CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
Credit is widely applicable in the modern world. It is the basis of all trading companies
and widely considered as an essential marketing tool in trading organizations acting as a
bridge for the movement of goods through distribution stages to customers.
A trading company grants credit to protect the sales from competitors and at favourable
terms, Mehta, (1992). It is of paramount importance to note however that the credit
offered has associated costs in terms of servicing, collection costs and creates debts that
must be collected or recovered. The dilemma is that some customers fail to pay their due
debts, therefore a company’s profits may be eroded due to costs of managing debtors and
bad debts in case the receivable are not recovered Pandey, (2003). This therefore
necessitates fuel companies of credit management policies to ensure proper management
of disbursements of fuel, recovery of debts and terms of taking fuel on credit.
According to Pandey, (1993), the term credit policy is used to refer to the combination of
three decision variables that is, credit standards, credit terms and collection efforts.
Pandey therefore put it that, there is only one way in which the credit manager can affect
the volume of credit sales, collection period and consequently, investment in accounts
receivable and that through the changes in the credit policy at the optimum level.
1
A bad debt according to Wiki pedia, is an amount that is written off by the business as a
loss to the business and classified as an expense because the debt owed to the business is
unable to be collected and all reasonable efforts have been exhausted to collect the
amount owed also the accounts receivable that will likely to remain uncollectible and will
be written off. Bad debts appear as an expense on the companies income statement thus
reducing net income.
In general companies make an estimate of bad debt expenses that might be incurred in the
current period based on past records as part of the process of estimating earnings and
most of the companies make bad debt’s allowance since it is likely that all of their
debtors will pay them in full. Federal law of United States defines a “debt” as a
consumer’s obligation to pay money arising out of a transaction in which money,
property, insurance or services have exchanged hands. Cambridge International
dictionary defines a “debt” as something especially money which is owed to someone
else.
There are several aspects to indicate sound credit management policies according to
Gitman (1992), which include credit standards, credit terms and collection procedures.
Nile Energy (U) Ltd. has introduced computerized accounting system in Rubaga station
to truck down all customers who take full on credit, proper invoicing and updates of their
financial statements but still the problem has persisted which has prompted a researcher
to research on it.
2
1.2
STATEMENT OF THE PROBLEM.
Many organizations have tirelessly worked to have proper Credit Management Policies in
order to ensure management of credit risks (Bad debts), However, Nile Energy (U) Ltd.
has for the last 3 years reported poor debt recovery portfolio and increasing costs of
administering accounts receivable as seen below:
TABLE 1: SHOWING AMOUNTS OF BAD DEBTS FROM 36 CLIENTS OF
NILE ENERGY (U) LTD.
Years
Amounts of bad debts
2008
58,545,800
2009
76,580,105
2010
98,611,005
Source: primary data.
It is however believed that it might be due to weak credit management policies that the
bad debt levels have continued to rise.
Despite the attempts made by Nile Energy to ensure strong credit management policies,
Bad debts increase in the company have persisted and if this continues, company’s
responsibility and commitment of steady supply of fuel will be at stake.
1.3 PURPOSE OF THE STUDY.
The study was aimed at evaluating the credit management policies and Bad debts in Nile
Energy (U) Ltd.
3
1.4
OBJECTIVES OF THE STUDY.
(i)
To assess the effectiveness of the credit management policies in Nile Energy
(U) Ltd.
(ii)
To find out whether there is compliance with the steps and procedures set by
Nile Energy (U) Ltd. towards reducing on the level of bad debts
(iii)
To establish the relationship between credit management policies and Bad
debts in Nile Energy (U) Ltd.
1.5
RESEARCH QUESTIONS
(i)
How effective are the credit management policies of Nile Energy use?
(ii)
Are the steps and procedures set by Nile Energy (U) Ltd towards reducing bad
debts followed?
(iii)
1.6
What is the relationship between credit management policies and Bad debts?
SCOPE OF THE STUDY.
1.6.1 Study scope
The study covered the variables of credit management policies and bad debts in oil
companies.
1.6.2 Geographical scope
The study was carried out from Nile Energy (U) Ltd. Station located on Rubaga road in
Rubaga division in the district of Kampala
4
1.7
SIGNIFICANCE OF THE STUDY.
(i)
The study will help the management of Nile Energy (U) Ltd. and other sister
companies in formulating and designing appropriate credit management
policies.
(ii)
The study will add knowledge to the existing literature in universities,
colleges and other research institutions for further case use.
