CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY · CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY ... Pandey therefore put it that, there is only one way in which the credit

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Credit is widely applicable in the modern world. It is the basis of all trading companies

and widely considered as an essential marketing tool in trading organizations acting as a

bridge for the movement of goods through distribution stages to customers.

A trading company grants credit to protect the sales from competitors and at favourable

terms, Mehta, (1992). It is of paramount importance to note however that the credit

offered has associated costs in terms of servicing, collection costs and creates debts that

must be collected or recovered. The dilemma is that some customers fail to pay their due

debts, therefore a company’s profits may be eroded due to costs of managing debtors and

bad debts in case the receivable are not recovered Pandey, (2003). This therefore

necessitates fuel companies of credit management policies to ensure proper management

of disbursements of fuel, recovery of debts and terms of taking fuel on credit.

According to Pandey, (1993), the term credit policy is used to refer to the combination of

three decision variables that is, credit standards, credit terms and collection efforts.

Pandey therefore put it that, there is only one way in which the credit manager can affect

the volume of credit sales, collection period and consequently, investment in accounts

receivable and that through the changes in the credit policy at the optimum level.

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A bad debt according to Wiki pedia, is an amount that is written off by the business as a

loss to the business and classified as an expense because the debt owed to the business is

unable to be collected and all reasonable efforts have been exhausted to collect the

amount owed also the accounts receivable that will likely to remain uncollectible and will

be written off. Bad debts appear as an expense on the companies income statement thus

reducing net income.

In general companies make an estimate of bad debt expenses that might be incurred in the

current period based on past records as part of the process of estimating earnings and

most of the companies make bad debt’s allowance since it is likely that all of their

debtors will pay them in full. Federal law of United States defines a “debt” as a

consumer’s obligation to pay money arising out of a transaction in which money,

property, insurance or services have exchanged hands. Cambridge International

dictionary defines a “debt” as something especially money which is owed to someone

else.

There are several aspects to indicate sound credit management policies according to

Gitman (1992), which include credit standards, credit terms and collection procedures.

Nile Energy (U) Ltd. has introduced computerized accounting system in Rubaga station

to truck down all customers who take full on credit, proper invoicing and updates of their

financial statements but still the problem has persisted which has prompted a researcher

to research on it.

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1.2 STATEMENT OF THE PROBLEM.

Many organizations have tirelessly worked to have proper Credit Management Policies in

order to ensure management of credit risks (Bad debts), However, Nile Energy (U) Ltd.

has for the last 3 years reported poor debt recovery portfolio and increasing costs of

administering accounts receivable as seen below:

TABLE 1: SHOWING AMOUNTS OF BAD DEBTS FROM 36 CLIENTS OF

NILE ENERGY (U) LTD.

Years Amounts of bad debts

2008 58,545,800

2009 76,580,105

2010 98,611,005

Source: primary data.

It is however believed that it might be due to weak credit management policies that the

bad debt levels have continued to rise.

Despite the attempts made by Nile Energy to ensure strong credit management policies,

Bad debts increase in the company have persisted and if this continues, company’s

responsibility and commitment of steady supply of fuel will be at stake.

1.3 PURPOSE OF THE STUDY.

The study was aimed at evaluating the credit management policies and Bad debts in Nile

Energy (U) Ltd.

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1.4 OBJECTIVES OF THE STUDY.

(i) To assess the effectiveness of the credit management policies in Nile Energy

(U) Ltd.

(ii) To find out whether there is compliance with the steps and procedures set by

Nile Energy (U) Ltd. towards reducing on the level of bad debts

(iii) To establish the relationship between credit management policies and Bad

debts in Nile Energy (U) Ltd.

1.5 RESEARCH QUESTIONS

(i) How effective are the credit management policies of Nile Energy use?

(ii) Are the steps and procedures set by Nile Energy (U) Ltd towards reducing bad

debts followed?

(iii) What is the relationship between credit management policies and Bad debts?

1.6 SCOPE OF THE STUDY.

1.6.1 Study scope

The study covered the variables of credit management policies and bad debts in oil

companies.

1.6.2 Geographical scope

The study was carried out from Nile Energy (U) Ltd. Station located on Rubaga road in

Rubaga division in the district of Kampala

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1.7 SIGNIFICANCE OF THE STUDY.

(i) The study will help the management of Nile Energy (U) Ltd. and other sister

companies in formulating and designing appropriate credit management

policies.

