EFFECTS OF ACCOUNTS RECEIVABLE MANAGEMENT ON THE PERFORMANCE OF BUSINESS ORGANISATION
TABLE OF CONTENT PAGES
Title page………………………………………………………………………………………….. i
Declaration……………………………………………………………………………………….. ii
Certificate…………………………………………………………………………………………. iii
Dedication………………………………………………………………………………………… iv
Acknowledgement……………………………………………………………………………… v
Abstract…………………………………………………………………………………………… vi
Table of content…………………………………………………………………………………. vii- ix
Chapter One: Introduction
Background to the study…………………………………………………………………… 1- 2
Statement of the problem……………………………………………………………… 3
Objectives of the study………………………………………………………………… 4
Research Questions……………………………………………………………………. 4
Statement of research hypothesis………………………………………………………… 4- 5
Significance of the study……………………………………………………………… 5
Scope of the Study………………………………………………………………………. 5
1.7.1 Brief History of Nestle Nigeria Plc…………………………………………… 5- 6
- Brief History of Cadbury Nigeria Plc……………………………………… 6- 7
Limitation of the Study……………………………………………………………………. 7
Operational Definition…………………………………………………………………….. 8
Chapter Two: Literature Review
Introduction………………………………………………………………………………….. 9- 11
- Conceptual Framework…………………………………………………………………………. 11- 13
- Reasons for Selling on Credit………………………………………………………… 13- 14
- Factors Influencing the Size of Receivables………………………………………… 14- 15
- Dimension of Receivables Management…………………………………………….. 15- 18
- Principles of Credit Management…………………………………………………….. 18- 20
- Objectives of Accounts Receivable Management………………………………….. 20- 22
- Management of Accounts receivable and the issue of Solvency… 22 2.1.7 Bad Debt and Liquidity……………………………………………………………………………………………….. 22
2.1.8 Consequences of Ineffective Accounts Receivable Management………………….. 23
Theoretical Framework……………………………………………………………………………… 23
Tax Theory……………………………………………………………………………… 24
Transaction cost Theory……………………………………………………………… 24- 26
Liquidity Theory……………………………………………………………………… 26
Product Quality Theory……………………………………………………………… 27- 28
Relevance of Theories to Account Receivable Management………………… 28
What do these theories not explain…………………………………………….. 28
Chapter Three: Research Methodology
Introduction……………………………………………………………………………………….. 29
Sampling Technique and sample size……………………………………………………… 30
Nature and Source of Data……………………………………………………………………… 30
Research Instrument………………………………………………………………………………. 30
Chapter four: Presentation and Data Analysis
- Introduction………………………………………………………………………………………….. 32
- Presentation of Data…………………………………………………………………………………….. 32- 33
- Data Analysis and Interpretation…………………………………………………………………….. 34- 37
Chapter Five: Summary, Conclusion and Recommendations
- Introduction…………………………………………………………………………………………….. 39
- Summary………………………………………………………………………………………………… 39
- Recommendations…………………………………………………………………………………….. 40- 41
References………………………………………………………………………………………… 42- 45
Appendix………………………………………………………………………………………………. 46 –
47
CHAPTER ONE
INTRODUCTION
- Background to the Study
Accounts receivable are credit in the provision of goods or services to a person or entity on agreed terms and conditions where payments are to be made later with or without interest. The primary goal of accounts receivable management is to maximize the value of the enterprise by striking a balance between liquidity, risk and profitability (Hrishikes, 2008). Business organizations in their attempts to make profit adopt several strategies and one of which is allowing credit to customers. Trade 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.
Accounts receivable management refers to the set of policies, procedures, and practices employed by a company with respect to managing sales offered on credit. It encompasses the evaluation of client credit worthiness and risk, establishing sales terms and credit policies, and designing an appropriate receivables collection process. Accounts receivable are found on the balance sheet of a company, and are considered a short- term asset. Effective management of accounts receivables is of great importance as it, by increasing cash flows, leads to sound financial health and flexibility of a business entity.
There are various reasons for setting accounts receivables in a business organization: when goods or services are provided on credit, a business records receivables that in turn increases the revenues. The objective is to survive in the market or to increase the sales. Besides, there are times when a business entity, depending upon the goodwill of the clients or customers, it is willing to help them and hence, providing goods or services on credit, establishes receivables and maintains it in accordance with the established policies. In short, establishing and managing accounts receivables is a universal practice.
Gills (2011) assert that the main objective of accounts receivable is to reach an optimal balance between cash flow management components. Cash flow management is the
process of planning and controlling cash flow both into and out of a business, that is, cash flows within the business and cash balances held by a business at a point in time (Samilogu, 2008).
Account receivable as a component of cash flow has a direct effect on the profitability of a business .Cash flow management refers to the management of movement of funds into and out of a business and involves the management of accounts payable, accounts receivable, inventory as well as the cash flow planning (Joshi,2007).Efficient firms maintain an optimal level of cash flow that maximizes their value.
Accounts receivable management is a dynamic financial management process and its effectiveness is directly correlated with a firm’s ability to realize its mission, goals and objectives. Despite the role cash flow management plays, many firms have not implemented effective cash flow management practices and the results can be dire, Ahmet (2012). Even profitable firms can go bankrupt if they fail to manage their accounts receivable effectively, particularly, if they operate in rapid- growth or seasonal industries. For a credit policy to be effective it should not be static but requires review periodically to incorporate changes in a firms strategic direction and risk tolerance as well as to ensure that the firm operate in line with competition to ensure sales and credit departments are benefiting (Eliots 2009).
A business organization grants credit in order to protect its sales from competitors and to attract the potential customers to its goods and services at favorable terms and to cultivate an atmosphere of mutual relationship between itself and its customers. Granting of credit no doubt leads to bad debts. In the words of Pandey, a credit sale has three characteristics:
- It involves an element of risk that should be carefully analyzed.
- It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, which the seller expects on equivalent value to be received later on.
- It implies futurity. The buyer will make the cash payment for goods or services received by him in a future period.
1.2 Statement of the Problem
THE EFFECTS OF ACCOUNTS RECEIVABLE MANAGEMENT ON THE PERFORMANCE OF BUSINESS ORGANISATION (CASE STUDY OF NESTLE NIGERIA PLC. AND CADBURY NIGERIA PLC. )
