TABLE OF CONTENT Title page Approval page Dedication Acknowledgement Table of Content CHAPTER ONE 1. 0Introduction 1. 1Background of the Study 1. 2Purpose of the Study 1. 3Scope and Limitation of the Study 1. 4Significance of the Study 1. 5Definition of Terms CHAPTER TWO 2. 0Literature Review 2. 1Development of Credit in Business Management 2. 2Importance of Trade Credit 2. 3Review of the Related Topic 2. 4Legal Consideration for Effectiveness of Credit Control and Management 2. 5Consideration for Effectiveness of Credit Control and Management 2. 6Credit Determination Factors 2. 7Credit Costs 2. 8Risk Evaluation 2. Determination of Credit Limits 2. 10Collection Procedure 2. 3. 0Appraisal of the Efficacy of Credit Control and Managements CHAPTER THREE 3. 0Research Methodology 3. 1Historical Background of the case Study 3. 2The Research Design 3. 3Method of Data Collection CHAPTER FOUR 4. 0Data Presentation 4. 1Data Interpretation 4. 2Data Analysis 4. 3The Data Collection Procedure CHAPTER FIVE 5. 0Summary and Observation 5. 1Conclusion 5. 2Recommendation CHAPTER ONE 1. 0INTRODUCTION A manufacturing company is a company that is engaged in the transformation and conversion of raw materials (inputs) into finished product known as outputs.
Economics wise, manufacturing could be said to be the second stage of production. Therefore, a manufacturing company turns raw materials or an input into finished goods, mostly with the objectives of maximizing profits. For the objective of any manufacturing company to be realized, goods produced will have to be sold out for the consumption of the people. This is done in mist cases through sales on credit (trade credit) or sales con cash basis (cash sales) Trade credit can be defined as the buying and selling of goods and services in which payment is postponed to a future date according to the agreement between the buyers and the sellers.
Therefore, it can be looked at in two ways viz: customer credit and suppliers credit. Customers credit can be defined as an outstanding debt owned by customers on both open account and against note on balance sheet, while suppliers is the outstanding amount owned to suppliers on both open account and against notes on balance sheet The entries of transaction in a manufacturing company comprising a complete circle often runs as follows: This represent the circular flow of capital from cash to inventory to be securable to cash against
Trade credit involve costs and benefits, benefits include expansion of sales, retention of customers and attraction of new customers. Cost of trade includes bad debt, losses, production and selling cost, administrative expenses and opportunity cots. For trade credit to contribute to the objective of any manufacturing company, its benefits must override the cost and the credit terms must censure liquidity at all times. Therefore, in order to maximize the value of the firm, there is need for credit management which is the theme of this project Trade credit could be termed as the lubricant of commerce.
Historically, it precedes the development of financial institution and rose out of special ties formed in the ordinary commercial activities. It is granted because of suppliers readiness to assume a grate degree of risk. Recently, its development as a result of liquidity has squeezed the Nigeria economy. Many companies turnover have reduced drastically, thus making these organization to engage the various forms of bonanza and competitions. Furthermore, in order to boost sales, there is the need for trade credit. Credit management plays an important role in any manufacturing company.
This is the situation particularly where there is a perfect competition and one wants to keep his factory busy for long and retain its share of the market Infact, credit management is a means of maintaining the health, growth and continuity of the business . the achievement of maximum profits serves as a measure of its credit control or management. Therefore, credit management can be seen as a process in which one manages account receivable from customers effectively to ensure maximization of profits. Minimization of bad debts and other cost as well as ensuring liquidity at all times. 1. 1BACKGROUND OF THE STUDY
The concept of credit management has been in practices for many decades, the granting of credit then was highly primitive The development of credit management is traceable to the Holy Bible, in the book of St. Luke 19 Vs 12-26, where Jesus Christ teaches the parable of the unfaithful servant. He taught them of a credit facility for them to trade with in an attempt to go into a far country to receive for himself a kingdom These ten servants are expected to trade with money advanced to them and make return of both the principal and interest. The latest development to academic interest is credit management is ascribed . 2PURPOSE OF THE STUDY In order to provide a useful credit transaction is a business organization, we need sometimes of keeping tract of the daily credit activities and summarizing the outcome in the accounting reports of control should be incorporated into all operate in relation to its benefits without such control. 1. 3OBJECTIVES The main objective of this study will be to examined chow credit sales health, growth and continuity of Lever Brothers Nigeria Plc, Lagos and to offer suggestion where the system appears defective Specifically , this study will among other things . Highlight the methodology of credit management in the company; ii. Determines whether Lever Brothers Nigeria Plc; is optimizing returns from receivables iii. Determine the need or otherwise for continued retention of defaulting customers in Level Brother Nigeria Plc; business in both the short and long terms 1. 4SCOCPE NAD LIMITATION OF THE STUDY Due to time and financial constraints, it would be impossible to cover other manufacturing companies.
The study is therefore restricted to Lever Brothers Nigeria Plc; a generalization of the result of this study to other manufacturing companies may therefore not be possible duce to variation on credit management practice in the different manufacturing companies The analysis of these study will be based on response from staff and management of Lever Brothers Nigeria Plc; Lagos. Since some organizations are sometimes interested in giving information which people wants to hear and not what is actually in practice, one can not say that all the information given by this organization will be fully reliable.
