impacts of credit management on the profitability of manufacturing companies

 ABSTRACT

The basic aim of this research is to examine the impacts of credit management on the profitability of manufacturing companies in Cameroon. The study was guided by 2 specific objectives which are to examine the impacts of credit management on the profitability of manufacturing. The study adopted a descriptive survey research design. The primary data used for this study was obtained directly from respondent CDC through the administration of structure questionnaires to 1/0 CDC. The data was analysed by using the regression technique. The research finding shows that the degree of competition and advertisement have a positive impact on profitability. This effect is also statistically significant at 5% level of significance. The results also revealed that profit participation has an insignificant negative effect manufacturing. Therefore, the study concludes that advertisement and and the level of competitionhas a significant impact of profitability in CDC. Based on this, the study recommends that CDC should adopt a credit management technique system and should make sure that set goals and objectives are known and implemented by the accounting, finance, operations, and marketing departments.

Keywords: Profitability, Credit management, Manufacturing companies.

CHAPTER ONE

INTRODUCTION

Business enterprises today use trade credit as a prominent strategy in the area of marketing and financial management. Thus, trade credit is necessary in the growth of the businesses. When a firm sells its products or services and does not receive cash for it, the firm is said to have granted trade credit to its customers. Trade credit thus creates accounts receivables which the firm is expected to collect in future (Kungu, Wanjau, Waititu&Gekara, 2014).

Accounts receivables are executed by generating an invoice which is delivered to the customer, who in turn must pay within and with the agreed terms. The accounts receivables are one of the largest assets of a business enterprise comprising approximately 15% to 20% of the total assets of a typical manufacturing firm (Dunn, 2009). Investment in receivables takes a big chunk of organization’s assets. These assets are highly vulnerable to bad debts and losses. It is therefore necessary to manage accounts receivables appropriately.

Trade credit is very important to a firm because it helps to protect its sales from being eroded by competitors and also attracts potential customers to buy at favourable terms. As long as there is competition in the industry, selling on credit becomes inevitable. A business will lose its customers to competitors if it does not extend credit to them. Thus, investment in accounts receivables may not be a matter of choice but a matter of survival (Kakuru, 2001). Given that investment in receivables has both benefits and costs; it becomes important to have such a level of investment in receivables at the same time observing the twin objectives of liquidity and profitability.

To remain profitable, businesses must ensure proper management of their receivables (Foulks, 2005). The management of receivables is a practical problem, businesses can find their liquidity under considerable strain if the levels of their accounts receivables are not properly regulated (Samuels & walkers, 1993). Thus management of accounts receivables is important, for without it; receivables will build up to excessive levels leading to declining cash flows. Poor management of receivables will definitely result into bad debts which lowers the business‟ profitability.

A company suffering from liquidity problem implies that the cost of obtaining funds from other sources may be high and a credit sale beyond the optimal level of credit is dangerous. On the other hand, sales level and profitability are reduced as a result of high or tight credit policy or not granting credit at all.

Due to the speed in which technology is changing and the dynamics in business caused by changes in their internal and external environment, the ways in which businesses are conducted today differ significantly from yester years. Therefore, for a credit policy to be effective it should not be static (Szabo, 2005 &Ojeka,

2012). Credit policy requires to be reviewed periodically to ensure that the organizations operate in line with the competition. This will ensure further that sales and credit departments are benefiting. While most companies have their own policies, procedures and guidelines, it is unlikely that any two firms will define them in a similar manner.

However, no matter how large or small an organization is and regardless of the differences in their operations or product, the effects of credit policies usually bring about similar consequences. Effects of a credit policy are either good enough to bring growth and profits or bad enough to bring declination and losses. This similarity is as a result of the aim of every manager which is to collect their receivables efficiently and effectively, thus maximizing their cash inflows (Ojeka, 2012).

This is contrary under competitive business environment where survival depends on the volume of turnover (sales) which in turn leads to trade debt accumulation. Here debtors cannot be completely avoided it is therefore the work of the management to initiate policies concerning credit sales so that they will survive in the business environment they find themselves. Meanwhile, the study is to assess the effect of credit management on profitability of manufacturing firms in Cameroon.

Credit management is a term used to identify accounting functions usually conducted under the umbrella of accounts receivables. Essentially, this collection of processes involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on a customer invoice. When functioning efficiently, credit management serves as an excellent way for business to remain financially stable.

Competent credit management seeks not to only protect the vendor from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner.

Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some forms of commercial credit. This may include; gathering data on the potential customer’s, current financial condition including the current credit score.

Brief history of the study area: The Tiko Banana project Southwest Region Cameroon.

Tiko Banana Project of the Cameroon Development Corporation (CDC) Del Monte, whose head quarter is based in Tiko Sub-Division South West Region of Cameroon, was established in 1987. This was after a partnership agreement and signing of an accord between CDC and an American Agro-industrial company interested in banana production known as Del Monte. The name Del Monte was adopted after the partnership agreement. The partnership between these two companies started with a ten years renewable contract that is from 1987 to 1997 and renewed from 1997 to 2007. There after, from 2007, this ten years contract was reduced to two years contract, which continued up to 2009.

