The Effects Of Credit Management On Liquidity Position
Of A Manufacturing Company (A Case Study Of
Nigerian Breweries Plc, Enugu)
TABLE OF CONTENTS
Title page
Approval page
Dedication
Acknowledgement
Table of content
Abstract
Proposal
CHAPTER ONE:
1.0
Introduction
1.1
Historical background of Premier Breweries Ltd
1.2
Statement of problems
1.3
Research objective
1.4
Statement of hypothesis
1.5
Significance of the study
1.6
Limitation and scope of the study
1.7
Definition of terms
CHAPTER TWO:
2.0
Literature Review
2.1
Historical background of credit
2.2
Credit policy
2.3
Trade credit
2.4
Credit Management
2.5
Effect of credit and bad debts on profitability
2.6
Determination of liquidity
2.7
Effects of credit on liquidity
CHAPTER THREE:
3.0
Research Methodology
Methods and Procedures of collecting and analyzing data
3.1
Sources of data
3.2
Survey instruments
3.3
Statistical treatment and analysis of data
3.4
Reliability of data
CHAPTER FOUR:
4.0
Analysis of data
4.1
Analysis of questionnaire
4.2
Published and unpublished data collected form the breweries book
4.3
Result at a glance
4.4
Test of Hypothesis
4.5
Interpretation of result
CHAPTER FIVE:
5.0
Summary of findings
5.1
Discussion of findings
5.2
Conclusion
5.3
Recommendation
Bibliography
CHAPTER ONE
1.0
INTRODUCTION:
1.1
HISTORICAL BACKGROUND OF NIGERIAN BREWERIES:
Nigerian Breweries Plc was founded in 1946 and since then has matured
to become the absolute pinnacle of corporate Nigeria.
Today, Nigerian Breweries most recent extension, the new Ama
Brewery, has taken the company into a new chapter in its history. Nigerian
Breweries: more than half a century of efforts to achieve world class status in
Africa.
Over a period of slightly more than fifty (50) years, Nigerian Breweries
has had success after success and has succeeded in anchoring itself firmly in
the Nigerian beer market, the business community and indeed in the very
hearts of Nigerian themselves.
The “Rising Star” or Nigerian Breweries has, for many decades now,
been synonymous with success, quality and commitment. The organization
can boast a wide portfolio of brands that cover the three segments of the
Nigerian beer market (Larger, Stout and Malt): Star, Gulder, Heineken, Legan
Extra Stout, Maltina, and Amstel malta.
In 1949, three years after its foundation, the first bottles of star were
being filled on the bottling line of the brand new brewery in Lagos.
Three more breweries have been founded since then: Aba, Kaduna and
Ibadan. Enugu brewery was acquired in 1993.
For decades, Nigerian Breweries had tow large shareholders, one of
which, Heineken had always focused on providing the breweries with technical
support. In year 2000, Heineken seized the opportunity of acquiring a 54.2%
majority interest in Nigerian Breweries, a decision which underlined
Heineken’s commitment to the African continent.
Thanks to the process of democratization that started to emerge towards
the close of the 1990s, plus the brewery’s alert anticipation of what would
happen in the new situation. Nigerian Breweries successfully managed to
accelerate a growth in sales from 2.5 million hectoliter in 1998 to 5.5 million
hectoliter (hi) in 2003. This was so successful in fact that a luxury problem
arose: the demand for Star, Gulder, and Maltina started to outstrip actual
supply. Nigerian Breweries and Heineken therefore started up the LAKIE
output optimization project (Lagos, Aba, Kaduna, Ibadan, Enugu).
An investment of 280 million euros in new bottling lines and brewing
plants substantially increased the capacity of these breweries.
The experts were more than aware that an expansion of the existing
breweries alone would be insufficient to meet the constantly increasing demand
for Star and Gulder.
And because of the rose-coloured prospects in the
medium term, early in 2001 Nigerian Breweries and large shareholder
Heineken decided to build an ultra-modern brewery fitted with the latest
innovations and the most up-to-date plant equipment. A world-class brewery
befitting a world-class company.
