the liability or obligation.
Credit:
Trust or confidence in a buyer’s ability intention to pay at the same future
time, exhibited by out rushing him with goods and services without present
payment.
Capital Structure:
Debt or equity relationship, it is configuration of equity capital and loan
capital in the long term financing of an organization.
Equity:
The risk bearing portion of the long term capital of a business organization.
Working Capital:
The Portion of an organization’s assets which is not invested in fixed assets
or obligation to pay current liabilities, but is available to fund day to day
working needs.
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