Therefore, the application of the results of this study is on the condition that all the information collected are true 1. 5SIGNIFICANCE OF THE STUDY The study will act as a guide the management in obtaining the maximum profit possible from the credit transaction and in ensuring liquidity at all times. It will also serve to stimulate other researchers with the attempt of finding out more specialized work in credit and management especially the credit buying aspect in a manufacturing company. This is an area which is yet to receive enough attention from researcher and authors. . 6 PLANS OF THE STUDY This study look into credit management policies of Lever Brothers Nigeria Plc; Lagos the purpose of this study, this work was divided into five broad chapters. The first chapter deals with the introduction of the topic, background of the study, purpose of the study, scope of the study and significant of the study. The second chapter deals with literature review, method or data collection and presentation while the fourth chapter deals with data presentation and data analysis, data collection procedure and interpretation of data.
The last chapter deals with the summery and observation, conclusion, recommendation and suggestion for further studies of the study. CHAPTER TWO 2. LITERATURE REVIEW 2. 1 DEVELOPMENT OF CREDIT IN BUSINESS MANAGEMENT Credit is the acceptance from the provider of goods and services to underwrite or finance such sales until his customer has himself recouped funds from the disposal of the goods and services and is able to pay off his debt to the suppliers. Credit in general term is a coinage from Latin word ‘creditum’ meaning ‘Trust’.
Etinger and Golish recognized that although there are variations to the usage of credit as presented in the Latin word creditum, it means that given of taken in exchange for money. Goods or services. Economists define credit as the trust or confidence placed in the ability and willingness of a debtor to meet an obligations. Credit is a portend forces to the modern business. It is considered as an essential marketing tools acting as a bridge for the movement of goods through production. And finally, it represents the maximum risk exposure that the firm will allow itself to undergo for an account.
When credit is granted, good will increases , market share expands and book proceeds on sales increase but rise of incurring doubtful or bad debts increase. According to P. Hunts, C. Williams and G. Donaldson (4). Risk has been defined as the uncertainty both with respect to the receipt of income and to there turn of the principle invested. These days the risk allowed in receivable are very substantial. Dun and Brand street (5) have found that difficulties associated with receivable rank first as fundamental causes of business failure.
This has not only called for full time attention of the management but has resulted in the setting up of credit control department in most organizationals. 2. 2IMPORTANCE OF TRADE CREDIT M. Tamari (1973) (6) pointed out that trade credit serves as a form of price reduction when the structure of the market does not encourage competition through price cutting. It is easier for a customer to have access to suppliers credit than other sources. Merle T. Welsham (1967) (7) pointed out that the evolution of specialized and highly efficient financial institutions and intermediaries has not diminished the importance of trade credit.
Infact, it continues to absolute amount and in relation to other sources of financing. Therefore, trade credit unlike bank credit is not subjected to the direct control of Central Bank 2. 3OBJECTIVES OF CREDIT MANAGEMENT Credit management policies vary from organization to organization. Brain Barkey (8) contended that a considered policy on credit and effective credit management can mean the difference between credit control and management is to maximize the value of the form. The optimum credit policy should occur at a point where there is trade off between liquidity and profitability.
Tighten-Credit policy loose From the diagram cost consideration concludes liquidity and opportunity cost. According to Pandey (9), liquidity consideration concern the possibility of receivable being collected on time and at full value. As the firm policy becomes liberal, the chances of bad debt increase and collection period gets extended. This poses problems of liquidity credit polices that tresses stringent credit standard and aggressive collection procedure shcoul clearly achieve minimum bad debt, but this would be at the expense of increased sales an higher profit margins.
On the other hand, a liberal credit granting policy result in high risk of bad debts without a compensating increases in sales and profits. The goals of credit management comprise of the two extremes Anker V. Aderson (10) pointed out that an optimum credit policy I none that is generally agreed to maximum profits. Hence the assertion by P. Hunt et al (11) that objective of credit management like that of inventory control is maximizing return investment which simultaneously reduce bad debt risk 2. 4LEGAL CONSIDERATION FOR CREDIT MANAGEMENT
When credit facility is granted to a customer one expect that he will not fail to fulfill his obligation under the transaction. But this unit is always the case, while some customers show reluctance in payment, some entirely refuse to ay. Either of the two is a breach of contractual obligation which may result in readdress through litigation In section 1 of Sales of Gods Acts: sales is defined as contract whereby the seller transfers or agrees to transfer the property in goods to the buyers for money consideration called the price.
In any contract of sales. The purchaser can pass titles in goods to a third party even if he is still indebted to the original sellers. The seller can only sue either for the price of the goods or for damages resulting from the breach of the contract. Litigation has always been of benefit in retrieving monies owned by debtors. An instance of this was sited but Brain Bailey (13) of medium sized engineering company in the motor industry in U. K which went into liquidation in 1980. It was decided on who should be paid first.
At the top of the list were those who were contemplating of instituting legal proceedings. The above has always been the case except when there is a clause in the agreement between the company and the customers where customers have studied the loopholes in the system. An instances this was also said by Brian (14) of a small retailing company which was registered with the name of the wife of the director who had been declared bankrupt and had not been discharged. It was decided that the woman whose name was used had no contractual capacity 2. CONSIDERATION FOR THE EFFECTIVENESS CREDIT MANAGEMENT 2. 6CREDIT DETERMINING FACTOR Seldin (15) pointed out that credit policy is an important factor in determining both the quantity and quality of trade credit outstanding. M Taman (16) contended that the type of credit policy of an organization can be influenced by the type of industry, class, type of product, current market share of the company and the economic climate Generally, creditors tend to avoid risky transactions in order to minimize and allow more credit to customers that are adjudged acceptable credit risks.
