THE MANAGEMENT OF ACCOUNT RECEIVABLE AND ITS IMPACT ON THE PERFORMANCE OF BUSINESS ORGANIZATION IN NIGERIA A CASE STUDY OF ENUGU HOME OWNERSHIP COMPANY
Recently with the present economic predicaments in
the country, many business organization and individuals have found it difficult
to cope with the high cost of living. This is due to the paucity of the cash
available in the economy with which they can buy the necessary goods and
services they required on the spot with cash.
Fortunately, with the advancement in the business
world sales and purchase can be made on credit basis thus alleviating the
sufferings and deprivation, that would have been experienced by individuals,
business enterprises and various governments while making business
The research topic delves into trying to ascertain
the management of accounts receivable and its impact on the performance of
business organization in Nigeria, but with particular attentions to Enugu Home
Ownership Company Limited Enugu.
In chapter one, a general background statement about
the topic was given. The state of the problems of the study was mentioned, it
also states the hypothesis for the study.
In chapter two, Review of related literature as
regards to account receivable impact on the performance of business
organization under this chapter, the definition of accounts receivables as were
given by related literature and the formulation of accounts receivable policy,
the determinants of accounts receivable policy as the measure of promoting
accounts receivable were all examined from related literature.
In chapter three, attempt was made to show the
various methods used in gathering the necessary data for the studies e.g.
Research design, area of study, population of study, sample and sampling
procedure and others in the table of content and the problems encountered in
In chapter four dealt with analysis of findings
based on the date collected, it evaluates and disuses the findings. The
hypothesis set in chapter one was tested also.
Likewise ascertain effectiveness or ineffectiveness
of the company in caring on the business.
Finally in chapter five, takes care of the summary
of the findings and conclusions likewise making the necessary recommendation.
of the study
of the problems
of the study
Significance of the study
of the study
Review of related literature
of accounts receivable policies
of accounts receivable policy
of promote account receivable
background of Enugu Ownership company limited
role of accounts receivable I achieving the firms goal
receivable policy and its implementation
3.2 Area of
of the study
and sampling procedure
of the Research Instrument
of the research instrument
of administration of the research instrument
of data analysis
presentation and analysis of results
Recommendation and Implication
of the result
for further research
of the study
1.1 BACKGROUND OF THE STUDY
Going by the advent of time, civilization, economic
conditions, and business world, the world had known only a cash or barter
economy. However, with development in business world, business is being
transacted on credit basis.
In recent years, many business organization in
Nigeria have experienced liquidity problems largely because of the effects of
high rate of inflation. This has been necessitated by he various economic
measures in 1982 to the structural adjustment programme (SAP). In 1991 and the
present economic crisis inspired by the 419 syndrome. Because of this, if they
becomes more imperative than ever to get money promptly from the debtors for
the day today operations because of;
uncertainty in the fluctuations of prices:
subjective preference for present consumption over future consumption; and
need to take advantage of the available investment opportunities.
However, if all these transactions were to be made
on cash basis, various firms in terms of sales turnover.
Consumers and middlemen could equally be affected of
all purchases made from companies are always on cash basis. Truly individuals
or firms have preference for possession of a given amount of cash now, rather
than having the same among some time in the future-time preference for many.
Yet, money (cash) is a scarce commodity which has
wide range of application in the area of both human and material needs. Thus,
this brings about the problem of effective management of the available cash
resources through efficient receivable collection management.
Receivable represent claims, usually stated in
definite financial terms, arising from the sale of goods, performance of
services lending of money or other type of transaction which establishes a
relationship whereby one party is indebted to another in an agreed term.
This column which result from the sale of goods or
services or property and which may or may not be supported by a written note
but which are not secured by specific collaterals right of specific claims or
the assets of the debtor should the debtor fail to pay, are categorized as
Accounts receivables are sometimes of short term
nature which can be defined as claims held against other for money, goods or
services which are collectible within a year or an operating cycle, which ever
For financial statement purpose, receivable could be
classified into sections.
clarrificable as trade and
clarrificable as Non trader
receivables are amount of owed by customers for goods sold as part of the
normal operation by business. They are usually a written commitment of other
and are normally collectible within one years and sometimes as long as five
years 95 years). Neither non-trade nor special receivable which arise from a
variety of transactions are written promises to pay at a later date. Example of
non-trade receivables are advance to officer, advance to subsidiaries and
deposits to cover potential damages or loses etc.
A firm grants credit in order to protect its sales
from competitions and to attract the potential customers to its goods and
services at favourable terms and to cultivate an atmosphere of mutual
relationship between itself and its customers. Trade credit creates accounts
receivables or what is called book debts, which the firm is expected to
retrieve in the forceable future.
These book debts or accounts receivables arising out
of granting credit facilities have three major elements.
1) RISKNESS OF THE AGREEMENT
This might result in bad debt to the sellers. Cash
sales are without risk out not credit sales as cash is yet to be received.
2) ECONOMIC VALUE
This is another element associated in granting
credit in that account receivable is based on economic value. To the buyer of
goods and services, economic value passes immediately at the time of sale be.
There is change of ownership while the seller accepts an equivalent value to be
received at a later late.
This means that payment will be made in the future.
The customers from whom receivable have to be collected in future are called
trade debtors or receivables which represent forms claim on assets.