The entire brewing community is envious of the new Ama brewery near
Enugu. The construction of a high-tech brewery, in corporating the absolute
latest in technological developments and major innovations in a rural tropical
environment is a feat which has never before been achieved in the brewery
industry.
Nigerian Breweries assigned Heineken Technical Services to design and
develop the new brewery and to supervise the construction of this 220 million
euro (30 billion naira) project.
There were frowns of concern when the first plans for Ama were
presented. Would it be possible to operate such a high-tech, state-of-the-art
brewery in Nigeria? The start-up phase has proven that it certainly is. There
are two main reasons for Ama’s success. First of all, Nigerian Breweries
invested heavily in the recruitment of young technical professionals straight
from technical school and then giving them additional training. Many key
operators and all the managers were sent to Holland and Germany for this
additional training, months before the first beer was brewed in Ama. The
others were given the training on recently upgraded equipment in the breweries
at Lagos, Aba, Kaduna and Ibadan.
The second success factor is the actual organizational structure. A stateof-the-art brewery such as Ama calls for a small number of highly professional
employees; employees who perform at their best when working in a
hierarchically small operation consisting of only three layers. Work here is
based on Total Productive Management (TPM), which for Nigerian Breweries
is a new concept introduced by Wiggert Deelen, the Technical Director.
The brewery has an initial capacity of more than 300 million litres of
beer and can be extended even further. The average production is in excess of
1.1 million creates per week. The Ama brewery uses only natural ingredients
for the brewing process, the brewing water being pumped up from five wells
two hundred metres below the ground. This is excellent quality water and
needs very little correction to make it suitable for brewing.
The malted barley and hops used are imported from Europe, the malted
surghum and maize grits are produced by local farmers, malters and millers.
Ama brewery uses 51,000 tonnes of grain per year, 2,550 truck-loads in all.
The brewery has one brew-house that produces twelve brews of 660
hectolitres high gravity wort per day. The brew-house is in operation 24 hours
a day, seven days a week.
After the boiled wort has been cooled down it is mixed with the yeast
and then pumped to the fermentation “celler”.
While the celler is the
traditional name for the location where fermentation takes place, in the brewery
the 30 fermentation tanks of 5,000 hectolitres each are situated in a building
above ground.
The beer is subsequently transported from these tanks to the brewery’s
bottling lines.
Here there are four bottling lines, two of which are reserved for the
popular brand, Star, and one for Gulder.
Each bottling line has a filling
capacity of 30,000 bottles per hour (60cl bottles).
The high level automation and the use of ultra-modern technical
equipment make it possible for the brewery to also produce Heineken beer.
Preparations were started for the local production of Heineken beer only six
months after the first brew had left the production line.
1.2
STATEMENT OF PROBLEM:
However, the research will be specifically concentrated on the problems
which arise when the brewery sells beer to its customers for the purpose of
receiving payment in future.
In view of these, the following critical questions demand answers:
1.
What effects does credit management have on liquidity position of
Nigerian Breweries Plc, Enugu?
2.
Does credit sales reduces liquidity of this brewery?
3.
Does credit sales increase the profit level of the brewery?
4.
Is there any relationship between credit sales and liquidity position of
this brewery?
5.
Has the brewery’s credit policy and credit terms any effect on its
liquidity?
1.3
RESEARCH OBJECTIVE:
The primary objective of this study is to find out how effectively and
efficiently the Nigerian Breweries Plc has managed its trade credit (selling
been on credit to customers) to achieve optimum level of liquidity, which will
in turn result in the promotion of the corporate image of the brewery and win
the patronage of the public.
The project also aims at making suggestions on how the brewery, based
on research findings, can improve its business through greater profitability and
growth can be assured.
1.4
STATEMENT OF HYPOTHESIS:
In order to achieve the above objective, the research will make the
following hypothesis:
1.
Liquidity of Nigerian Breweries Plc Enugu in a function of proper credit
management.
2.
Credit sales do not reduce liquidity of Nigerian Breweries Plc Enugu.
3.
Credit sales increase the profitability of Nigerian Breweries Plc, Enugu.