(iii)
The study will also assist in applicability of credit in a practical aspect of
working environment.
(iv)
The research will help the researcher to attain the award of Bachelor’s degree
in Commerce.
5
CHAPTER TWO
LITERATURE REVIEW
2.0
INTRODUCTION
This section reviews the literature relevant to the study. The literature reviewed covers
credit management policies and bad debts in relation to the objectives of the study. The
relationship that exists between credit management policies and bad debts has been
attended to in the literature.
2.2
CREDIT
Credit is controversial in principle as much as the buyer and the seller view it differently.
To the seller, consumer credit is a marketing too (Van horne, 1989). Like Van horne,
trade credit is the most prominent force of modern business and it is considered as an
essential marketing tool, acting as a bridge for the movement of goods through
production and distribution stages to the consumer finally (Pandey, 1993).
Credit can therefore be used to expand sales, maintain a certain market share and retain
old customers in a competitive or recessionary economic environment.
According to Bogges (1967), consumer credit is a philosophy of “buy now and pay later”
the organization delivers a service or product now but allows a delay in receiving
payment from consumers.
However, consumer credit in the eyes of the buyer is the one very favourable option since
it is a source of financing him/her (Van horne, 1989).
6
Trade credit therefore creates receivables or book debts which the firm is expected to
collect in a near future.
A dilemma befalls the financial manager in reconciling the objectives of the company
with those of the customer and this necessitates faulting in place a credit management
policies for proper credit management (Pandey, 1993 Van horne, 1989).
The credit supplier must gain an acceptable level of confidence to extend the maximum
amount of credit at the lowest possible risk of loss. The credit extension function then
becomes a certain commitment of company funds for uncertain returns to an organization
(Copeland and Khoury, 1980)
2.3
CREDIT MANAGEMENT POLICY.
Credit management is affected by the use of a credit policy (Gitman, 1992).
According to Pandey (1993) the term credit policy is used to refer to the combination of
three variables, that is credit standards, credit terms and collection efforts. Pandey
therefore put it that, there is only one way in which the financial manager can affect the
volume of credit sales, collection period and consequently, investment in accounts
receivables and that is through the changes in the credit policy at the optimum level.
Van horne (1989), a firm should evaluate its credit policy in terms of returns (profits) and
costs. The three types of costs involved include the selling and production costs,
administration costs and bad debt losses. Management needs to establish a policy on its
7
trade debtors by critically addressing factors like cash discounts offered for prompt
payment, official period normally offered for credit, assessing the customer’s credit
worthiness and action to be taken regarding late payment in its credit policy. All these are
achieved through the use of credit management variables.
2.3.1 Credit management variables
According to Gitman (1992), there are three important aspects in a sound credit policy,
which include credit standards, credit terms and collection procedures.
Credit standards
Dickerson et al (1995), described credit standards as the strength and credit worthiness a
customer must exhibit in order to qualify for a credit.
Pandey (1995), define credit standards as criteria, which a firm follows in selecting
customers for the purpose of credit extension. Credit standards therefore stipulate the
minimum financial strength an applicant must demonstrate in order to be granted credit.
Setting credit standards implicitly requires a measurement of credit quality. This can be
defined in terms of a customer default Campsey and Brigham, (1985).
They therefore advised that in determining credit quality, the firm should first establish
the character of the potential, customer whether he/she can honour the obligation,
capacity to pay back which can be gauged in records and business methods and
observation of customer’s plants and stores, capital, collateral capacity, which are the
8
assets of that the customer may offer as security to obtain a credit and conditions
generally referring to economic trends or a special development in certain geographical
regions or sectors of the economy which may affect the customers ability to meet his/her
obligations. They call this a 5C’s criteria.
Credit terms
Credit terms are stipulations under which a firm grants credit to customers Kakuru,
(2000). The firm should try to make terms more attractive to act as incentives to clients
without incurring unnecessarily high levels of bad debts.
According to Van horne and Wachowicz (1994), credit terms specify the length of time
over which credit is extended to a customer and the discount if any given for early
payments cash discounts are given to buyers by the seller in order to encourage early
payment before the end of the period of credit Pandey, (1993).
A firm may follow a lenient or stringent credit policy. Lenient tends to sell on credit to
customers or very liberal terms and standards. Stringent credit policy – a firm sells on
credit on a highly selective basis only to those who have proven credit worthiness and
who are financially strong. In practice, firms follow credit policies ranging from stringent
to lenient Pandey I.M 1995, Bhrat, R , (1993).
