ABSTRACT
An efficient credit management system reduces the amount of
capital tired up with debtors and minimizes bad debts. Good credit management
system is vital to business cash flow and success and ensures effective
business operation.
The study
investigated the impact of financial management of trade credit on firm’s
performance; using Guinness Ghana brewery limited (GGBL) as case study. The
choice of the topic was influenced by the impact of short term financial
management of trade credit on profitability of companies.
Secondary
data was used for the study. It noted that, average collection period of 39.6
days was maintained by GGBL over the period. Average payment period was also
96.2 days, which was encouraging. This
means that, supplies made to GGBL on credit were utilized to turn over sales
cycle three times before payments were eventually made to suppliers. The
performance in terms of profitability evidenced by ROE (Return On Equity), was
36% and OPM (Operating Profit Margin) was 12.4%. This goes to highlight the
importance the impact of efficient credit management have on profitability of
firms.
The study further
observed that ACP and APP were positively related to profit margin (OPM), but
negatively related to return on equity. The study was observed to be consistent
with other studies conducted by Poutziouris, Michaelas and Soufani (2005)
The recommendations
made include;
•
Policy makers should have the interest in
promoting efficient management of working capital to facilitate performance
management.
•
Top management of every firm should manage their
trade credits prudently in order to remain profitable and competitive.
TABLE
OF CONTENTS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
1.2. Problem Statement
1.3 Research Objective
1.4 Research Questions
1.5 Research Hypothesis
1.6 Scope of The Study
1.7 Significance
of the Study
1.8 Limitations of the Study
1.9 Organization
of the Study
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
2.1 Theoretical Basis of the
Study
2.2
Significance of Working Capital
Management
2.3
Policies of Working Capital
Management
2.5 Stages of Working Capital Management
2.5.1
Working Capital Management Overview
2.6 Constituents of Working Capital Management
2.7 Inventories Management
2.8 Just -In-Time Inventory Management
2.9 Working Capital and Cash Conversion Cycle
2.10 Working Capital Trade-Off
2.11 Managing Cash Flows
2.12 Managements of Trade Credit (Debtors)
2.12.1 Account Receivable and Current Liability
Management
2.12.2 Methods of Collection
2.12.3 Cost
of Accounts Receivables
2.12.4 Evaluation of
Credit Worthiness
2.12.5 Currents Liabilities
2.13
Financing Current Assets
2.14
Sources of Short-Term Financing
2.13 Empirical Studies on
Working Capital Management and its effects on Performance
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction
3.2. Research Design
3.3 Data Consideration and
Sources
3.4 Description and Explanation
of Variables
3.4.1 Dependent Variable
3.5 Data Coding
3.6 Data Analysis
3.6.1 Data Analysis Technique
3.7 Profile
of the Study Area
CHAPTER FOUR
DATA ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Introduction
4.2 Descriptive Statistics
CHAPTER FIVE
FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
5.2 Descriptive Statistics
5.3 Raw Data Analysis
5.4 Conclusions
5.5 Recommendation
References
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
An efficient credit management system reduces the amount of
capital tied up with debtors and minimizes bad debts Finlay (2009). Peter D.
(2005) conceived that there is a positive correlation between credit management
and profitability. According to Dina A. (2007), good credit management is vital
to business cash flow and ensures business operations. Good credit management
involves optimizing cash flow to ensure stability and provide maximum potential
for growth. Credit arises when a firm sells its products or services on credit
and does not receive cash immediately. It is an essential marketing tool,
acting as a bridge for the movement of goods through production and
distribution stages to customers. A firm grants trade credit to protect its
sales from the competitors and to attract the potential customers to buy its
products at favorable terms. Trade credit creates receivable or book debts
which the firm is expected to collect in the near future. The book debts or
receivable arising out of credit has three characteristics:' first, it involves
an element of risk which should be carefully analysed. Cash sales are totally
riskless, but not the credit sales as the cash payment are yet to be received.
Second it is based on economic value. To the buyer, the economic value in goods
or services passes immediately at the time of sale, while the seller expects an
equivalent value to be received later on. Third, it implies futurity. The cash
payment for goods or services received by the buyer will be made by him in a
future period. The customers from whom receivable or book debts have to be
collected in the future are called trade debtors or simply as debtors and
represent the firm's claim or asset.(Ramamoorth,1976,p.183)
Receivable constitutes a substantial
portion of current assets of several firms. For example in India, trade
debtors, after inventories, are the major components of current assets. They
form about one-third of current assets in India. Granting credit and creating
debtors amount to the blocking of the firms funds,(Ramamoorthy,1976.)
It is perceived that the following factors might have
contributed to high failure of business having bad debt sitting in their
account statements;
• Either
no documentation or poorly constructed documentation specifying the terms and
conditions of trade in the organization’s credit policy.
• Inability
to seek legal advice before finalizing the documentation to ensure it has
internal consistency and covers all the key issues.
• Inability
to clearly specifying what will be supplied, when the work will be done, and
when and how payment is to be made.
• Failure
to obtain a written acceptance of the agreement along with written approval of
any variations to the original agreement
• Poor
timing of invoicing and insufficient details to resolve invoice queries or
disputes quickly.
• Poor
maintenance of debtors’ records to identify any due or over due debts and how
much is owed and who owes (Ramamurthy, 1976.)
Philip K. (2010) cited four basic things
businesses must strive for effective credit management:
• Know
who your customers are before you start trading with them.
• Agree
payment terms before supplying,
• Invoice
promptly after you have sent the goods; and
Do not be afraid to ask for payment when it is due.
