Full Project-THE EFFECTS OF CREDIT MANAGEMENT ON LIQUIDITY POSITION OF A MANUFACTURING COMPANY (A CASE STUDY OF NIGERIAN BREWERIES PLC, ENUGU STATE)

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CHAPTER ONE

• INTRODUCTION:

There is no doubt that credit management is central to the liquidity of firms; especially manufacturing firms which maintain high volume of working capital. Credit management can simply be regarded as written guidelines that set the terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making collections and steps to taken in case of customer delinquency (Taiwo and Abayomi, 2013).

Credit is a major marketing tool or weapon that firms commonly employ for the sole purpose of expanding sales. It therefore, implies that credit sales or extension to customer needs to be properly monitored and managed. Irrespective of the company’s share of the market and also the demand for its products, it there are no adequate measure put in place to regulate sales made to the firms’ customers on credit, then there could be problem more especially those problems related to liquidities (Taiwo and Abayomi, 2013).

Liquidity is the ability of the firm to convert assists into cash. A firm’s liquidity is also referred to as short-term solvency. According to Taiwo and Abayomi (2013), the liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors.

Dina (2007) suggests that good credit management is vital to business cashflow to ensure business operations. He opined further that credit management provides a firm the potential for growth. Similarly, Peter (2005) point out that there is a positive correlation between credit management and profitability. To the best of our knowledge, the impact of credit management on manufacturing companies’ liquidity has actually not gain empirical evidences or ascendancy in Nigeria. Against this background, this study attempts to empirically examine credit management and liquidity of manufacturing companies in Nigeria.

• STATEMENT OF PROBLEM:

A lot of studies have been conducted to establish the impact of credit management on firms’ liquidity. Dina (2007) argued that it appears that customers who pay promptly are not problems but those who cannot pay or would not pay. Invariable unpaid debts will affect profitability and liquidity. 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 and it is believed that inefficient credit management generates irregular incomes which hinder the organization’s effectiveness, efficiency and liquidity (Aboagye, Adjei, Amponfi, Abona and Alhassan, 2013).

Further study conducted by Michael, (1997) concluded that, about 38% of businesses that extent credit to clients is 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. However, extending credit has become an aspect of everyday business activity to be able to increase sale by firms since it contributes significant revenue to business especially as the world recovers from the financials shocks of recent years and exposures of company balance sheet. Irrespective of this doubt still remains as to whether findings can be applied in the Nigeria situations, where the business environment is very fragile. In addition, there is inadequate research on credit management and liquidity of manufacturing firms in Nigeria. Similarly, the significant of the relationship between the two variables still remains to be empirically concluded /investigated. In the light of this, the following research questions are raised:

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?

• RESEARCH OBJECTIVE:

The primary objective of this study is to find out how effectively and efficiently the Nigerian Breweries Plc has managed its trade credit (selling been on credit to customers) to achieve optimum level of liquidity, which will in turn result in the promotion of the corporate image of the brewery and win the patronage of the public.

The project also aims at making suggestions on how the brewery, based on research findings, can improve its business through greater profitability and growth can be assured.

1. To find out if credit management have on liquidity position of Nigerian Breweries Plc, Enugu.
2. To examine if credit sales reduces liquidity of this brewery.
3. To find out if credit sales increase the profit level of the brewery.
4. To examine the relationship between credit sales and liquidity position of this brewery.
5. To find out if brewery’s credit policy and credit terms any effect on its liquidity.

• STATEMENT OF HYPOTHESIS:

In order to achieve the above objective, the research will make the following hypothesis:

1. Liquidity of Nigerian Breweries Plc Enugu in a function of proper credit management.
2. Credit sales do not reduce liquidity of Nigerian Breweries Plc Enugu.
3. Credit sales increase the profitability of Nigerian Breweries Plc, Enugu.

• SIGNIFICANCE OF THE STUDY:

The study is significant in so many ways. Firstly, in the academic world, the study will shed some lights on the significant relationship debt polices and firm’s liquidity in Nigeria. The study will be of much relevance to corporate managers in manufacturing and non-manufacturing sectors in Nigeria to know how to enhance competitive positive using very effective credit management policy. It will further shed lights to them as regard how they can employ varying credit management policy to enhance the liquidity and profitability of the firms with a view to maximizing shareholders wealth. Future researchers no doubt would find outcome of the study useful in that it will serve as a useful reference material to them. Similarly, creditors, especially short-term and long-term creditors will find the outcome of the study useful to them in that it will serve as a basis of policy implication to them.

LIMITATION AND SCOPE 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.

The greatest identifiable ones are time, finance, respondents and general economic problem.

(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)     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.

(3)     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.

(4)     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.

• DEFINITION OF TERMS:

Haven going this far, the researcher sees it reasonably enough to define some key terms or phrases intended to be used in this research project as they operationally apply to the problem:

The terms include:

1. Trade Credit:

This is the quantity of goods (beer) the brewery sold to its customers with the purpose of collecting cash in the future.

2. 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.

3. Liquidity:

This is the volume of cash the brewery has at hand and/or in the bank.  It is the actual total money (most liquid assets) the brewery has as a balance after all expenses (including cost of financial credit) have been made.

4. Profitability:

This is the total net profit or gain made by the brewery from its selling activities (both cash and credit sales).

5. 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.

6. 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.

7. 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.

8. 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.

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