9
Collection efforts
Dickerson et al (1995), collection policy refers to the procedures used to collect accounts
receivables that is letters, telephone calls, representatives and many others.
A collection policy is needed because all the customers do not pay the firm’s bills on time
(Dickerson et al, 1995 and Pandey 1998). The scholars further noted that some customers
are slow payers while others are non-payers. The collection efforts should therefore
aimed at accelerating collections from slow payers and reducing bad debts.
In order to collect the slow paying accounts, the firm should follow collection procedures
in a clear cut sequence (Pandey, 1998 and Kakuru, 2000). For instance when a normal
credit period granted to a customer is over and he has not made the payment, a polite
letter reminding the customer that the account is overdue should be sent. If the
receivables remain uncollected, letters that are progressively strongly worded can follow
telegrams or the firm’s representative may pay personal visit to the customer. If the
payment is still not made, the firm may proceed to a legal action.
2.3.2
Credit terms and bad debts
According to Van horne and Wachowicz (1994), although the customers of the industry
frequently dictate the credit terms given, the credit period is another means by which a
firm may increase the product demand and reduce on its bad debts.
10
Pandey (1993) noted that a firm lengthens credit period to increase its operating profits
through expanded sales. However, there will be net increase only when the cost of
extended credit period is less than the incremental operating profits. As before the trade
off is between the credit terms and required returns on the additional investment in
receivables and this is at optimum level.
2.4
BAD DEBTS.
A bad debt according to Wikipedia is an amount that is written off by the business as a
loss to the business and classified as an expense because the debt owed to the business is
unable to be collected and all reasonable efforts have been exhausted to collect the
amount owed. Also the accounts receivable that will likely to remain uncollectible and
will be written off. Bad debts appear as an expense on the company’s investment thus
reducing on income.
2.4.1 Debtor’s control system
There is always need for a good debtor’s control system because it is very important that
without it, receivable would build up to excessive levels. Cash flows would decline and
bad debts would rise to unacceptable levels.
Bodil et al (1995), Furness (1983), say that no amount of saving on its own has the need
for credit management, by adding that the basic problem of the under developed world is
that there are neither adequate savings nor adequate saving mechanism and thus the need
for proper management of debtors which involves three issues of setting the credit
11
standards, credit terms and collection efforts (Capeland Weston 1986, Chandra 1997 and
Pandey, 1995) are all in agreement on this issue.
However Chandra splits credit terms into credit period and cash discount. He also adds
that these variables are related and have a breaking on the level of sales;
Bad debts losses, discounts and collection expenses
Debtors are current assets of the business that are vulnerable to being bad debtors and
cause loss to a company therefore, monitoring of debtors should be continuous.
2.4.2 Monitoring of book debts
There is a need for a company to continuously monitor and control its books to ensure the
success of its collection efforts (Pandey, 1995). He suggested two traditional methods for
monitoring book debts, average collection period and aging schedule.
Average collection period is the number of days debts remain outstanding if the firm’s
average collection period is compared with the industry average the firm’s collection
efficiency will be established.
Extended collection period delays cash inflows impairs the firm’s liquidity position and
increase chance of bad debts. This method of average collection period has got two
limitations; provides average picture of collection experience and it is based on aggregate
data (Pandey, 1995).
12
Van horne (1989) observes that economic conditions and that company’s credit policy are
the underlying influences on the level of credit. Bierman and Hass (1973) contend that
accounts receivable accumulation rests on how the credit granting decision is taken in the
organization. Samuels et al (1989) concluded that the monitoring and follow-up
procedures on slow payment are also a principal cause of accounts receivable
accumulation.
Brigham (1985) and Pandey (1993) have recognized the need of collection policy and
aggressive collection efforts because very few customers are willing to pay in time. The
collection effort must aim at accelerating collections from slow payers and reducing bad
debt losses. A high rate of default will occur when customers recognize that a firm has no
will to enforce repayment procedures or policies. This explanation provides an insight
into the possible causes of Nile Energy’s accumulation in uncollected revenues.
2.4.3 The effects of credit standards on bad debts
According to Mehta (1973) and Boggess (1967), in advancing credits, credit standards
must be emphasized such that credit supplier gains an acceptable level of confidence to
extend the maximum amount of credit at the lowest possible risk of loss through bad
debts.
Van horne (1994), and Pandey (1993), credit standards can be loose or tight. Tight
credit make a firm loose a big number of customers and when standards are loose; the
13
firm gets increased number of customers but this does not mean good cash inflows,
because the increased customers leads to increased costs in terms of tracking debtors and
screaming them and also servicing added volumes of bad debt losses.