Nevertheless, instruments and method to be used for appraising credit worthiness of customers have to be determined. Organization look at the final accounts or companies financial ratios. Commercial status report, financial pres and trade references However, there might be need for further investigation to be carried out, this may be due to laziness in filling account with the company’s house, a change of auditors, a change of backer and an audit qualification for this purpose.
Large organization in Western world, for ex ampler, Unilever Plc in Rotherdan makes use of credit reporting organization in order to supply them with relevant credit worthiness information on prospective customers Brian Barley (17) sited an instance that was discovered by the United Association for the protection to trade of director who had been obtaining credit in his own different credit transactions which eventfully resulted in debt of $750,000. Hence, it will be good to employ the services to credit reporting agency who will be able to provide detailed information on small or new companies.
Other organization also make use of customers and bankers to carry out independent in house investigation on prospective customers. Which ever is the type of investigation employed, it is imperative that the investigation be rapid enough to forestall loss in the prospective sales as a result of delays in credit a clearing David Juskow (18) pointed out that a certain degree of co-ordination is also needed between the sales functions and the credit department, so that new customers can be located and investigated as quickly and at a lower cost. 2. CREDIT COSTS Many companies do not attempt to work out the cost of their credit. This is an essential element of making accurate decisions on general terms of business, in allowing special terms in accepting and setting credit limits. The main cost to be taken into account includes credit staff salaries, credit department accommodation equipment of supplies, agency and legal expenses, bad debts and cost of finance invested in the form o average debtor balance The hidden cost of credit control is the loss in the revenue of customers who have been rejected.
Hence, the assertion by Brain that the objective of credit control of management is to strike the correct balance between potential losses, bad debts risk and potential income. 2. 8RISK EVALUATION The investigation conducted is expected to help management in determining and quantifying the acceptable level of risk and to determine what level of risk could be reasonably allowed for each customer given all relevant information and at a collected regarding credit worthiness of the customer
Further evaluation of risk involved us based on the theoretical concepts which influences the credit standards and are common referred to as the five C’s of credit. These are capacity, capital condition, character and collateral CAPITAL This represents the financial standing of the company as shown cby the balance sheet CONDITION This refers to certain restrictions or limitation brought about by the economic environment and which makes or mars the desire to grant credit. It is an essential factor which both the company and prospective customers has on control
CHARACTER Are those qualities of honesty, moral uprightness and fair play which are intrusive and urges the debtor to settle outstanding dues. The regular update of information and accurate record keeping about customer gives accurate assessment of the character of the prospective customer and enables and organization to determine which customer has a consistent record of credit payments and should also prevents any fraudulent intention of some customers to present a sudden outwardly attractive position of themselves in order to secure credit CAPACITY
This is the demonstrated ability of the organization to operate successfully and pay when settlement is due. The ability of an organization to meet its liabilities as they fall due is a function of the liquidity and cash flow department of the organization This is in return a function of the volume of cash sale and level of returns from receivables COLLATERAL This is represented by assets that the customers may offer as a pledge for security of the credit extended to him. Apart from evaluating risk of prospective customers through the 5c’s of credit.
Van Home (21) recommended that credit personnel obtain relevant information of the applicant also through one or more of the following sources; financial statement, credit rating and reports, bank checking and company’s own experience From all these information accounting ratio such as: – Quick assets ratio – Raito of total debts to working capital – Net sales to net worth ratio – Net profit to net sales are calculated and compared with industry average and past results . Where customers are unable to present financial statements, other sources of information about the customer are utilized . 9DETERMINANT OF CREDIT LIMITED A credit limit is a maximum allowable of credit a customer can enjoy credit limits arises because there is no firm with the resources for unlimited receivable. Some firm have the same limit for all customers, some set different limit for different categories of customers. When a customer reaches his limits special permission, has to be granted for additional credit. Ankar Anderson (22) pointed out hat this policy is an example of management but exception.
However, a firm should note that the changes in the economic conditions are significant enough to influence changes in t he limit of credit granted to customers When setting a credit as well as past trend of payments, competition market and length of credit period, Beckman J. and Foster (23) formular for calculating credit limit is below. Credit Limit = s x a x b C Where: S=Annual Sales a=% of th sellers line of business the sellers expect to obtain b. =Cost of goods sold as % of sales c=average turnover of sellers account receivable 2. 5. 5COLLECTION PROCEDURE
When goods are sold on credit, it is the responsibility of the credit management team to update the account and measure that bills are promptly delivered and effective reminder sent to show paying customers According to M. Tamari (24) collection procedure depend on: 1. Debtor category: debtors can be classified into high risk medium risk and low risk debtors. This classification depends on the level of risk borne of the, volume of transaction, payment trend and goodwill enjoyed are important future tat influence classification. 2. 2. Size of Debt: This decided how substantial the debt is to the organization.
There are small and large accounts 3. Market Share: The procedure to adopt in collecting debt is also the function of the market share of the company. A low market share may at time call for a liberal approach so as to retain and increase customers patronage 4. Class of Products: This depends on the type of product the company is dealing in companies dealing with consumable products, with short shelf life normally have short collection period 5. Aggregate level of returns: When the aggregate level of return is substantial, collection may be liberal.