1.5
SIGNIFICANCE OF THE STUDY:
In carrying out this study, it is intended that it will be of immense help to
the accounting staff of Nigerian Breweries Plc Enugu, especially its credit
management officers.
This study exposes the intricacies involved in extending credit to
customers.
To the customers, this study will enumerate the several benefits that can
be derived by making prompt settlements of their debts. This serves as a
means of increasing organizational efficiency.
This study also is particularly important for the financial manager of a
small company because a small company has relatively limited access to the
capital markets, it relies heavily on trade credits for its short-term financing.
This study will be helpful guide for him.
Thus any company or
individual through this study can have a reasonable knowledge of what credit
transactions are all about and how it can be effectively managed to attain the
much needed profit maximization.
1.6
LIMITATION AND SCOPE OF THE STUDY:
In a study like this type, a lot of set-backs are bound to come up, this
work is restricted by many variables.
The greatest identifiable ones are time, finance, respondents and general
economic problem.
(1)
Time:
Since the research will be carried out at student’s level, the researcher
will have to allot his time such that the demand for their courses will have to be
met.
Moreover, since the interview will be conducted during the working
days of the work the researcher will have to forfeit some of his lectures in order
to successfully conduct the study. The time that will be lost in terms of lecture
missed will be a substantial loss in itself.
(2)
Finance:
Insufficient funds will be another factor inhibiting this research project.
The work will be single-handedly sponsored by the researcher.
And as a student, the project will be sponsored from his meager pocket
money. As a result, he may find it difficult to cover some inevitable expenses
like transport, stationeries, typing and binding labour and so on.
This in turn is bound to affect the sample size and the geographical area
of coverage of the study.
(3)
Respondent:
The inability of the officials concerned to produce adequate and relevant
information required for the research project has been one of the most
frequently encountered constraints by researchers.
Apart from the fact that some of the staff that will be required to give
data are not technically skilful in the area of study, many of them may think
that the researcher is one of government functionaries that come to question
their activities or to assess them for tax payment.
This may be due to the fact that the school authority has been reluctant
to introduce the researcher to the establishment formally by issuing identity
papers or introduction papers to the students.
(4)
General Economic Problem:
The last but not the least limiting factor is this work will be the general
economic problem facing the entire country as at this point in time when the
research will be carried out.
Considering the above constraints, the researcher will concentrate on
few areas of trade credit management that lead to high profitability, optimum
liquidity level and efficient utilization of all the brewery’s financial assets.
Such areas include – historical overviews and origin of credit, trade credit and
credit management; credit policy; five Cs of credit; effects of credit on liquidity
and profitability, and important areas of trade credit management.
1.7
DEFINITION OF TERMS:
Haven going this far, the researcher sees it reasonably enough to define
some key terms or phrases intended to be used in this research project as they
operationally apply to the problem:
The terms include:
1.
Trade Credit:
This is the quantity of goods (beer) the brewery sold to its customers
with the purpose of collecting cash in the future.
2.
Credit Management:
This is the process by which the brewery properly maintains its credit
sales so as to achieve optimum liquidity level. Or, put in this way, credit
management is a way of controlling the brewery’s credit granting attitude in
order to maximize the brewery’s value of achieving a balance between risk and
profitability.
3.
Liquidity:
This is the volume of cash the brewery has at hand and/or in the bank. It
is the actual total money (most liquid assets) the brewery has as a balance after
all expenses (including cost of financial credit) have been made.
4.
Profitability:
This is the total net profit or gain made by the brewery from its selling
activities (both cash and credit sales).
5.
Optimum Liquidity:
This is the level of cash (at hand and/or in the bank) at which all the
brewery’s assets (resources) are efficiently employed and utilized.
6.
Company:
This is a legal person or entity created by the association of number of
persons in accordance with the law for the purpose of a defined objective.
7.
Management:
This is the process of allocating an organisation’s inputs (human and
economic resources) by planning, organizing, directing and controlling for the
purpose of producing outputs (goods and services) directed by its customers so
that organization objectives are accomplished.
8.
Credit Sales:
These are sales made by the brewery without immediate payment.
They are goods (beer) the brewery exchanged for money but with the
intention to receive the cash in the future.
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