If a firm employs very tight credit standards, it may sell most on cash basis and may
extend credit to only financially strong customers. Such standards result in no bad debt
losses and less costs of credit management thus earning profits (Pandey, 1993). But the
firm may not be able to extend the sales and the profit sacrificed on lost sales may be
bigger than cost saved by the firm and vice versa.
Van horne (1994), agrees with Compsey and Brigham (1985) and Pandey (1993) that
firms should make use of optimal credit standard policy in order to average out the
weaknesses of both tight and loose credit standards on bad debts.
2.4.4 Collection efforts and bad debts
Campsey and Brigham (1985), noted that the collection efforts or process may be
expensive in terms of both out-of- pocket expenditures and lost good will, but some
fairness is needed both to prevent any undue lengthening of the collection period and to
minimize out right losses of bad debts.
14
A balance must be struck between the costs and the benefit of different collection policies
because changes in a collection policy influences the level of sales, the collection period,
the bad debt loss percentage and the percentage of customers who take discounts.
Pandey (1995) therefore put it that the firm has to be very cautious in taking steps in
order to collect from the slow paying customers. If the firm is strict in its collection
policy with the permanent customers, who are temporarily slow payers due to the
economic conditions, they will get offended and may shift to competitors. Because of
this, the firm may lose its permanent business. On the contrary, if there is lenient in
collection, receivables could increase and profitability reduce and this makes it necessary
for an optimum collection policy. Pandey propounded that optimum collection policy
will minimize debts and maximize profits.
In line with Pandey (1993), Van horne (1994) suggest that the overall debt collection
policy of the firm should be such that the administrative costs and other costs incurred in
debt collection do not exceed the benefits derived from incurring those costs and that
some extra spending on bad debt collection procedures might reduce bad debt losses and
the average collection period and therefore the costs of investing in debtors.
15
2.5
RELATIONSHIP BETWEEN CREDIT MANAGEMENT POLICY AND
BAD DEBTS
According to Pandey (1993), a firm may follow a lenient or stringent policy, the firm
following a lenient credit policy tends to sell on credit to customers on a very liberal
terms and standards. Credits are granted for longer periods, even to those customers
whose credit worthiness is not fully known or whose financial position is doubtful and
this creates a lot of book debts and running costs and the firm utmost earns losses through
accumulation of bad debts.
In contrast, a firm following a stringent credit policy sells on credit on a highly selective
basis only to those customers who have proven credit worthiness and who are financially
strong this will reduce on the bad debt risk for the company.
Pandey put it that a firm uses its credit management policy variables as mentioned above
of credit standards, credit terms & collection efforts to influence its investment in
accounts receivables.
2.5.1 Optimum credit management and bad debts
An optimum credit management is one which maximizes the firm’s value. The value of
the firm is maximized when the incremental rate of return (marginal rate of return) of an
investment set is equal to the incremental costs of funds (marginal cost of capital) used to
finance the investment (Pandey, 1993; Van horne, 1989). The incremental cost of funds is
the rate of return required by the supplier given the risk of investing in accounts
receivables (Pandey, 1993).
16
When the firm’s policy is loosened, its investment in accounts receivables becomes more
risky resulting in slower paying and defaulting accounts hence bad debts. To this effect,
the required rate of return tends to swing downwards.
Van horne (1989) further argued that, when a firm resorts to liberal credit policy, its
profitability increases on account of higher sales but such a policy leads to increased bad
debts and more collection costs. The total investment in receivables increases and
liquidity is credited. However, with a stringent credit policy, profitability reduces but
liquidity does increase. This is why an optimum level is necessary to average out all these
odds. The firm’s optimum investment in receivables will be at a level of trade off
between bad debt risk and sales.
Franks, Broyles and Carleton (1985),
have argued there is need to develop cost
effective measures for identifying credit customers monitoring the status of customer
accounts with over due bills. Gitman (1982) identifies three important aspects of a
sound accounts receivable management these are credit standards or analysis, credit
terms, and collection policies.
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CHAPTER THREE
METHODOLOGY
3.1
INTRODUCTION.
This chapter explains how the study was conducted by the researcher regarding data
collection and its analysis. This chapter includes the various methods which were used in
data collection, research design, sample size, survey population, data processing and
analysis.
3.2
RESEARCH DESIGN.
The design used in this study was cross sectional and descriptive with a correlation bias.
The correlation approach of the study dealt with the analysis of the relationship between
factors of credit management and bad debts.