Generally, collection machinery is set up to communicate with the debtors, this is backed up with reminders. This can be through telephones callas an personal visits by the sales staff an credit staff with an established personal relationship which often encourage prompt payments The collection procedures tend to become more formal, for shadowing the final resources of level action. The company can instruct a solicitor to write a warning letter and if necessary commerce legal proceedings for the payment The services of debt collectors could be employed with the attended bad publicity in trade circle.
Hunt et al clammed that failure to pay promptly gives bad publicity in trade circle and affect the credit standing of the firm. They however, went further that threat of unfavourable publicity is of no effect and minor indeed to a customer whose financial difficulty is already well published in trade circles The inevitable final action is litigation but before this stage, further credit to the customer must have been stopped, it is also worthwhile to investigate and consider compromise settlement before resorting to full legal remedies 2. 5. 6Appraisal o the Efficacy of Credit Management
The credit management team will from time to time sits back and reflect on past levels of credit grunted and returns achieved in order to ascertain the degree of efficacy of the credit control in management. It is from this appraisal that management could be guided to decide whether to change retain or notify its credit policies for the future. There acre many criteria which have been developed and used in assessing the effectiveness and efficiency of a credit management team. Some of them are: a. Bad Debt index: This criteria justifies the retention or modification of a credit policy. Bad debt index = Bad debt loss
Total credit sales b. Average Collection Period: This represent the average time the company will have to wait after granting of credit sales before expecting returns from customers. This enables the firm to compare its credit period with the average existing in the particular branch and size groups ACP=Receivables- no of days in the year Sales c. Collection Index: This represents the ratio of collection made during its period of total credit granted. This shows the firm whether or not it is making adequate returns from its credit sales Collection Index =Collection for a period__________________
Total credit sales granted during the period d. Age Analysis: This represents analysis of receivables outstanding according to the length of time that the credit was granted. It helps in the classification of the account into dates of sales and percentage representing each class of sales are attached. The ageing tendency also reveals the probability of accumulation of old accounts and enables adequate provision to be made for ad and doubtful debts e. Debtors and Working Capital Raito: This helps in the liquidity consideration of a firm by taking into account the ratio of debtors to the working capital of the company
CHAPTER THREE 3. 0RESEARCH METHODOLOGY 3. 1HISTORICAL BACKCGROUND OF THE CASE STUDY Lever Brothers Nigeria Limited (formerly) is an arm of an international organization of a successful international soap merchant. The company came into existence a private company on the 11th Apil,1 1923 under the name of Lever Brothers (West Africa) Limited on 19th February 1954, lady M. O Abayomi opened the margarine factory, which was registered under the name Van Den Beigh (Nigeria) Ltd, also at Apapa Lagos.
In 1955 both West African Soap Company and Van Den Beigh (Nigeria) limited merged to form Level Brothers Nigeria under the same management at Apapa Manufacturing at Apapa factory started with the production of bar soaps using local palm oil. This was later extended to toilet soaps including such international brands as Lux Astra and Asepso. Its operation was later diversified in the manufacturing of Blue Band and Planta Margarines, Omo and surf, non soapy Detergent, pepsodents, Close-up Tooth Paste and True Top fruit squash. The company’s second factory was opened at Aba in 1958 for production of Sunlight and key laundry soaps.
The Aba factory was extended to manufacture non-soapy detergents in 1980. The company’s third factory at Agbara in Ogun state was commissioned on 22nd March 1983 to manufacture margarines, cooking oils, industrial facts (which includes maria and breeder for baking cakes and bread) and other food drinks in response to the increased demand for these products. The merger of Lipton Nigeria Limited with the company in 1985 and with Chessbrough Nigeria Limited in December 1988 added Lipton tea, Borncafe, Bongo and Chesbrough’s products to the range of company products
The detergents food and toilet soap preparations sectors of the company presently operating with five divisions namely: a) The technical division which has responsibility for transforming raw material into high products that will not be acceptable to the consumers but also meet international standard b) The marketing division was charged with knowing the consumer taste and demands as well as product presentations to the public c) The commercial and financial division was formerly made p to two separate divisions. It has the responsibility for all financial and commercial functions of the business d) The sales division has the responsibility to ensure that products are made available to consumers throughout the country and that optimum sales levels are attained e) The corporate affairs and personnel division has responsibility of monitoring personnel welfare, remuneration, general administration, training and industrial relations functions.
The managing Directors of Lipton Nigeria limited and Chesbrough Nigeria Limited still manage the activities in these companies but all their activities are being coordinated by the Chairman of Lever Brothers Nigeria Limited. 3. 2RESEARCH METHOD This chapter concerns itself with the method employed in conducing the research. The information for his study is primary an secondary sources. The primary sources include personnel interview with the accounting and sales staff of the company. Questionnaires to be administered on credit control and management in the organization and the observation of credit control and management system.