The importance of practicing good credit management cannot
be over emphasized. According to Michael (1997), good credit management is an essential
component and a fundamental part of the modern commercial strategy. Michael
(1997) consented that extending credit to customers is an aid to selling and
all staff should be involved. Michael blended sensible control of credit
management and customer satisfaction with profitability. According to Steve
(1997) of Association of Credit Professionals (ACP) good credit management is
all about customer satisfaction and profit. Steve, (1997) agreed with Michael’s
assertion. Michael contended that satisfied customers are more likely to pay
promptly than buyers who feel they are not getting a good deal.
Indeed if revenue is the energy that
powers company, credit management is the engine that keeps it flowing. The
credit management engine acts as a powerhouse, driving revenue and motivation
to every part of the company. As credit management engine becomes more refined
and efficient, so the company becomes more productive and profitable. Good
credit management should be a proactive task, starting even before the sales
begin. Effective credit management will protect and prosper the business with
regards to profitability however; the opposite is true if ineffective credit
management is practiced. Credit indeed impacts all areas of life and efficient
credit management minimizes delinquency and bad debt losses.
It is against this background that the researchers want to
ascertain the impact of credit management on profitability using GGBL as a case
study.
1.2. PROBLEM STATEMENT
A lot of studies have been conducted to establish the impact
of short term debt management policies on profitability. Dina, A. (2007) argued
that, it appears that customers who pay promptly are not the problem but those
who cannot pay or would not pay. Invariable unpaid debts will affect profitability.
If repayments are not made regularly as a result of poor controlling,
monitoring and collection of debts, then the ability to make profit is severely
affected. It is believed that
inefficient credit management generates irregular incomes which hinder the
organization’s effectiveness and efficiency.
Further study conducted by Michael,(1997) concluded that,
about 38% of businesses that extend credit to clients are unlikely to sustain
in the market. Michael asserted that it is possible to be profitable on paper
but lack the cash to continue operating the business. The European Commission
in 2008 reported that, 33% of EU businesses regard late payment as a
survivalthreatening issue. The report
stated that late payments hinder the functioning of the single market and
cross-border trade.
However, extending credit has become
an aspect of everyday business activity to be able to increase sale. Since it
contributes significant revenue to businesses especially as the world recovers
from the financial shocks of recent years and exposures of company balance
sheet
The above have demonstrated the contributions made so far by
theses researchers in contributing to the existing literature in this context.
Irrespective of this doubt still remains as to whether the findings can be
applied in the Ghanaian situations, where the business environment is very
fragile. In addition, there is inadequate research on trade credit management
in Ghana.
Furtherance to this, the significance of the relationship
between the two variables still remains to be empirically concluded. Hence this
study was initiated to contribute to the existing literature using data from
the Ghanaian business environment. It is hoped that the findings of this study
will have enormous policy implications to the private sector given the fact
that the private sector has been earmarked to be the engine of growth.
1.3 RESEARCH OBJECTIVE
The objective of this study is to
identify any relationship between short term financial management of trade
credit on profitability of GGBL. .Specifically; we are going to look at the
Average Collection Period (ACP), Average
Payment Period (APP) and their relationship with
Return On Equity (ROE) and Operating Profit Margin (OPM)
1.4 RESEARCH QUESTIONS
Do short term debt or trade credit management policies or
decisions matter in firms’ performance in Ghana? Is there any relationship
between trade credit management and performance? To what extent does effective
trade credit financial management affect profitability?
1.5 RESEARCH
HYPOTHESIS
To answer the above questions the
following hypothesis are designed based on the test of the null hypothesis:
HoA: There is no significant relationship
between short term debt or credit and profitability as measured by Return on
Equity (ROE) and operating profit margin (OPM).
H1B: There is a significant relationship
between short term debt or credit and profitability as measured by Return on
Equity (ROE) and operating profit margin (OPM).
HOi: There is no significant change in firm’s profitability as a
result of increase or decrease in short term debt and credit.
HOii: There is a significant change in firm’s profitability as a
result of increase or decrease in short term debt and credit.
1.6 SCOPE
OF THE STUDY
The study covered a period of 2004 - 2012 works of GGBL.
1.7 SIGNIFICANCE OF THE STUDY
For the academic world, this study has shed some light on
the short term debt policies. The significance of this study has further
enhanced considering the fact that research into the relationship between short
term debt and profitability in Ghana is only at its infantile stage. For
practitioners, this study is relevant and of much interest to financial
controllers, managers, directors particularly those working in the brewery
sector to get to know about the trend of debt management policies of their competitors.
The study is also relevant to the government of
Ghana. Policy makers in Ghana recently developed Medium-Term National Private
Sector Development Strategy, and articulated government’s commitment to
facilitating private sector-led growth. It is expected that the findings of
this study will have important policy implications.
1.8 LIMITATIONS OF THE STUDY
The limitations of the study are;
·
Financial constrains
·
Time constrain.
1.9 ORGANIZATION OF THE STUDY
The study is organized as follows:
Chapter One covers the background,
statement of the problem, purpose of the study, research question, significance
of the study, limitations, and organization of the study.
Chapter two; Review of related
literature on; Theoretical basis of the study, Working capital management,
Management of trade credit, Financing current assets, Empirical studies on
working capital management and its effects on performance.
Chapter three covers research
methodology used for this study. The chapter includes the sources of the data,
description of the variables; research questions with respective hypotheses
.The analysis of the data and the tools that were used to perform the
statistical analysis. Chapter four; includes data analysis, presentation of
results and discussion of the findings of the study.
The last chapter that is chapter five;
consists of the summary of findings, recommendations and conclusion.
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