3.3
STUDY POPULATION.
The study population included 120 people of Nile Energy (u) ltd comprising of workers
from the various departments and clients.
3.4.1 SAMPLING TECHNIQUES
3.4.1 Sample size
The sample size included 30 members of staff of Nile energy ltd from various
departments and the clients of Nile energy ltd.
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Table 2: the distribution of the sample size.
Department
Frequency
percentage
Accounts
5
16.7%
Credit
8
26.7%
Audit
4
13.3%
Operations
3
10%
Clients
10
33.3%
Total
30
100
Source: primary source
3.4.2 Sampling method
Purposive sampling was used in selecting respondents and then collect data from them.
Also on selecting clients the researcher used convenient sampling.
3.5
DATA COLLECTION.
3.5.1
Data sources
The researcher used secondary data from text books, journals and reports. This was
supplemented by primary data from respondents.
3.5.2 Data collection instruments
Questionnaires, the researcher used questionnaires and copies were distributed among
different departments chosen for their responses.
Documentary review, secondary data was obtained from the existing literature taking
into account those related materials
19
3.6
DATA ANALYSIS AND INTERPRETATION.
The responses collected from the field were edited with a view of checking for
completeness and accuracy, data analysis was carried out with a view to provide answers
to the research questions and the findings were presented in tables and analyzed in
frequencies and percentages. The findings were interpreted in light of research objectives
and literature review to attach meaning to figures.
3.7
LIMITATIONS OF THE STUDY
Time constraint
This was one of the major problems encountered – the time in which i was required to
write out the report was limited. Despite this, effort was made to ensure that all the
important areas on aspects of the study are covered.
Financial constraint
Due to lack of sponsorship, I found it very difficult to finance this research as a student..
Attitudes of the respondents
I also encountered non response and holding out of some important information by
management of Nile Energy (U) Ltd.
20
CHAPTER FOUR.
PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS.
4.1
INTRODUCTION.
The chapter entails interpretation and presentation of orderly findings as the result of the
study and data gathered from the field.
4.2
CHARACTERISTICS OF THE RESPONDENTS.
In order to identify the general characteristics of the respondents, respondents were asked
to identify their gender and their response is as shown below.
Table 3: characteristics of the respondents
RESPONSE
FREQUENCY
PERCENTAGE
Male
20
67%
Female
10
33%
TOTAL
30
100%
Source: primary data.
Out of the 30 respondents approached, 20 were male and 10 were female
4.3
EFFECTIVENESS OF THE CREDIT MANAGEMENT POLICIES.
4.3.1 Credit limits.
In order to find out whether there are set credit limits to all customers, 20 workers of Nile
Energy (U) were asked and there response was as follows,
21
Table 4: Response on credit limits.
Response
Frequency
Percentage
Strongly agree
10
50%
Agree
10
50%
Uncertain
-
-
Disagree
-
-
Strongly disagree
-
-
20
100%
Total
Source: primary data.
From the table above, 50 % of the 20 staff members strongly agreed that there are set
credit limits for all the clients and the remaining 50% agreed to the same which shows
that there are set credit limits to all the customers as no body disagreed or strongly
disagreed.
4.3.2 Compliance with the credit policies.
The researcher also asked staff members whether they follow the set credit policies while
offering credit to customers and the replied as follows.
Table 5: Response on compliance with the credit policies
Response
Frequency
Percentage
Strongly agree
-
-
Agree
2
10%
Uncertain
-
-
Disagree
15
75%
Strongly disagree
3
15%
Total
20
100%
Source: primary data.
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The responses in table 5 above show that of the 20 respondents, only 2 agreed that the set
credit policies are followed and 15 and 3 respondents disagreed and strongly disagreed
respectively which shows that that the credit policies are to a greater extent not followed.
4.3.3 Credit worthiness of clients.
Workers of Nile Energy (U) Ltd./Gaz Fuel Station were asked whether they ascertain the
credit worthiness of their clients before offering credit to them as per the credit policies.
They replied as follows,
Table 6: response on whether credit worthiness of clients is ascertained
Response
Frequency
Percentage
Strongly agree
2
10%
Agree
2
10%
Uncertain
3
15%
Disagree
8
40%
Strongly disagree
5
25%
Total
20
100%
Source: primary data.
Strongly agree and agree responses both got 10% 0f the 20 staff members, 3 respondents
were uncertain, 8 and 5 staff members disagreed and strongly disagreed respectively that
the credit worthiness of the clients is not ascertained before giving them credit.