Secondary sources will include accounting records, final account, textbook, journals and related literature to know more about credit management and their requirement. 3. 2. 1Primary Sources The primary sources includes personal interview with the accounting and sales state of the company. , The oral interview technique of collecting data was underwent because it has flexibility and can be derived to meet carious situations. This method guarantee an accurate and reliable information to the researcher for subsequent evaluation during the project write up. 3. 2. 2Secondary Sources
The Chapter will include accounting records, final account, textbook, journals and related literature to know more about credit management and heir requirement. Lever Brothers Nigeria limited grants credit facilities to worthy customers to enable them purchase more of its product thereby achieving sales target, ensuring and maintaining customers loyalty and generating business growth which results in good profit for the company. The company has a policy of selling mainly to distributors and customers like institutions and merchant house and do not in principle sell to individuals.
It cooperates a weekly selling cycle during which both credit sales and cash transactions are granted 3. 3. 3Problems of Data Collection (a)When the company is satisfied that there is extra unfulfilled demand in a particular location. The company in this instance may initiate a process of upward revision of the credit facility to a reliable customer in location (b)When an existing customer (distributor) applies for such a revision and the company is satisfied that: (i)The volume of business in his location warrants such an upward revision (ii)The customer can rationally cope with the additional stock if the credit limit is revised.
From the foregoing, it is apparent that the sales management team owes it a duty to the company to be objective in making recommendations for credit or cheque drawing facilities 3. 3. 4The Research Design The plan and organization of his research is mainly or primarily description. This plan helps as if were a specification of the nature of and operation of the credit management and the information in manufacturing company 3. 3METHOD OF DATA COLLECTION AND PRESENTATION The data for the analysis of this project collected from both primary and secondary sources.
This involves reading around system that is studying cash records and documents which relates to the topic. This often provides a useful starting point for any researcher facts finding. The materials usually consulted are the organization’s relevant procedure moments, job description and job specification, which lay down how task should be performed, the file which the system monitors and the output which be performed, the file which the system monitors and the output which the system produce.
Other documents include textbooks, reports statistical summarize, memoranda, hand boos and training aids. A second method of data collection is through interview face to face interview with the interviews is an indispensable part of fact findings and if well conducted provides valuable information about policies process and situation that will not be apparent form document in this method, the researcher should ensure that the interview which is conducting it into the overall fact finding objective.
In this direction also, the interview must be made aware of the purpose of the investigation so that they should be in a better position to answer the question being asked. When under going this method, the researcher should make preparation in advance about preparation in advance about the suitable time to be chosen and also the appropriate venue to be selected. The process of data collection has been split into two phases, one concentrated on gathering data on the theoretical aspect of the essence of credit management in manufacturing company during which textbooks and journals on the subject matter were consulted.
A comprehensive list of secondary materials consulted in the course of the research is included as the bibliography to the project. The data collection on the process of Lever Brother Nigeria Limited now Unilever Plc. The technique of collecting data was used because its flexibility can be devised to meet various situations. This method guarantee an accurate and reliable information to the researcher for subsequent evaluation during the project write up.
However, this method is without its limitation as transportation cost are generally higher in view of the present economic situations. CHAPTER FOUR 4. 0DATA PRESENTATION TABLE 1: ANALYSIS OF FIVE YEARS COMPANY BALANCE | |1983 |1984 |1985 |1986 |1987 | |Capital employed |N’000 |N’000 |N’000 |N’000 |N’000 | |Share capital |36,125 |36,125 52,244 |52,244 |52,244 | |Capital reserve |10,796 |10,769 |12,D355 |12,355 |- | |Asset revaluation account |13,615 |13,615 |13,807 |13,807 |26,142 | |Debenture redemption res. – |- |2,000 |4,000 |6,000 | |Revenue reserve |15,115 |20,827 |17,996 |29,740 |41,304 | |Shareholders interest |75,681 |81,36 |98,382 |112,126 |125,690 | |Debenture |20,000 |20,000 |20,000 |200,000 |20,000 | |Bank loans |4,900 |2,100 |- | |- | |Total capital employed |100,351 |103,463 |118,382 |132,126 |145,692 | |Finance by fixed assets |100,649 |96,871 |97,714 |95,868 |114,455 | |Stock and work in progress |14,795 |37,854 |61,052 |200,601 |126,172 | |Debtors and prepayment |9,635 |11,527 |10,416 |27,254 |17,932 | |Bank and cash