ABSTRACT

The main objective of this study was to examine the effect of credit management on profitability of manufacturing firms in Buea. The research design for this study was a descriptive research design, which made use of the primary sources of data collection. Data was collected from thirty manufacturing firms using a using self-administered questionnaires. Convenience sampling technique was used for this study. Descriptive and the inferential statistics were used to analyze the data. The descriptive statistics analysis was done by the use of tables, simple bar charts and pie charts on which the measures of central tendency such as the frequencies, mean, and standard deviation were indicated. An ordinary least squares (OLS) analysis was conducted to test each hypothesis established for the study. The findings of this study indicate that credit appraisal has a significant and positive relationship with profitability of manufacturing firms, credit risk control has a significant relationship with the profitability of manufacturing firms, Meanwhile, debt collection policies have an insignificant relationship with profitability of manufacturing firms. Based on the findings, the following recommendations were made: it is recommended that manufacturing firms in Buea should place a strong emphasis on credit appraisal processes to ensure that credit is extended only to financially stable and creditworthy customers, the results also suggest that manufacturing firms in Buea should strengthen their credit risk control measures to mitigate the impact of credit-related risks on profitability, manufacturing firms should prioritize the development and implementation of effective debt collection policies to improve the recovery of outstanding receivables and enhance profitability.

Key words: Credit Management, Profitability, Manufacturing Firms

CHAPTER ONE

INTRODUCTION

1.1 Introduction

Nowadays, the business landscape is very competitive, effective credit management plays an important role in the financial health of the manufacturing firm’s profitability. Credit management practices and policies eventually impact the company’s ability to optimize cash flows, minimize the existence of bad debt, and enhanced overall financial performance. To understand and able to control and manage the available resources, the effect of credit management is useful for manufacturing firms aim to achieve a sustainable growth and maintain its competitive stand in the market. This introduction is aim to explore the relationship between credit management and profitability within the context of manufacturing firms. By examining the main factors and the strategies involved in credit management. Credit management contain a range of activities and decisions related in building strong relationship with customers, by offering favorable credit terms and open communication to the customers, monitoring creditworthiness, and the collection of outstanding payments. This activity directly affects the manufacturing firm’s cash flows, working capital. By striking a balance between granting credits to customers and credit risk management, manufacturing firms can improve their financial resources and maximize profitability.

This study seeks to examine the effect of credit management on the profitability of manufacturing firms in Buea. The researcher will examine the effect of credit appraisal, credit risk control and debt collection policies on the profitability of manufacturing firms in Buea. The research report consists of five chapters. Chapter one (Introduction) covers the background of the study, statement of the problem, research questions, and objectives of the study, scope of the study, significance of the study and operational definition of key terms. Chapter two (literature review): shows the existing literature relating to the variables under the study. It comprises of the conceptual review, the theoretical review, the empirical review and the gaps and contributions. Chapter three (methodology) consists of the research design, area of the study, population of the study, sampling procedure and sample size, instruments, data collection, data analysis procedure and ethical considerations. Chapter four is the presentation, analysis and interpretation of findings.  Chapter five shows conclusions and recommendations.  At the end, references from which information concerning this work was gotten are attached. These references are listed using the American Psychological Association (APA) style. Finally, it ends with appendices.

1.2 Background of the study

Accounts receivables typically covers the accounting activities that fall under the phrase “credit management.” This group of procedures mostly entails approving the extension of credit to a customer, monitoring the receipt and reporting of payments on past-due invoices, starting collection actions, and resolving any disputes or questions about charges on a customer invoice. Credit management may be a great tool for a corporation to maintain financial stability when used effectively. Credit is just one of the many variables a company may utilize to affect consumer demand for its goods. According to Horne and Wachowicz (1998), businesses can only profit from credit if their increased sales lead to more profitability than their rising receivables costs.

According to Myers and Brealey’s definition from 2003, credit is the procedure by which possession of goods or services is permitted after a contractual arrangement for eventual payment. The idea of a manufacturing firm has been used for millennia in various regions of the world. For instance, good credit management aims to safeguard both the vendor from potential losses and the client from accruing further debt that cannot be paid off in a timely manner. Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit. This may include; gathering data on the potential customer’s, current financial condition including the current credit score. Given that high default rates result in decreased cash flows, lower profitability levels, and financial difficulties, it is crucial to promptly identify possible loan defaults. Lower credit exposure, on the other hand, indicates an ideal debtor level with fewer likelihood of bad debts and thus better financial health.