4.3.4 Type of credit policy and terms.
In an attempt to find out how lenient or tough the credit policies may be, staff members
were asked to rate the credit policies in their view. This is how they responded
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Table 7: response of staff on type of credit policy and terms.
Response
Frequency
Percentage
Stringent
6
30%
Lenient
10
50%
Optimum
4
20%
Total
20
100%
Source: primary data.
6 respondents described the credit policies and terms as stringent, 10 which constitute the
greatest percentage of 50% believed that the credit policies and terms are lenient and only
4 described it as optimum as per table 7 above.
4.3.5 Rating the credit policy.
10 customers of Nile Energy (U) Ltd./Gaz Fuel Station were requested to rate the credit
policy in terms of effectiveness and this is how they responded;
Table 8: customer’s responses on rating the effectiveness of the credit policy
Response
Frequency
Percentage
Very effective
-
-
Effective
4
40%
Inefficient
6
60%
Very inefficient
-
-
10
100%
Total
Source: primary data.
From table 8 above, only 4 customers out the 10 who were approached rated the credit
policy as effective, 6 rated it as inefficient and no body rated it as very effective or very
inefficient.
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4.4
COMPLIANCE WITH THE SET STEPS AND PROCEDURES TOWARDS
REDUCING BAD DEBTS.
4.4.1 Relationship with the creditors.
In order to find out the relationship between Nile energy and its debtors, 10 customers
were asked whether they have any binding contract with their creditor (Nile energy (U)
ltd) and they responded as follows,
Table 9: customer’s response on their relationship with Nile energy (U) ltd
Response
Frequency
Percentage
Yes
3
30%
No
7
70%
Total
10
100%
Source: primary data.
Table 9 shows that out of ten customers, only 3 have formal binding contracts with the
company (Nile energy (U) ltd) and the remaining seven do not have binding contracts a
thing which may be of greater problem towards recovery of the credit.
4.4.2 Collateral security.
Customers were asked to state whether they dive collateral security before they get credit.
They responded as below.
Table 10: customer’s response on collateral security.
Response
Frequency
Percentage
Yes
5
50%
No
5
50%
Total
10
100%
Source: primary data.
25
It’s shown from table 10 above that not all clients are requested to present collateral
security is it is indicated that only 5 out of every 10 clients are the only one required to
present collateral something which can lead to bad debts when clients refuse to pay.
4.4.3 Payment period
Credit clients were asked to indicate the period within which they settle their debts. This
is how they responded,
Table 11: client’s response on payment period.
Response
Frequency
Percentage
The same day
-
-
After 1 day
1
10%
After 3 days
1
10%
After 1 week
1
10%
After 2 weeks
3
30%
Over a month
4
40%
Total
10
100%
Source: primary data
No client paid on the same day, the periods of after 1 day, 3 days and 2 weeks each
received one response and 4 clients indicated that they settle for a period of over a month
from the day of transaction.
4.4.4 Bank references.
The members of staff approached were asked if they ask for bank references from
customers before granting them credit and below is how they responded.
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Table 12: response on bank references
Response
Frequency
Percentage
Strongly agree
-
-
Agree
1
5%
Uncertain
-
-
Disagree
15
75%
Strongly disagree
4
20%
Total
20
100%
Source: primary data.
Table 12 above shows that only 1 person agreed that customers are asked for bank
reference before giving them credit, 15 and 4 disagreed and strongly disagreed
respectively which can cause increase in bad debts because they don’t find out the ability
of the customer to pay back.
4.4.5 Reminders for payment.
In order to find out whether Nile energy Uganda reminds credit customers of their credit
status, 10 credit customers were asked whether they get any form of reminder. They
responded as below.
Table 13: customer’s response on whether they receive reminders for payment.
Response
Frequency
Percentage
Yes
5
50%
No
5
50%
Total
10
100%
Source: primary data
27
50% representing 5 respondents accepted that they have ever received reminders for
payments mainly through phone calls and the 50% indicated that they have never gotten
any reminder for payment in whatever form.
4.5
RELATIONSHIP BETWEEN CREDIT MANAGEMENT POLICY AND
BAD DEBTS
4.5.1 Effect of credit management policy on bad debts.
In order to find out how credit management policy has an effect on the level of bad debts,
20 workers of Nile energy (U) ltd were asked whether they think that poor credit
management policy has an adverse effect towards bad debts and there response was as
follows,
Table 14: response on the effect of credit management policy on bad debts.