(ii) The study will add knowledge to the existing literature in universities,

colleges and other research institutions for further case use.

(iii) The study will also assist in applicability of credit in a practical aspect of

working environment.

(iv) The research will help the researcher to attain the award of Bachelor’s degree

in Commerce.

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CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This section reviews the literature relevant to the study. The literature reviewed covers

credit management policies and bad debts in relation to the objectives of the study. The

relationship that exists between credit management policies and bad debts has been

attended to in the literature.

2.2 CREDIT

Credit is controversial in principle as much as the buyer and the seller view it differently.

To the seller, consumer credit is a marketing too (Van horne, 1989). Like Van horne,

trade credit is the most prominent force of modern business and it is considered as an

essential marketing tool, acting as a bridge for the movement of goods through

production and distribution stages to the consumer finally (Pandey, 1993).

Credit can therefore be used to expand sales, maintain a certain market share and retain

old customers in a competitive or recessionary economic environment.

According to Bogges (1967), consumer credit is a philosophy of “buy now and pay later”

the organization delivers a service or product now but allows a delay in receiving

payment from consumers.

However, consumer credit in the eyes of the buyer is the one very favourable option since

it is a source of financing him/her (Van horne, 1989).

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Trade credit therefore creates receivables or book debts which the firm is expected to

collect in a near future.

A dilemma befalls the financial manager in reconciling the objectives of the company

with those of the customer and this necessitates faulting in place a credit management

policies for proper credit management (Pandey, 1993 Van horne, 1989).

The credit supplier must gain an acceptable level of confidence to extend the maximum

amount of credit at the lowest possible risk of loss. The credit extension function then

becomes a certain commitment of company funds for uncertain returns to an organization

(Copeland and Khoury, 1980)

2.3 CREDIT MANAGEMENT POLICY.

Credit management is affected by the use of a credit policy (Gitman, 1992).

According to Pandey (1993) the term credit policy is used to refer to the combination of

three variables, that is credit standards, credit terms and collection efforts. Pandey

therefore put it that, there is only one way in which the financial manager can affect the

volume of credit sales, collection period and consequently, investment in accounts

receivables and that is through the changes in the credit policy at the optimum level.

Van horne (1989), a firm should evaluate its credit policy in terms of returns (profits) and

costs. The three types of costs involved include the selling and production costs,

administration costs and bad debt losses. Management needs to establish a policy on its

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trade debtors by critically addressing factors like cash discounts offered for prompt

payment, official period normally offered for credit, assessing the customer’s credit

worthiness and action to be taken regarding late payment in its credit policy. All these are

achieved through the use of credit management variables.

2.3.1 Credit management variables

According to Gitman (1992), there are three important aspects in a sound credit policy,

which include credit standards, credit terms and collection procedures.

Credit standards

Dickerson et al (1995), described credit standards as the strength and credit worthiness a

customer must exhibit in order to qualify for a credit.

Pandey (1995), define credit standards as criteria, which a firm follows in selecting

customers for the purpose of credit extension. Credit standards therefore stipulate the

minimum financial strength an applicant must demonstrate in order to be granted credit.

Setting credit standards implicitly requires a measurement of credit quality. This can be

defined in terms of a customer default Campsey and Brigham, (1985).

They therefore advised that in determining credit quality, the firm should first establish

the character of the potential, customer whether he/she can honour the obligation,

capacity to pay back which can be gauged in records and business methods and

observation of customer’s plants and stores, capital, collateral capacity, which are the

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assets of that the customer may offer as security to obtain a credit and conditions

generally referring to economic trends or a special development in certain geographical

regions or sectors of the economy which may affect the customers ability to meet his/her

obligations. They call this a 5C’s criteria.

Credit terms

Credit terms are stipulations under which a firm grants credit to customers Kakuru,

(2000). The firm should try to make terms more attractive to act as incentives to clients

without incurring unnecessarily high levels of bad debts.

According to Van horne and Wachowicz (1994), credit terms specify the length of time

over which credit is extended to a customer and the discount if any given for early

payments cash discounts are given to buyers by the seller in order to encourage early

payment before the end of the period of credit Pandey, (1993).

A firm may follow a lenient or stringent credit policy. Lenient tends to sell on credit to

customers or very liberal terms and standards. Stringent credit policy – a firm sells on

credit on a highly selective basis only to those who have proven credit worthiness and

who are financially strong. In practice, firms follow credit policies ranging from stringent

to lenient Pandey I.M 1995, Bhrat, R , (1993).