balance |45,503 |49,287 |52,847 |14,483 |17,623 | |Others |16,306 |5,741 |4,751 |38,956 |53,083 | |Total Assess |186,888 |201,280 |226,280 |337,162 |,329,265 | |Less Net Assets |(86,337) |(97,817) |(107,898) |(245,036) |(183,575) | |Total net Assets |100,551 |118,382 |118,382 |132,126 |145,690 | TABLE 2: COMPARISM OF TURNOVER PROFIT BEFORE TAX AND CREDIT SALES |1983 |1984 |1985 |1986 |1987 | | |N’000 |N’000 |N’000 |N’000 |N’000 | |Turnover |148,277 |170,352 |266,119 |273,256 |362,712 | |Profit before tax |15,884 |26,962 |43,251 |57,745 |65,094 | |Total credit sales |96,380 |91,990 |119,254 |46,454 |170,474 | |Credit sales % of total |65% |54% |45% |17% |47% | TABLE 3: L. B. N 5 YEARS SUMARY OF ACCOUNTS RECEIVABLES |1983 |1984 |1985 |1986 |1987 | |Total sales |N’000 |N’000 |N’000 |N’000 |N’000 | |Total credit sales |148,277 |170,352 |266,119 |272,256 |362,712 | |Total collection |96,380 |91,990 |119,754 |46,454 |170,474 | |Total collection |85,770 |91,640 |119,395 |45,770 |167,775 | |Bad debt collection |6/0 |350 |359 |684 |699 | |Total collection | | | | | | |% of credit sales |99. 37% |99. 62% |99. 1% |98. 5% |99. 59% | |Bad debt % of total sales |0. 41% |0. 2% |0. 1% |0. 25% |0,19% | |Bad debt of credit sales |0. 63% |0. 38% |0. 305 |1. 4% |0. 41% | Source: L. B. N Accounting Records TABLE 4: SALES SPLIT BY CUSTOMER CATEGORIES SALES SPLIT |1983 |1984 |1985 |1986 |1987 | |Total sales (N’000) |148,277 |170,352 |266,119 |272,256 |362,712 | |Total credit sales (N’000) |96,380 |91,990 |119,754 |46,452 |170,474 | |Total credit sales (N’000) |37,069 |64,734 |117,902 |202,209 |116,848 | |7 days credit sales (N’000) |69,690 |59,623 |82,497 |27,326 |130,576 | |28 days credit sales (N’000) |26,690 |32,367 |37,257 |19,128 |39,898 | |Other sales |14,828 |13,628 |29,272 |24,593 |25,390 | | |% |% |% |% |% | |Cash sales as % of total sales |25 |38 |44 |74 |46 | |7 days credit sales as % of total sales |47 |35 |31 |10 |36 | |28 days credit a % of total sales |18 |19 |14 |7 |11 | |Other sales as % of total sales |10 |8 |11 |9 |7 | |Total |100% |100% |100% |100% |100% | |7 days credit sales as % of total sales |72. 3% |64. 8% |68. 9% |38. % |66. 6% | |28 days credit sales as % of total sales |27. 7% |35. 19% |31. 11% |26. 92% |20. 37% | |Total Net Asset |100,551 |103,163 |118,382 |132,126 |145. 690 | Source: L. B. N Accounting Records TABLE 4(B): CREDIT CONTRIBUTION TO TURNOVER |YEARS |TOTAL CREDIT PER N TURNOVER |7 DAYS CREDIT PER N OF TOTAL CREDIT |28 DAYS CREDIT PER N OF TOTAL | |1983 |N0. 65 |N 0. 2 |N 0. 28 | |1984 |N 0. 54 |N 0. 65 |N 0. 35 | |1985 |N0. 45 |N 0. 69 |N 0. 31 | |1986 |N0. 17 |N 0. 59 |N 0. 41 | |1998 |N0. 47 |N 0. 71 |N 0. 23 | Source: L. B. N Accounting Records
TABLE 5: ANALYSIS OF RECEIVABLE, WORKING CAPITAL AND BAD DEBTS | |1983 |1984 |1985 |1986 |1987 | | |N’000 |N’000 |N’000 |N’000 |N’000 | |Current Asset |86,239 |104,409 |129,294 |281,294 |214,810 | |Current Liabilities |86,337 |97,817 |107,898 |245,036 |183,575 | |Working Capital |98 |6,592 |21,169 |36,258 |31,235 | |Debtors |9,635 |11,527 10,417 |27,254 |17,932 | |Bad Debts |616 |350 |359 |684 |699 | |Current Assets |86,239 |104,409 |129,067 |281,294 |214,810 | |Debtors |9,635 |11,527 |10,417 |27,252 |17 | |Debtors a % of current assets |11. 2% |11% |8% |9. 69% |8. 35% | Source: Computation from L. B. N Accounting Records 4. 1DATA INTERPRETATION Table 1 shows extracts from the company’s 5 years balance sheet.
Thus, provides a basis for calculations and deduct ion to be made later. From comparism of turnover, profit before tax and sales in table 1, it is seen that declining. This is due to low capacity utilization leading to shortage of s tock supply caused by non-availability of adequate foreign exchange or purchase raw materials for production. There was not much need for granting of credit. Most of the available stock were sold by distributors on cash basis. However, sequel to introduction of S. A. P in late 1986, there was adequate supply of raw materials at higher exchange rate, selling therefore became more precarious as prices were increased
Furthermore, with liquidity squeeze in the Nigeria economy, the consumers dispensable incomes as affected and these led to increasing credit sales in 1987. The figure 1 below further illustrates the situation Figure 1 19831984198519861987 An interesting thing in the above figure is the increase in credit sales of 3% between 1986 and 1897. A projection of this trend might give some other factors to be considered later, predict further increase in the level of credit sales granted. Table 3 shows the company’s 5 years summary accounts receivable. The histogram below has been drawn from the table. This shows the level of credit sales turnover, as well as the collections which were made from credit sales, thereby showing the level of bad debt incurred n each year.
The higher level of bad debt in 1987 was due to increased level of credit sales. This will be further explained in the following figures Figure 2 Diagram Form data available in Table 3, it is seen that the average collection index for 5 years under review is 99. 36 i. e 93. 37+99. 62+997+98. 53+99. 56=496. 785 5 =99. 36% This means that the company is optimizing returns from receivables, maximum bad debt loss of 699. 000 naira occurred in 1987 and the lowest level of N350,000 was recorded in 1984e. Although the highest bad debt occurred in 1987, this was because the amount of credit sales granted in percentage of total credit sales in 1986 was the highest.
