CHAPTER ONE

INTRODUCTON

1.1 Background of The Study

The effectiveness of account receivable plays a very important role in the profitability of microfinance in Bamenda III. Account receivable (AR) which is also known as trade credit or trade receivable is the amount of money that the customers owe the microfinance for granting loan. This loan are then given to a customers which they are expected to pay back within a specific time frame; this time frame can be within 15 days, 30 days, 60 days or maybe even more, this depends on the relationship or connection between the microfinance and a customer. Account receivable is a method used to measure a microfinance liquidity or ability to overlay short-term obligation without additional cash flow. Account Receivable can be found under current asset of the balance sheet.

By establishing a balance among liquidity, risk and profitability can help increase the worth of the microfinance thereby making the MFI to achieve their primary objective. The motive behind any loan granting is for interest motive and profit making. order for MFI to boost their profit, they do not sorely s. “The main aim of managing accounts receivables should not be limited to loan increase but should seek to increase investment returns” (Haruna Ndebugri, 2017).

Account receivable has been an option for financial institutes to purchase on credit longer than it even had a name. The methods have changed and refined throughout history, but it had been an option for micro finance to obtain goods on credit and pay on a later date. Below is a brief history of how account receivable was founded and how it has evolved to become what we know it to be today.

In the 2000 B.C., the Mesopotamians founded account receivable and created a form of factoring similar to what we use today, which allow financial institutes to purchase goods and pay on a later date.

 1300s – 1400s, account receivable took form in England and becomes a very popular financial institute track in the clothing industry. Clothing items coming to England were often traveling far distances and the transporters would have to wait to get paid once the delivery was made.

1600s, account receivable was also used by the colonist of “New World” in order to make a living using the available raw materials which they had discovered. The colonist would ship tobacco, cotton, timber back to England. The colonist would offer cash base on the fortitude of the customer’s account receivable.

 1800s, Due to the industrial revolution, the popularity of account receivable financing increased even more acutely then extenders of credit began looking at the “credit – worthiness” of a customer.

 EARLY 1900s, MFI started using account receivable as a major source of financing their financial institute. Account receivable financing allowed them to deal with long loan cycles when lending out loans and carrying out serves was not yet quite reliable.

1940s -1980s, some banks in U.S. began offering account receivable factoring options, as opposed to just a financial institute to financial institute model. Interest rate has become to climb exceedingly high since banks joined the factoring financial institute. Due to that, private accounts receivable factoring micro finance started to grow.

Today, it is even easier for small, medium and large financial institutes to offer credit extensions without the use or help of a bank thanks to increase in technology.

According to Samiloglu, any financial institute with proper trade receivables management system is able to increase profitability due to a reduction in transaction costs involved in raising extra funds due to liquidity issues (K., 2008).

 Ahmet defined accounts receivable as a component of cash flow that affects profitability of any financial institute. Cash flow management can be described as the management of cash inflows and cash outflows in and out of the financial institute. Some main component of management of cash flow includes inventory, trade receivables, planning of cash flow and trade payables (Gamze V., 2012).

 1980s and 1990s in Cameroon like in most parts of Sub-Saharan Africa, triggered austerity ways which led to impoverishment of the indigenous population. The paper starts that in abide to adjust to the shocks of the economic and financial crisis,  unions drifted from their financial inclusiveness policy to financial exclusiveness which was principally based on a scheme of profit maximization. This paper attempts to demonstrate how the shift to profit motivation led the lose in credibility. ( Nixon Kahjum., 1968)

When it comes to the profitability of micro finance in Cameroon account receivable management has a very important role to play. Microfinance institute lend out loan because it helps in appealing those customers who cannot borrow from other sources or find it expensive or inconvenient to do so. The credit period extended by the micro finance in Cameroon usually ranges from 15 to 60 days. Hence finished goods are converted into accounts receivable (trade debtors) in the books of the seller when goods are sold on credit. In the books of the buyer, the obligation arising from the credit purchase is represented as accounts payable (trade creditors).

 A Microfinance’s investment in accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. A very important part of managing receivables has to do with the proper selection of customers for credit due to the potential risk of delayed payment or non-payment of the value involve (K., 2008).