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Collection efforts

Dickerson et al (1995), collection policy refers to the procedures used to collect accounts

receivables that is letters, telephone calls, representatives and many others.

A collection policy is needed because all the customers do not pay the firm’s bills on time

(Dickerson et al, 1995 and Pandey 1998). The scholars further noted that some customers

are slow payers while others are non-payers. The collection efforts should therefore

aimed at accelerating collections from slow payers and reducing bad debts.

In order to collect the slow paying accounts, the firm should follow collection procedures

in a clear cut sequence (Pandey, 1998 and Kakuru, 2000). For instance when a normal

credit period granted to a customer is over and he has not made the payment, a polite

letter reminding the customer that the account is overdue should be sent. If the

receivables remain uncollected, letters that are progressively strongly worded can follow

telegrams or the firm’s representative may pay personal visit to the customer. If the

payment is still not made, the firm may proceed to a legal action.

2.3.2 Credit terms and bad debts

According to Van horne and Wachowicz (1994), although the customers of the industry

frequently dictate the credit terms given, the credit period is another means by which a

firm may increase the product demand and reduce on its bad debts.

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Pandey (1993) noted that a firm lengthens credit period to increase its operating profits

through expanded sales. However, there will be net increase only when the cost of

extended credit period is less than the incremental operating profits. As before the trade

off is between the credit terms and required returns on the additional investment in

receivables and this is at optimum level.

2.4 BAD DEBTS.

A bad debt according to Wikipedia is an amount that is written off by the business as a

loss to the business and classified as an expense because the debt owed to the business is

unable to be collected and all reasonable efforts have been exhausted to collect the

amount owed. Also the accounts receivable that will likely to remain uncollectible and

will be written off. Bad debts appear as an expense on the company’s investment thus

reducing on income.

2.4.1 Debtor’s control system

There is always need for a good debtor’s control system because it is very important that

without it, receivable would build up to excessive levels. Cash flows would decline and

bad debts would rise to unacceptable levels.

Bodil et al (1995), Furness (1983), say that no amount of saving on its own has the need

for credit management, by adding that the basic problem of the under developed world is

that there are neither adequate savings nor adequate saving mechanism and thus the need

for proper management of debtors which involves three issues of setting the credit

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standards, credit terms and collection efforts (Capeland Weston 1986, Chandra 1997 and

Pandey, 1995) are all in agreement on this issue.

However Chandra splits credit terms into credit period and cash discount. He also adds

that these variables are related and have a breaking on the level of sales;

Bad debts losses, discounts and collection expenses

Debtors are current assets of the business that are vulnerable to being bad debtors and

cause loss to a company therefore, monitoring of debtors should be continuous.

2.4.2 Monitoring of book debts

There is a need for a company to continuously monitor and control its books to ensure the

success of its collection efforts (Pandey, 1995). He suggested two traditional methods for

monitoring book debts, average collection period and aging schedule.

Average collection period is the number of days debts remain outstanding if the firm’s

average collection period is compared with the industry average the firm’s collection

efficiency will be established.

Extended collection period delays cash inflows impairs the firm’s liquidity position and

increase chance of bad debts. This method of average collection period has got two

limitations; provides average picture of collection experience and it is based on aggregate

data (Pandey, 1995).

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Van horne (1989) observes that economic conditions and that company’s credit policy are

the underlying influences on the level of credit. Bierman and Hass (1973) contend that

accounts receivable accumulation rests on how the credit granting decision is taken in the

organization. Samuels et al (1989) concluded that the monitoring and follow-up

procedures on slow payment are also a principal cause of accounts receivable

accumulation.

Brigham (1985) and Pandey (1993) have recognized the need of collection policy and

aggressive collection efforts because very few customers are willing to pay in time. The

collection effort must aim at accelerating collections from slow payers and reducing bad

debt losses. A high rate of default will occur when customers recognize that a firm has no

will to enforce repayment procedures or policies. This explanation provides an insight

into the possible causes of Nile Energy’s accumulation in uncollected revenues.

2.4.3 The effects of credit standards on bad debts

According to Mehta (1973) and Boggess (1967), in advancing credits, credit standards

must be emphasized such that credit supplier gains an acceptable level of confidence to

extend the maximum amount of credit at the lowest possible risk of loss through bad

debts.