This is because some sales men engaged in fraudulent malpractice Table 3 shows that the upper and lower limit of bad debt indices of 1. 47% and 0. 3% were also recorded respectively in 1986 and 1985. Ti sis shown in figure 3 below Figure 3 1983 1984 1985 1986 1987 Source L. B. N Accounting records Inspite of significance of level of losses rescored in this analysis, a further analysis of trend as in the graph above reveals that: a. Though there was a 2. 8% drop in the level of credit sales between 1985 and 1986. , there was a rise of 1. 14% in the level of bad debt incurred in the same period. This was due to the difficulties encountered by the sales management team towards the end of 1986, when S. A. P was introduced. b.
Despite the fact that there is an increase in the level of credit sales between 1986 and 1987, there was a fall in the bad debt percentage for the same period. The reasons for this is that, after their experience a result of S. A. P in 1986, the sales management team were able to put into operation properly the credit control and management policies of the organization Table 4 shows the sales split by customers and the company cash sales, 7 days credit sales, 28 days credit sales and other sales. Other sales are miscellaneous sales such as sales granted to public relations charity donations and sales attributable to salesman. This table shows the contribution made by each of these categories to total turnover.
From table 4(b) showing credit contribution to turnover, it seems that except in 10987, when total credit granted by Naira of turnover was no 47, the trend in credit permissiveness had been declining. Although, no clear pattern has been shown in the contributions of 7 days credit sales, 28 days credit sales and public relations charity donations and sales attributable to salesman. This table shows the contributions made by each of these categories to total turnover The general trend of turnover, 7 days and 28 days credit are shown in figure 4. The increasing level of cash sales is represented by the ever widening gap between total credit sales and turnover while the rate of change of 7 days credit is in conformity with the total credit sales of 28 days.
Credit increasing at a gradual rate until between 1985 and 1986 when it declined (see gig 4) The influence of debtors on the company’s current assets as represented in table 5 were respectively 11. 2%, 8%, 9. 69% and 8. 35% from 1983 through to 1987 Source: L. B. N Accounting records (credit management in manufacturing company) 4. 2DATA ANALYSIS This particular chapter deals with explanation of the selection of the subjects the instrument and the process used for the data collection and the procedure of analyzing the data collected and justification for methodology used, its problems and limitations. As aforementioned, the aim of this study is to ascertain the level of the role and the uses of accounting information in an industry.
In order to verify the reality of other formalized information systems in the manufacturing company. 4. 3THE DATA COLLECTION PROCEDURE The data which is basis of analysis for thus project is collected from both primary and secondary source. The primary sources are the direct managers and those who deal with the credit management section of the company. This study looked in the credit management and control policy of lever brothers Nigeria Plc, Lagos (formally). For the purpose of this study, the work was divided into five chapters. The first one deals with introduction of the topic, purpose of the study, scope and limitation of the study, significance of the study and research methodology.
The second chapter deliberates on literature review of the earlier work of researchers in this area was reviewed. The third chapter deals with the brief history of the organization and their credit policies. While the fourth chapter deals with the data analysis and interpretation of the data collected from the organization for the period of five years especially 1983 – 1987 as a sample. Lately the fifth chapter deals with the summary and observation and recommendation. Within the period under study (1983 – 1987), it has been seen that the maximum and minimum amount of bad debt written off by he company are N690,000 for 1987 and N350,000 for 1994 respectively.
During the same period, the bad debt percentage of total credit sales show a peak of 1. 47% in 1986 and a bottom line of 0. 3% in 1983 Except for the fall of N350,000 and N359,000 recorded n 1984 and 1985. It could be concluded that there is a generated upward trend in the volume of bad debt written off by the company. However, even a minimum bad debt loss of N350,000 in one financial year calls for a reappraisal of the company’s credit management policies and processes Cleverly look at peak qualifying a prospective customer for credit shows that the decision to grant credit is by large dependent n the recommendation passed by the field sales force. This could be subject to immensurable abuse
The company also review the performance of its credit customers every six months by which time a fraudulent minded customer could have made away with a lot of company products The need for effective management of credit cannot be overemphasized. Lack of management ad effective control could result in many of the following. a. Loss of company fund; b. Loss of business/selling time c. Diversion of credit to other businesses or for social enjoyment; d. Liquidity position of the company being threatened; e. Legal proceeding in Law court f. Loss of confidence and respect in credit management team For the analysis carried out in chapter three, 7 days sales took 72% of total credit granted in 1983 and 65% in 1984.
Thereafter, an increase was observed from 65% in 1984 to 69% in 1985, 59% in 1986 and 77% in 1987. Conversely, the proportion of 28 days credit sales to total credit granted increases from 28% in 1983 to 35% in 1984 31% in 1983 to 41% in 1986 and to 23% in 1987. These trend are observed normally in view of the economic climate Which we operate in Nigeria between 1983-1986, essential commodities (some of which L. B. N Plc. Manufacturers were very scarce in the market, demand outstripped supply and by the classical economic models of demand and supply, prices consumers and distributors alike tended to employ both orthodox and orthodox means of increasing their possession of the goods in order to maximize their margins.