Response
Frequency
Percentage
Strongly agree
2
10%
Agree
18
90%
Uncertain
-
-
Disagree
-
-
Strongly disagree
-
-
20
100%
Total
Source: primary data.
From the table above, 90% representing 18 out of the 20 respondents agreed that poor
credit management policies have an effect on the level of bad debts, 2 strongly agreed
and none disagreed or strongly disagreed an indication that the poor credit management
policy has really contributed towards the present level of bad debts.
28
4.5.2 Cause of bad debts.
In an attempt to find the cause of bad debts, 20 staff members were asked to indicate
whether high levels of bad debts are due to weak credit management and they responded
as follows.
Table 15: Response on the cause of bad debts.
Response
Frequency
Percentage
Strongly agree
2
10%
Agree
18
90%
Uncertain
-
-
Disagree
-
-
Strongly disagree
-
-
20
100%
Total
Source: primary source.
From the table above, 18 out of the 20 respondents agreed that bad debts are due to weak
credit management policies, 2 strongly agreed and none disagreed or strongly disagreed.
From the above findings, we can say that there is a strong negative relationship between
credit management policies yet there has to be a positive relationship because credit
management policies are supposed to reduce on the level of bad debts but due their poor
implantation, they have just increased on level of bad debts.
29
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS
5.1
INTRODUCTION
This section presents the summary, recommendation and conclusions of the findings from
chapter four and analysis based on the research objectives and questions in chapter one.
5.2
SUMMARY OF THE MAJOR FINDINGS.
5.2.1 Effectiveness of the credit management policies.
From the findings, the researcher revealed that the credit management policies are not
effective since some of the policies were not followed, the credit worthiness of the credit
clients is not ascertained before granting credit and also the workers of Nile Energy
Uganda rated the credit management policy as lenient which confirms its ineffectiveness
5.2.2 Compliance with the set steps and procedures towards reducing bad debts.
The set steps and procedures such as asking for collateral before giving credit, reminding
of customers about their credit status were not fully executed which could be one of the
problems causing high bad debts.
5.2.3 Relationship between credit management policy and bad debts
There is a negative relationship between credit management policy and bad debts as bad
debts kept on increasing in the years of 2008 to 2010 due to poor credit management
policies.
30
5.3
CONCLUSIONS.
From the above, we can conclude that the credit management policies of Nile energy
Uganda are not efficient because they failed to help the company reduce on the level of
bad debts.
Not all credit policies are adhered to and there is a negative relationship between credit
management policies and bad debts as the poor credit policies just led to an increase in
bad debts.
5.4
RECOMMENDATIONS.
The credit worthiness of clients should be first ascertained before they are given credit so
that credit can only be given to credit worthy customers who will be able to pay.
Formal binding contracts should be made to streamline the company customer
relationship. This can make debt collection easier on part of the company.
The company should slowly phase out offering credit and embark on cash transactions as
this will ensure 100% solution to problems of credit and bad debts.
5.5
SUGGESTIONS FOR FURTHER RESEARCH
 There is need to find out how best companies that deal in credit transactions can
do to reduce on the burden of bad debts.
 There is also need to research about the in depth reasons as to why people refuse
to pay yet some make profits out of the businesses for which they get credit for.
31
REFERENCES.
Boggess W.P (1976) ”Screen test Your Credit risk s” in Harvard Business Review, vol.
45, No 6 (November- december1967), pp113-122
Brealy R. and Myers S. (1981), Principles of Corporate Finance. Singapore McGraw Hill
Inc.
Brigham Eugeno F, (1983): Money and credit Developing Africa, Heinemann
educational books
Gitman L.J (1982) principle of managerial finance, 3rd ed. new York: harper & Row ,
publishers,inc
Kakuru, J. (1993). Financial Management. Makerere University, Kampala.
Metha. D., “The formulation of creditpolicy Models”. In management science Journal
(October 1968), vol. 15 No. 2, pp. B30-b50.
Pandey, I.M. (1995). Financial Management, 7th edition. Vikas Publishing House, PVT
India.
32
Van Horne, J.C. (1989). Financial Management Policy and Principles. New Jersey. Eagle
Woodcliff.
33
APPENDIX I
MAKERERE UNIVERSITY
QUESTIONNAIRE
Dear respondent,
This questionnaire is intended to facilitate the study above the effect of credit
management policies and bad debts in Nile Energy (U) Ltd./Gaz fuel stations. The study
is purely for academic purposes and is carried out in partial fulfillment of the
requirements for the award of a Bachelors Degree in Commerce. As a stakeholder your
response will be highly appreciated and treated with utmost confidentiality.
