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THE EFFECTS OF CREDIT MANAGEMENT ON LIQUIDITY POSITION OF A MANUFACTURING COMPANY

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 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.

1.2 Statement of the 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:

i.  What is the relationship between average collection period and a firm’s liquidity?

ii.  Is there a significant relationship between average payment period and the liquidity of a firm?

iii.  Do debts have a negative effect on the liquidity of manufacturing companies?

iv.  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:

i.  To examine the relationship between average collection period a firm’s liquidity.

ii.  To examine if there is a significant relationship between average payment period and the liquidity of a firm.

iii.  To find out how debt affects the liquidity of a firm.

iv. To establish if there is a significant relationship between credit policy and liquidity of a firm.

1.4       Scope of the Study

The study examines credit management and liquidity of manufacturing company for the period 2008 to 2012 shall be examined to ascertain how credit management is related and or affect the liquidity position of firms with a view to making inference. Thus, ten quoted manufacturing companies in Nigeria are examined with regard to credit management and liquidity position.

1.5       Research Hypotheses

In order to determine how credit management influences the liquidity position of the selected companies in this study, the null hypotheses are used and specified as follows:

H1: Credit management does not affect the liquidity of a firm

H2: Average collection period does not affect the liquidity position of a firm

H3: Average payment period does not affect the liquidity of a firm

H4: Credit policy does not affect the liquidity of a firm in Nigeria

1.6       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.

1.7       Limitation of the Study

Inadequate availability of very recent data for the year 2013 is a major limitation in this study. In order words, the data from the annual financial statement of the selected manufacturing firms used in this study are not readily available for the period, 2013, hence the choice of the period 2012 as the most recent contender year. Another major limitation affecting this study is the problem of generalizing the findings to other non-manufacturing firms in Nigeria as regard how credit management affect their liquidity position.

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