In partnership agreement, the factors of production, namely: land, labor, capital and entrepreneur, were to be provided by CDC while Del Monte provided the technical services, marketing facilities and finance. The government of Cameroon also supported the project with the donation of land worth 3,000 hectares to CDC for the commencement of agricultural industry. It is important to note that Del Monte paid CDC cost plus a fixed margin per box of banana exported. Effective operation by Del Monte Tiko started in 1990.

The firm is very elaborate and is headed by a managing director (MD) who is answerable to a General Manager (GM) of CDC. The firm is made up of six basic departments namely the technical department, headed by the Project Engineer (PE), the personnel/administrative department headed by Project Administrative Officer (PAO), the finance department headed by the Project Accountant (PA), the Production Department headed by a production manager and finally the medical section headed by a Medical Doctor. A project manager who is answerable to the Managing Director (MD) who is assisted by field supervisors sometimes referred to as “headman” supervises all these departments.

Taking in to consideration the recent trends and evolution in agricultural technology outline above, this study seeks to identify how agricultural technology affects organizational performance in the Tiko Banana Project South West Region Cameroon.

Problem Statement

Every manufacturing company needs to generate profit. To be able to generate this profit, they need to sell their products on both cash and credit bases so as to attract customers and get good market share from their rivals. Offering products on credit base to customers needs an effective credit system management that allows the firm to collect its accounts due on time and not inherit risk from the buyer. To get early payments, the seller needs to offer discount for his credit products, so, this is one of the credit costs which reduces the firm’s profitability. In Puntland, like many other regions, manufacturing companies experience tough competition from their rivals. Due to the tough competition in the market, manufacturing companies need to sell their products both on cash bases and credit bases and these manufacturing company does not has an effective credit system that allows the firm to collect its accounts due on time and not inherit risk from the buyer. It is still using the traditional credit based system (Puntland chamber of commerce, 2009).

In view of this discrepancy, there is need to establish the kind of relationship that exists between the credit management and the firm’s profitability. Therefore, the researcher endeavored to determine the effects of accounts credit management on profitability in selected manufacturing companies.

Manufacturing  firms  operate  in  a  highly  competitive  environment  a  fact  that  compromises  firm profitability as the competition is stiff and oligopolistic in nature in the industry. There is need for internal  adjustments  with  a  potential  of  increasing  profits  for  instance  the  financial  structure (Sheik & Wang, 2013). The above scholars agree on a correlation of the financial structure and the  profitability  of  a  company in  the  developing  countries.  However,  not  all  findings  agree  with this argument as other researchers have not found a correlation of the financial structure to the profits of the firms (Muchiri, 2014).

Studies in different countries have shown that, the financial structure affects profits differently depending on the industry under study.  Regionally,  studies  conducted  have  shown  a  significant  difference  in  the  relationship between financial structure and firm profitability with findings varying depending on the industry and country of the study (Khan, et al., 2012). An analysis in Kenya on the movement of annual gross margin profits before and after price regulation has shown decline in gross profit margin from the year 2010 to 2014 for manufacturing firms, Corporation of Cameroon and Hash  manufacturing firms who  are  all  leaders  in  the  industry  (KIPPRA,  2015).

With  numerous  studies having been conducted both in kenya and in the rest of the globe, not much has been done in terms of the effect of the financial structure on profitability of manufacturing firms in Cameroon, further research has shown that Banana marketing firms have continued to experience poor returns due  to  the  fact  that  the  industry  is  highly  regulated  leading  to  systematic  decline  in  profits  as formulae used by ERC to price products doesn’t cover all components. Other studies by Gakure et  al.,  (2012)  investigating  the  significance  of    the    financial  structure    on  performance  of  manufacturing companies at the NSE; Omesa, et al., (2013) on  the role of financial stricture on financial performance among  20  manufacturing  firms  and Nyabwanga et al.,  (2012) on the  relationship of financial structure  on performance of SMEs in  Kisii  county.  Despite  the  carrying  out  of  the  researches  on  the  effects  of  financial  structure  and profitability of a firm in Kenya, such studies have not been carried out in the petroleum industry. Besides  the  above,  as  Kenya  is  keen  on  becoming  an  industrialized  economy  by  2030, petroleum  marketing  companies  which  are  key  in  the  provision  of  energy  must  be  profitable enough  to  enhance  sustainable  development  in  the  sector  and  other  sector  likewise  as  the sector is a fundamental pillar in the growth of other sectors (Ngniatedema & Li, 2014). Another rationale is that multinational firms like AGIP, Kenol Kobil and Shell & BP have either attempted or  exited  the  Kenyan  market  citing  profitability  challenge  as  the  main  cause  (Kimeli,  2012), therefore it is rational to conduct a study that was to point  towards a reverse to the exit plans besides through sustainable profits.

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