Van horne (1994), and Pandey (1993), credit standards can be loose or tight. Tight

credit make a firm loose a big number of customers and when standards are loose; the

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firm gets increased number of customers but this does not mean good cash inflows,

because the increased customers leads to increased costs in terms of tracking debtors and

screaming them and also servicing added volumes of bad debt losses.

If a firm employs very tight credit standards, it may sell most on cash basis and may

extend credit to only financially strong customers. Such standards result in no bad debt

losses and less costs of credit management thus earning profits (Pandey, 1993). But the

firm may not be able to extend the sales and the profit sacrificed on lost sales may be

bigger than cost saved by the firm and vice versa.

Van horne (1994), agrees with Compsey and Brigham (1985) and Pandey (1993) that

firms should make use of optimal credit standard policy in order to average out the

weaknesses of both tight and loose credit standards on bad debts.

2.4.4 Collection efforts and bad debts

Campsey and Brigham (1985), noted that the collection efforts or process may be

expensive in terms of both out-of- pocket expenditures and lost good will, but some

fairness is needed both to prevent any undue lengthening of the collection period and to

minimize out right losses of bad debts.

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A balance must be struck between the costs and the benefit of different collection policies

because changes in a collection policy influences the level of sales, the collection period,

the bad debt loss percentage and the percentage of customers who take discounts.

Pandey (1995) therefore put it that the firm has to be very cautious in taking steps in

order to collect from the slow paying customers. If the firm is strict in its collection

policy with the permanent customers, who are temporarily slow payers due to the

economic conditions, they will get offended and may shift to competitors. Because of

this, the firm may lose its permanent business. On the contrary, if there is lenient in

collection, receivables could increase and profitability reduce and this makes it necessary

for an optimum collection policy. Pandey propounded that optimum collection policy

will minimize debts and maximize profits.

In line with Pandey (1993), Van horne (1994) suggest that the overall debt collection

policy of the firm should be such that the administrative costs and other costs incurred in

debt collection do not exceed the benefits derived from incurring those costs and that

some extra spending on bad debt collection procedures might reduce bad debt losses and

the average collection period and therefore the costs of investing in debtors.

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2.5 RELATIONSHIP BETWEEN CREDIT MANAGEMENT POLICY AND

BAD DEBTS

According to Pandey (1993), a firm may follow a lenient or stringent policy, the firm

following a lenient credit policy tends to sell on credit to customers on a very liberal

terms and standards. Credits are granted for longer periods, even to those customers

whose credit worthiness is not fully known or whose financial position is doubtful and

this creates a lot of book debts and running costs and the firm utmost earns losses through

accumulation of bad debts.

In contrast, a firm following a stringent credit policy sells on credit on a highly selective

basis only to those customers who have proven credit worthiness and who are financially

strong this will reduce on the bad debt risk for the company.

Pandey put it that a firm uses its credit management policy variables as mentioned above

of credit standards, credit terms & collection efforts to influence its investment in

accounts receivables.

2.5.1 Optimum credit management and bad debts

An optimum credit management is one which maximizes the firm’s value. The value of

the firm is maximized when the incremental rate of return (marginal rate of return) of an

investment set is equal to the incremental costs of funds (marginal cost of capital) used to

finance the investment (Pandey, 1993; Van horne, 1989). The incremental cost of funds is

the rate of return required by the supplier given the risk of investing in accounts

receivables (Pandey, 1993).

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When the firm’s policy is loosened, its investment in accounts receivables becomes more

risky resulting in slower paying and defaulting accounts hence bad debts. To this effect,

the required rate of return tends to swing downwards.

Van horne (1989) further argued that, when a firm resorts to liberal credit policy, its

profitability increases on account of higher sales but such a policy leads to increased bad

debts and more collection costs. The total investment in receivables increases and

liquidity is credited. However, with a stringent credit policy, profitability reduces but

liquidity does increase. This is why an optimum level is necessary to average out all these

odds. The firm’s optimum investment in receivables will be at a level of trade off

between bad debt risk and sales.

Franks, Broyles and Carleton (1985), have argued there is need to develop cost

effective measures for identifying credit customers monitoring the status of customer

accounts with over due bills. Gitman (1982) identifies three important aspects of a

sound accounts receivable management these are credit standards or analysis, credit

terms, and collection policies.

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CHAPTER THREE

METHODOLOGY

3.1 INTRODUCTION.

This chapter explains how the study was conducted by the researcher regarding data

collection and its analysis. This chapter includes the various methods which were used in

data collection, research design, sample size, survey population, data processing and

analysis.

