CHAPTER ONE
INTRODUCTION
1.1 Background to the study
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 cash flow 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.
1.2 Statement of the research 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: 1. What is the relationship between average collection period and a firm’s liquidity? 2. Is there a significant relationship between average payment period and the liquidity of a firm? 3. Do debts have a negative effect on the liquidity of manufacturing companies? 4. Is there a significant relationship between credit policy and liquidity of a manufacturing firm?
1.3 Objective of the study
The objectives of this study are divided into general and specific objectives. The general objective is on credit management and liquidity of manufacturing companies. However, the specific objectives are: 1. To examine the relationship between average collection period a firm’s liquidity. 2. To examine if there is a significant relationship between average payment period and the liquidity of a firm 3. To find out how debt affects the liquidity of a firm. 4. To establish if there is a significant relationship between credit policy and liquidity of a firm.