This questionnaire is to be filled by the staff of Nile Energy (U) Ltd./Gaz Fuel Stations.
SECTION A
Background of the respondent
1.
Department:…………………………………………………………………………
2.
Position held:……………………………………………………………………….
3.
Gender:
4.
Age:
Male
Female
18-25 years
25-35 years
39-46 years
5.
Over 46 years
Marital status
Married
6.
35-39 years
Single
Divorced
Academic qualification
Degree holder
UACE
Diploma holder
UCE and below
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Professionally qualified
7.
For how long have you been employed by Nile energy company?
Less than a year
1-3 years
5-8 years
Over 8 years
3-5 years
SECTION B
Tick the most appropriate option in the boxes given below for each question
1.
2.
3.
4.
5.
Are there are set limits in authority to acquire fuel?
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
Do you issue vouchers are raised, authorized and approved before issuing fuel?
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
Invoices and purchase order are matched before fuel is issued
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
The company often asks for bank references before granting credit to a customer
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
The nature of your creditor’s business is permanent
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
35
6.
7.
8.
9.
Are there set credit limits to all the clients?
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
Do you follow the credit policies?
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
Is the credit worthiness of a customer ascertained before granting him credit?
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
Do you request for security (collateral) before extending credit?
Strongly agree
Agree
Uncertain
Disagree
Strongly disagree
SECTION C: Credit terms analysis
10.
In your view what type of credit policy and terms does the company operate?
Stringent
11.
12.
Lenient
Optimum
What is your credit period?
1 day
1 week
2 weeks
3 months
3 months and above
Do you offer cash discounts to all customers?
Yes
No
36
1 month
SECTION D: Collection procedures/efforts
Tick as appropriate
1.
Do you often send invoices to our credit customers?
Strongly agree
Disagree
2.
Disagree
Strongly disagree
Agree
Uncertain
Strongly disagree
Do you send reminding letters to let creditors know their amounts due?
Strongly agree
Disagree
4.
Uncertain
Do you always send credit notes to inform customers of the amount due?
Strongly agree
3.
Agree
Agree
Uncertain
Strongly disagree
Our firm makes personal contact with customers in order to clear their debt
obligations.
Strongly agree
Disagree
Agree
Uncertain
Strongly disagree
SECTION E: Relationship between credit management policy and bad debts
1.
Do you think poor credit management policy has an adverse effect on bad debts?
Strongly agree
Disagree
2.
Agree
Uncertain
Strongly disagree
High levels of bad debts are due to weak credit management.
Strongly agree
Disagree
Agree
Strongly disagree
37
Uncertain
3.
In your opinion, what suggestions do you think should be in place in order to
reduce on the bad debt levels in Nile Energy.
………………………………………………………………………………………
Thank you for taking time to complete this questionnaire
38
MAKERERE UNIVERSITY
Dear respondent,
This questionnaire is intended to facilitate the study above the effect of credit
management policies and bad debts in Nile Energy (U) Ltd./Gaz fuel stations. The study
is purely for academic purposes and is carried out in partial fulfillment of the
requirements for the award of a Bachelors Degree in Commerce. As a stakeholder your
response will be highly appreciated and treated with utmost confidentiality.
To be completed by the customer
1.
Position held:……………………………………………………………………….
2.
Gender:
3.
Age:
Male
Female
Below 20 years
31-35 years
4.
21-25 years
36-40 years
26-30 years
41 and above
Type of business
Registered company
Not registered
5.
Did you fill any application form to be a dealer or corporate customer?
Yes
6.
Does Nile Energy require you to pay in advance?
Yes
7.
No
Is there any binding contract between you and your supplier?
Yes
8.
No
No
Does the company ask for collateral security before granting credit to you?
Yes
No
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9.
In your opinion how do you rate the company’s credit policy?
Very effective
Effective
Inefficient
Very inefficient
10.
Do you get any reminder from Nile Energy if payment is due?
Yes
11.
12.
13.
No
If your answer is yes in (10) above then how?
Postal address
Telephone
Personal visit
Email
For how long have you been dealing with Nile Energy?
Less than 6 months
Less than 1 year
About 2 years
Over 2 years
Do you keep books of accounts?
Yes
14.
15.
No
How long do you take to clear your debt?
The same day
after one day
after 3 days
After 1 week
after 2 weeks
over a month
Do you want to continue trading on credit?
Yes
No
Thank you for taking time to complete this questionnaire
40