3.2 RESEARCH DESIGN.

The design used in this study was cross sectional and descriptive with a correlation bias.

The correlation approach of the study dealt with the analysis of the relationship between

factors of credit management and bad debts.

3.3 STUDY POPULATION.

The study population included 120 people of Nile Energy (u) ltd comprising of workers

from the various departments and clients.

3.4.1 SAMPLING TECHNIQUES

3.4.1 Sample size

The sample size included 30 members of staff of Nile energy ltd from various

departments and the clients of Nile energy ltd.

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Table 2: the distribution of the sample size.

Department Frequency percentage

Accounts 5 16.7%

Credit 8 26.7%

Audit 4 13.3%

Operations 3 10%

Clients 10 33.3%

Total 30 100

Source: primary source

3.4.2 Sampling method

Purposive sampling was used in selecting respondents and then collect data from them.

Also on selecting clients the researcher used convenient sampling.

3.5 DATA COLLECTION.

3.5.1 Data sources

The researcher used secondary data from text books, journals and reports. This was

supplemented by primary data from respondents.

3.5.2 Data collection instruments

Questionnaires, the researcher used questionnaires and copies were distributed among

different departments chosen for their responses.

Documentary review, secondary data was obtained from the existing literature taking

into account those related materials

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3.6 DATA ANALYSIS AND INTERPRETATION.

The responses collected from the field were edited with a view of checking for

completeness and accuracy, data analysis was carried out with a view to provide answers

to the research questions and the findings were presented in tables and analyzed in

frequencies and percentages. The findings were interpreted in light of research objectives

and literature review to attach meaning to figures.

3.7 LIMITATIONS OF THE STUDY

Time constraint

This was one of the major problems encountered – the time in which i was required to

write out the report was limited. Despite this, effort was made to ensure that all the

important areas on aspects of the study are covered.

Financial constraint

Due to lack of sponsorship, I found it very difficult to finance this research as a student..

Attitudes of the respondents

I also encountered non response and holding out of some important information by

management of Nile Energy (U) Ltd.

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CHAPTER FOUR.

PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS.

4.1 INTRODUCTION.

The chapter entails interpretation and presentation of orderly findings as the result of the

study and data gathered from the field.

4.2 CHARACTERISTICS OF THE RESPONDENTS.

In order to identify the general characteristics of the respondents, respondents were asked

to identify their gender and their response is as shown below.

Table 3: characteristics of the respondents

RESPONSE FREQUENCY PERCENTAGE

Male 20 67%

Female 10 33%

TOTAL 30 100%


Out of the 30 respondents approached, 20 were male and 10 were female

4.3 EFFECTIVENESS OF THE CREDIT MANAGEMENT POLICIES.

4.3.1 Credit limits.

In order to find out whether there are set credit limits to all customers, 20 workers of Nile

Energy (U) were asked and there response was as follows,

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Table 4: Response on credit limits.

Response Frequency Percentage

Strongly agree 10 50%

Agree 10 50%

Uncertain - -

Disagree - -

Strongly disagree - -

Total 20 100%


From the table above, 50 % of the 20 staff members strongly agreed that there are set

credit limits for all the clients and the remaining 50% agreed to the same which shows

that there are set credit limits to all the customers as no body disagreed or strongly

disagreed.

4.3.2 Compliance with the credit policies.

The researcher also asked staff members whether they follow the set credit policies while

offering credit to customers and the replied as follows.

Table 5: Response on compliance with the credit policies


Strongly agree - -

Agree 2 10%

Uncertain - -

Disagree 15 75%

Strongly disagree 3 15%

Total 20 100%


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The responses in table 5 above show that of the 20 respondents, only 2 agreed that the set

credit policies are followed and 15 and 3 respondents disagreed and strongly disagreed

respectively which shows that that the credit policies are to a greater extent not followed.

4.3.3 Credit worthiness of clients.

Workers of Nile Energy (U) Ltd./Gaz Fuel Station were asked whether they ascertain the

credit worthiness of their clients before offering credit to them as per the credit policies.

They replied as follows,

Table 6: response on whether credit worthiness of clients is ascertained



Agree 2 10%

Uncertain 3 15%

Disagree 8 40%


Total 20 100%


Strongly agree and agree responses both got 10% 0f the 20 staff members, 3 respondents

were uncertain, 8 and 5 staff members disagreed and strongly disagreed respectively that

the credit worthiness of the clients is not ascertained before giving them credit.