Generally,  taking loan has become  a general practice especially with micro finance that are out to help businesses lending them money. Greater portions of the revenue are realized through credit related transaction making receivables a significant proportion of the Microfinance’s current assets. Whether it is a manufacturing or a wholesale financial institute that lend out loans basis it is evident that accounts receivables are forms of investment in any financial institute However, account receivables require a proper analysis and prudent management to ensure receivables as well managed increase loan and profitability which forms the delicate aspect of financial institute’s success.

1.2 Statement of The Problem

Lynch asserts financial institutes must ensure proper management of trade receivables to avoid finding their liquidity under considerable strain and to remain profitable (Ed Lynch, 2005).

In Cameroon today micro finance are preoccupied with the tactics or strategies to stay relevant in the market with the high increase in competition in the market, as a result of the introduction of close substitutes to the financial institute’s own method of transaction made available by competitors. Causing several microfinance to employ different strategies, tactics and mechanisms to draw and earn the trust of  new customers and also to promote their products or to withhold their existing share of the market. sale on credit is one of the approaches financial institutes are assimilating in order  to promote loan thereby turning out to be a good tool in keeping customers, in retaining the interest relationship with the any and the financial institute’s profit is increase time after time and eventually leading to optimizing the microfinance’s profit.

Trade Credit is also one of the main factors that affects the profitability of manufacturing micro finance. The pursuit of this concept is beneficial to both buyers and suppliers in several ways. Despite the many attaining benefits, trade credit is sorely characterized by several challenges. Since some clients abide to the terms and conditions strictly, many are the cases where clients especially buyers are in default and in a manner that totally violates and dislocates the stipulated terms and conditions been it documented or not. It could be made of delay in payments, payments defaults and in extreme cases some individuals and entities deliberately refuse to pay. This I believe is as a result of the informal nature of trade credit pursuit that dominates the practice of this concept, in Cameroon.

 Micro finance in Bamenda III  are  trapped into problems, since not all customers pay-in time for the loan they have taken; since some customers don’t pay at all leading a bad debt to the MFI. Many financial institutes lack the time and required expertise to properly manage accounts receivable and interconnected financial institute activities as a result they cannot relate trade receivable management with other financial institute activities.

Improper handling of accounts receivable often leads to frequent disruptions in the financial institute’s day to day activities caused by improper and unreliable cash flows. This could result in issues such as delayed or low liquidity ratio, non-payments of employees and inability to meet statutory obligations. This can easily halt financial institution. Salek stated that cash is the life line of any financial institution and every dollar of a MIF’s revenue that becomes a receivable, must be managed and collected (Salek, 2005). Improper management of receivables adversely impacts the profits of  micro finance in Bamenda III   in two ways, debts written off often reducing the financial institutes’ profits directly, in the profit and loss account, Secondly, when a lot of funds are tied up with customers, the financial institute may struggle financially and it is likely to find itself borrowing at a cost to finance activities which also eats away some profit.

Ineffective management of accounts receivable, could put the financial institute in a poor credit rating category making it difficult and very expensive to obtain funding from other institutions to operate. Extreme liquidity problems resulting from locked up cash with debtors could lead to insolvency which would eventually lead to the collapse of the financial institute.

 The ultimate focus of the study was to research into the determinants of trade credits as well as the principles and practices adopted by micro finance in Bamenda III  to effectively and efficiently manage accounts receivables.

1.3 Research Questions

Per the above reasons, the study specifically sought to;

1.3.1 Main Research Question

 What is the effect of account receivable management on the profitability of micro finance in Bamenda III?

1.3.2 Specific Questions

What is the effect of Average Collection Period (ACP) on the profitability of micro finance in Bamenda III?

 What is the effect of Accounting Receivables Turnover (ART) on the financial performance of micro finance in Bamenda III?

1.4 Research Objective

1.4.1 Main Research Objective

To examine the effect of account receivable management on the profitability of manufacturing micro finance in Bamenda III.

1.4.2 Specific Research Objective

 To examine the effect of Average Collection Period (ACP) on the profitability of micro finance in Bamenda III?

 What is the effect of Account Receivables Turnover (ART) on the financial performance of micro finance in Bamenda III?

1.5 Hypothesis

H01: Average Collection Period (ACP) has no significant effect on the profitability of micro finance in Bamenda III. 

H02: Accounts Receivables Turnover (ART) has no significant effect on the financial performance of micro finance in Bamenda III.