In view of these characteristics the adoption of an
efficient accounts receivable policy becomes necessary towards achieving the
overall organizational goals or objectives.
STATEMENT OF THE PROBLEM
Many business organization make their sales on
credit which may prove unable to collect as and when due. This causes a great
problem, on the performance of the organization especially as a going concern.
However, the sales department will always want to increase the sales turnover,
hence the need to increase credit sales to customer. The credit department
being the conservative partner will always rely wholly on collectibles of these
debts. What occupies the department most is whether such credit exerted, with
definitely materialize by debtors, paying their debts. If the debts resulting
from credits are not collected then due, which department should bear the bunt?
Is it the accounts department or the sales department which requested for its
approval? The functional problem is heightened as the following expression
Our aim is to spell out in no uncertain terms the
two edged nature of the credit sword, viz.
“Protection and promotion”. The problem thus becomes
that of protecting the company’s investment is receivable which is
responsibility of the credit department, and that of promotion of profitability
which is directly them main pre-occupation of the sales department.
In Nigeria, accounts receivables constitute a
substantial portion of current assets of several companies granting credit
customers tantamount to temporarily deprivation of the user of the company’s
funds. Thus the effect of allowing to take time to pay their debts is
equivalent to investing in the debtors concerned. However, according to the
reliability on these customers, the investment on them will take on greater or
lesser degree of risk while at the same time there is effectively locked up
amount of capital which the company might use profitability for other purpose.
Subsequently, this mighty force the company to seek funds internally for its
Infact, the management of accounts receivable is
saddled with timing problems. When a company (ie the creditors). Extends credit
to its customers, it is not possible to say with certainty whether the credit
will be paid on forms agreed upon.
The company is bound to face a certain degree of
credit risk. In the required trade off between risk and profitability enough to
composite the company for taking such a risk? If the risk sufficiently good
enough to be accepted by all departments? Theses and others are the problems
that require attention in the company.
As an efficient management of accounts receivable is
necessary for the overall performance of an organization, it is pertinent that
in extending credit, the credit department should analyze critically the “five
C” “S” of credit for any perfective debtors.
PURPOSE OF THE STUDY
In every business organization, accounts receivable
plays an important role in assisting the business attain its profitability
objectives, particularly in those areas that relate to the profits and returns
on assets investment.
The basic purpose of this study is to:
to attempt how the company can optimize liquidity position by adequate credit
policies, practices and procedures regarding credit granting, credit limits and
collection of receivables without risking assets through an excessive amount
being field up in accounts receivables.
and check the amount of receivables that can be rightly classified as
receivables which will definitely materialize in payment.
the need for co-operations with other credit departments through regular
exchange of information. The credit department should also liaise with other
departments within the business organization which may be in position to give
information relating to effective accounts receivables management.
the profitability of maximizing or optimizing sales or business volume through
the use of trade debtors.
how effective accounts receivable management can assist business to attain its
predetermined profitability by increasing net returns on asset investment.
whether inefficient accounts receivable management had led for the winding up
of offices in debt collection during the past three years.
SIGNIFICANCE OF THE STUDY
In the recent time, the entire business world is
witnessing some changes and so, greater emphasis being placed on credit
While industrial out-put are growing, we should
expect receivables to increase as well, which to some extent is forced by
highly competitive conditions. This therefore suggests that perhaps, credit,
being used as an instrument by the sales department to generate more sales
volume. If a firm embarks on a too high credit policy, there will be tendency
for possible loss of some customers and so loss of sales to other competitions;
while on the other hand, it will possibly face high risk of bad debts if she
allows for any easy or porous credit policy.
Therefore, since non of two extent favour, the
company of this study will be to help strike a balance between the two in order
for the company to be able to achieve its desired objectives. The study will
also highlight on the possible consequences of not having or operating on
efficient accounts receivable management in business organization. The research
work will also expose management of business organization to the effective way
of managing accounts receivables towards the achievement of the organizational
goals. And now business organization will tackle various risk inherent in
credit sales but the most essential aspect is the control function which aims
at checking and bringing any defaulter desired objectives of efficient
SCOPE / DELIMITATION OF THE
The study is to analyze the management of accounts
receivables and its impact on performance of business organization in Nigeria,
with particular reference to Enugu Home Ownership Company Limited. This is with
the view to determine how the company has been able to manage her accounts
receivables towards achieving her objectives.
In the analysis, attentions will be focused on the
investment in trade from the stand point of granting company. Study covers
ascertaining from the company’s accounts or cr3dit department, all necessary
information and other requirements that would help the company in achieving its
objectives by granting credit or where there are short falls. What factors that
attributed to that are all among the areas to be covered under study.
DEFINITION OF TERMS
To avoid loss of value of this research through
misinterpretation of words, effort was made by the researcher to allow for
common understanding of terms used in the research works.
The research however is not completely without some
essential terms, and abbreviations such as:
FLUCTUATION: It is he movement (moving
up and done) of prices of goods and services. The prices of goods are not
the favourable time or chance of put your money into business.
Something used as pledge for repayment of a igan .
RISK: The possibility of meeting
PROFITABILITY: They benefits that come out
from investment or business. The 5C’S: The factors to consider before granting
credit to customers, they are capital, capacity, collateral, character and