4.3.4 Type of credit policy and terms.

In an attempt to find out how lenient or tough the credit policies may be, staff members

were asked to rate the credit policies in their view. This is how they responded

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Table 7: response of staff on type of credit policy and terms.


Stringent 6 30%

Lenient 10 50%

Optimum 4 20%

Total 20 100%


6 respondents described the credit policies and terms as stringent, 10 which constitute the

greatest percentage of 50% believed that the credit policies and terms are lenient and only

4 described it as optimum as per table 7 above.

4.3.5 Rating the credit policy.

10 customers of Nile Energy (U) Ltd./Gaz Fuel Station were requested to rate the credit

policy in terms of effectiveness and this is how they responded;

Table 8: customer’s responses on rating the effectiveness of the credit policy


Very effective - -

Effective 4 40%

Inefficient 6 60%

Very inefficient - -

Total 10 100%


From table 8 above, only 4 customers out the 10 who were approached rated the credit

policy as effective, 6 rated it as inefficient and no body rated it as very effective or very

inefficient.

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4.4 COMPLIANCE WITH THE SET STEPS AND PROCEDURES TOWARDS

REDUCING BAD DEBTS.

4.4.1 Relationship with the creditors.

In order to find out the relationship between Nile energy and its debtors, 10 customers

were asked whether they have any binding contract with their creditor (Nile energy (U)

ltd) and they responded as follows,

Table 9: customer’s response on their relationship with Nile energy (U) ltd


Yes 3 30%

No 7 70%

Total 10 100%


Table 9 shows that out of ten customers, only 3 have formal binding contracts with the

company (Nile energy (U) ltd) and the remaining seven do not have binding contracts a

thing which may be of greater problem towards recovery of the credit.

4.4.2 Collateral security.

Customers were asked to state whether they dive collateral security before they get credit.

They responded as below.

Table 10: customer’s response on collateral security.


Yes 5 50%

No 5 50%

Total 10 100%


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It’s shown from table 10 above that not all clients are requested to present collateral

security is it is indicated that only 5 out of every 10 clients are the only one required to

present collateral something which can lead to bad debts when clients refuse to pay.

4.4.3 Payment period

Credit clients were asked to indicate the period within which they settle their debts. This

is how they responded,

Table 11: client’s response on payment period.


The same day - -

After 1 day 1 10%

After 3 days 1 10%

After 1 week 1 10%

After 2 weeks 3 30%

Over a month 4 40%

Total 10 100%

Source: primary data

No client paid on the same day, the periods of after 1 day, 3 days and 2 weeks each

received one response and 4 clients indicated that they settle for a period of over a month

from the day of transaction.

4.4.4 Bank references.

The members of staff approached were asked if they ask for bank references from

customers before granting them credit and below is how they responded.

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Table 12: response on bank references


Strongly agree - -

Agree 1 5%

Uncertain - -

Disagree 15 75%


Total 20 100%


Table 12 above shows that only 1 person agreed that customers are asked for bank

reference before giving them credit, 15 and 4 disagreed and strongly disagreed

respectively which can cause increase in bad debts because they don’t find out the ability

of the customer to pay back.

4.4.5 Reminders for payment.

In order to find out whether Nile energy Uganda reminds credit customers of their credit

status, 10 credit customers were asked whether they get any form of reminder. They

responded as below.

Table 13: customer’s response on whether they receive reminders for payment.


Yes 5 50%

No 5 50%

Total 10 100%

Source: primary data

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50% representing 5 respondents accepted that they have ever received reminders for

payments mainly through phone calls and the 50% indicated that they have never gotten

any reminder for payment in whatever form.

4.5 RELATIONSHIP BETWEEN CREDIT MANAGEMENT POLICY AND

BAD DEBTS

4.5.1 Effect of credit management policy on bad debts.

In order to find out how credit management policy has an effect on the level of bad debts,

20 workers of Nile energy (U) ltd were asked whether they think that poor credit

management policy has an adverse effect towards bad debts and there response was as

follows,

Table 14: response on the effect of credit management policy on bad debts.



Agree 18 90%

Uncertain - -

Disagree - -


Total 20 100%


From the table above, 90% representing 18 out of the 20 respondents agreed that poor

credit management policies have an effect on the level of bad debts, 2 strongly agreed

and none disagreed or strongly disagreed an indication that the poor credit management

policy has really contributed towards the present level of bad debts.