 According to Scheufler (2002), managing risks and enhancing cash flow are exceedingly difficult in the current company environment. The likelihood of suffering losses has increased with the rise in industrial companies’ raptly rates. Organizations are being forced to slow payments by economic pressures and business practices, yet resources for credit management are being cut back despite the increased expectations. To employ tried-and-true best practices, credit professionals must hunt for opportunities to do so. Five frequent hazards are avoided by updating your methods. These pitfalls are summarized by Scheufler (2002) as failing to identify potential frauds, underestimating the contribution of current customers to bad debts, being caught off guard by manufacturing companies’ rustics, failing to fully utilize technology, and devoting an excessive amount of time and resources to credit evaluations that are unrelated to lowering credit defaults. It suggests that credit sales or extensions to customers ought to be adequately managed and monitored. Regardless of the company’s market position and the demand for its products, if proper measures aren’t put in place to control sales made to clients on credit, problems could arise, especially those relating to liquidities (Taiwo, 2013). The capacity of the business to turn assistance into money is known as profitability. Profitability is another name for a company’s short-term solvency. According to Taiwo (2013), a business firm’s profitability is typically of special significance to its short-term creditors because it reflects their ability to be paid. According to Dina (2007), effective credit management is essential for a company’s cash flow in order to maintain commercial operations. He added that credit management gives a business the chance to expand. Similar to this, Peter (2005) notes that there is a link between profitability and credit management.

The manufacturing industry is particularly important to a nation’s economy since it serves as the foundation for both industrial development and long-term economic prosperity. It is the oldest and most prevalent type of corporate form in existence today (Kpelai, 2009). Numerous studies and surveys have been conducted regarding the expansion and restrictions faced by manufacturing enterprises (for instance, Cambridge Small Business Research Centre, CSBRC, 1992). The CSBRC (1992) survey found that financial issues are the biggest obstacles for all businesses. The company’s business relies more heavily on short term funding due to a variety of financial as well as non-financial behavioral variables, which makes them more susceptible to microeconomic shifts (Poutiziouris et al., 1998). Businesses must aim for more effective credit management in light of such circumstances. Cash alone cannot be used to conduct business in the modern world. As a result, credit terms are used in the majority of business transactions between manufacturing enterprises. They both extend credit to their clients and obtain it from their suppliers. In each instance, repayment is anticipated to be provided in accordance with the conditions of the business transactions at a predetermined period. For managers and owners of major manufacturing enterprises, managing credit is of utmost importance because it directly affects the viability of the business. The profitability of the operations is determined by effective credit management, which also affects the business’s cash flow liquidities.

1.3 Statement of the Problem

Despite many vital importance of credit management in the financial performance of manufacturing firms, there is a significant gap in the literature regarding the specific effect of credit management practices on profitability within the manufacturing firms.While there are studies on credit management in the financial and banking sector, limited research has focused on the challenges faced by manufacturing firms.

The problem is the lack of comprehensive understanding regarding how credit management practices and policies, credit risk assessment and collection strategies directly influence the probability of manufacturing firms. This hinders gap the manufacturing firm’s to make an effective decision that Will positively impact their financial performance. This problem will assist in investigating the issue. The poor level of trade credit management affects the liquidity and profitability of the firm. The high rate of bad debts due to some corporations which takes advantage of the credit given to them and not able to pay later their debts.

Ineffective credit management practices will eventually have a negative effect n the profitability of the manufacturing firm. The implications of the above include financial risks, operational inefficiencies, and potential missed opportunities.  Inadequate credit management practices and policies can increase the likelihood of bad debts, late payments, and defaults, which directly impact a firm’s financial health and profitability. This can lead to cash flow problems, increased borrowing costs, and potential bankruptcy risks. Inefficient credit risk assessment and collection strategies can result in wasted time and resources spent on chasing overdue payments, managing disputes, and dealing with non-performing customers. This diverts valuable resources away from core business activities, affecting overall operational efficiency.

Ineffective credit management practices may result in overly conservative credit policies, leading to missed opportunities to extend credit to creditworthy customers. This can hinder sales growth and limit market expansion for manufacturing firms.

Establishing a comprehensive credit management framework that includes clear policies, procedures, and guidelines can help mitigate credit-related risks. This framework should cover areas such as credit approval criteria, credit limits, payment terms, and credit monitoring processes. Other measures include: Robust credit risk assessment, effective collection strategies, technology and automation, continuous monitoring and evaluation, collaboration and information sharing.

Therefore, credit management needs to make sure that cash flow and other profitability-related indicators are properly monitored, as well as that the right procedures are in place to carefully assess the customer’s ability to adhere to the terms of the company’ credit. As a result, the study aims to investigate how credit management affects a manufacturing company’s profitability position.

1.4 Research Questions

1.4.1 Main Research Question

What is the effect of credit management on the profitability of manufacturing firms in Buea?

1.4.2 Specific Research Questions

Specific research questions include:

1. i) What is the effect of credit appraisal on profitability of manufacturing firms in Buea?
2. ii) What is the effect of credit risk control on profitability of manufacturing firms in Buea?

iii) What is the effect of debt collection policy on profitability of manufacturing firms in Buea?

1.5 Research Objectives

1.5.1 Main Research Objective

To examine the effect of credit management on profitability of manufacturing firms in Buea

1.5.1 Specific Research Objectives

Specific research objectives include:

1. i) To examine the effect of credit appraisal on profitability of manufacturing firms in Buea
2. ii) To assess the effect of credit risk control on profitability of manufacturing firms in Buea

iii) To examine the effect of debt collection policy on profitability of manufacturing firms in Buea.