Customers (traders) who procured company product dispose them to ready and eager buyers at exorbitant prices soon after leaving the distribution centers. Since the introduction of S. A. P in the late 1986 essential commodities are readily available in the market at exorbitant prices which most customers cannot afford to buy. In view of the above, therefore, the credit policy of the company could be reviewed with a view to synchronizing present economic realities with the company’s credit management policies. 5. 2CONCLUSION From the foregoing data analysis, it is seen that although Lever Brothers Nigeria Plc is maximizing its returns in receivable a lot effort Is still Required in nearly obliterating incidences of bad depts.. deally, with a potent and active credit management team, there should not be situations of bad dept losses since the credit management team should not only ensure granting of credit but should also monitor the day to day activities of the customers. This when truly practices, would ensure an articulate monitoring of deviations from factors which are originally the yardstick for granting the credit. To this end the credit management team of L. B. N. should visit more regularly, all credit customers and assess there reliability and business potentials. 5. 3. RECOMMENDATIONS It is also recommended that review of credit customers which normally takes pace every six months be graduated to reflect credit risk status rating of the customer. An example of this review could be detailed below: GROUP |CLASSIFICATION |DAYS CREDIT |RVIEW PERIOD | |A |Tested and consistent |7 days |1 months | | |Customers |28 days |3 months | |B |Reliable people |7 days |2 weeks | | |Customers |28 days |2 months | |C |New and untested |7 days |7 days | | |Customers |28 days |30 days | New and interested customers could be made to graduate into a reliable people customers status after a year and after about 2 years should graduate from the reliable pupil customer status to a tested consistent customer status Even after requiring the tested and consistent customer status activities of such customers should still be closely be monitored. In addition, The researcher suggests an enhance forum for business discussion between all grades of credit customers and the company.
This forum will surely permit the company to determine business hence, reliability of its customers accurately. Presently, recommendation for granting credit sales is incumbent on the judgment of the field sales forces. This judgment could be influenced by sentiments and favourism. If single handedly carried out by the field sales force. The company should involve a system of check and balances that is capable of supportive verification. Since the potency of the credit management team is reflected in its capacity to grant credit and maintain a collection index acceptable to management, it is very vital therefore that the credit management each be trained regularly so as to keep abreast with latest credit management techniques.
Inspite of the fact that data analyzed is in favors of retention of credit facilities and in view of the fact that we are presently operating a competitive producer market, I strongly recommend the total granting of credit facilities in the short run (at least as long as the period of competitive producer market lasts) This could be reviewed in the long run when scarcity of essential commodities is back in the market. T is recommended that the prevailing bank rates of interest should be charged on overdue accounts By and large, since credit granting expands sales volume and increase the market share, it is therefore logical that in a competitive producer market, there is much justification in support of credit transactions. The above recommendations if implemented could go a long way in evolving a more dynamic and resourceful credit management team in Lever Brothers Nigeria Plc. 5. 3SUGGESTION FOR FURTHER STUDIES This research work is limited to the management of credit sales in Lever
Brother Nigeria Plc, Lagos, it is hereby recommended for further researchers to look into their purchasing aspect of the topic, purchasing on credit is as important consideration as that of credit sales. Because various interest or increase in price of the supplier should be looked into if it can be avoidable for the good running of the business. Also, the credit sales of other manufacturing companies and business enterprises should be looked at to determined how effective and efficient their various business organizations are, in controlling and managing their credit transaction. BIBLIOGRAPHY |AUTHORS |YEAR OF PUBLICATION |TITLES |PUBLISHERS | |Bass. D.
V |1979 |Credit control management |Business Book Limited | |Beckmen T & Foster R |1969 |Credit and collections management theory |M. C Graw Hill Ltd | | | |(1stedition) | | |Ehinger R & Cohes |1962 |Credit and collection (2nd edition) |Prentice Hall industry | |Hunt Williams C. Donalson G. |1960 |Basic business finance |Richard & Irwin Ind | |Meigs W. B & Meig R. F. |1970 |Financial Accounting (3rd edition) |Mgrew Hill industry | |Pandy M.
I |1987 |Financial Management |Vikes publishing House BVT Ltd| |Summars E. L |1974 |Profit Growth and Planning techniques of |Raw, Jones Irwin industry | | | |modern financial management | | |Van. Horne, J. C |1980 |Financial management and policy (2nd |Prentice Hill Industry | | | |edition) | | |Weston S. F & Brigham E.
F |1971 |Essential of management (2nd edition) |Hot Rinehort/Winston Ltd | JOURNALS |Anderson A . V |1982 |Current collection and credit practice |Management accounting vol. LXIV | | | | |(4) | |Barley B. |1981 |Credit control of liquidity |Accounting journal of ICAEXW, vol| | | | |92 | |Juskow D. 1983 |Is your credit policy effective |Management account vol. LXIV | |Sadem M. H |1987 |The quality of trade credit |New York national Bureau of | | | | |Economic research | |Tamari M. |1973 |Cost and use of trade credit |Management international review | | | | |vol, 45 | |Welshem M.
T |1967 |Using credit for profit | | OTHERS 1. New age Encyclopedia Lexicon Publication Inc. 1981 2. Sales of good account 3. Student PYE Nigeria Limited “some element of credit management and source of finance, PEZ finance management ———————– Raw material purchase Manufacturing of finished goods Sales Goods on Credit Collection of Account Returned from Customers Profitability Liquidity 2 1 0. 9 0. 8 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 70 60 50 40 30 20 10 0 360 300 280 240 200 160 120 80 40 7 day credit 28 day credit Total credit sales Turnover 1983 1984 1985 1986 1987