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4.5.2 Cause of bad debts.

In an attempt to find the cause of bad debts, 20 staff members were asked to indicate

whether high levels of bad debts are due to weak credit management and they responded

as follows.

Table 15: Response on the cause of bad debts.



Agree 18 90%

Uncertain - -

Disagree - -


Total 20 100%

Source: primary source.

From the table above, 18 out of the 20 respondents agreed that bad debts are due to weak

credit management policies, 2 strongly agreed and none disagreed or strongly disagreed.

From the above findings, we can say that there is a strong negative relationship between

credit management policies yet there has to be a positive relationship because credit

management policies are supposed to reduce on the level of bad debts but due their poor

implantation, they have just increased on level of bad debts.

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CHAPTER FIVE

SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS

5.1 INTRODUCTION

This section presents the summary, recommendation and conclusions of the findings from

chapter four and analysis based on the research objectives and questions in chapter one.

5.2 SUMMARY OF THE MAJOR FINDINGS.

5.2.1 Effectiveness of the credit management policies.

From the findings, the researcher revealed that the credit management policies are not

effective since some of the policies were not followed, the credit worthiness of the credit

clients is not ascertained before granting credit and also the workers of Nile Energy

Uganda rated the credit management policy as lenient which confirms its ineffectiveness

5.2.2 Compliance with the set steps and procedures towards reducing bad debts.

The set steps and procedures such as asking for collateral before giving credit, reminding

of customers about their credit status were not fully executed which could be one of the

problems causing high bad debts.

5.2.3 Relationship between credit management policy and bad debts

There is a negative relationship between credit management policy and bad debts as bad

debts kept on increasing in the years of 2008 to 2010 due to poor credit management

policies.

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5.3 CONCLUSIONS.

From the above, we can conclude that the credit management policies of Nile energy

Uganda are not efficient because they failed to help the company reduce on the level of

bad debts.

Not all credit policies are adhered to and there is a negative relationship between credit

management policies and bad debts as the poor credit policies just led to an increase in

bad debts.

5.4 RECOMMENDATIONS.

The credit worthiness of clients should be first ascertained before they are given credit so

that credit can only be given to credit worthy customers who will be able to pay.

Formal binding contracts should be made to streamline the company customer

relationship. This can make debt collection easier on part of the company.

The company should slowly phase out offering credit and embark on cash transactions as

this will ensure 100% solution to problems of credit and bad debts.

5.5 SUGGESTIONS FOR FURTHER RESEARCH

There is need to find out how best companies that deal in credit transactions can

do to reduce on the burden of bad debts.

There is also need to research about the in depth reasons as to why people refuse

to pay yet some make profits out of the businesses for which they get credit for.

32

REFERENCES.

Boggess W.P (1976) ”Screen test Your Credit risk s” in Harvard Business Review, vol.

45, No 6 (November- december1967), pp113-122

Brealy R. and Myers S. (1981), Principles of Corporate Finance. Singapore McGraw Hill

Inc.

Brigham Eugeno F, (1983): Money and credit Developing Africa, Heinemann

educational books

Gitman L.J (1982) principle of managerial finance, 3rd

ed. new York: harper & Row ,

publishers,inc

Kakuru, J. (1993). Financial Management. Makerere University, Kampala.

Metha. D., “The formulation of creditpolicy Models”. In management science Journal

(October 1968), vol. 15 No. 2, pp. B30-b50.

Pandey, I.M. (1995). Financial Management, 7th edition. Vikas Publishing House, PVT

India.

33

Van Horne, J.C. (1989). Financial Management Policy and Principles. New Jersey. Eagle

Woodcliff.

34

APPENDIX I

MAKERERE UNIVERSITY

QUESTIONNAIRE

Dear respondent,

This questionnaire is intended to facilitate the study above the effect of credit

management policies and bad debts in Nile Energy (U) Ltd./Gaz fuel stations. The study

is purely for academic purposes and is carried out in partial fulfillment of the

requirements for the award of a Bachelors Degree in Commerce. As a stakeholder your

response will be highly appreciated and treated with utmost confidentiality.

This questionnaire is to be filled by the staff of Nile Energy (U) Ltd./Gaz Fuel Stations.

SECTION A

Background of the respondent

1. Department:…………………………………………………………………………

2. Position held:……………………………………………………………………….

3. Gender: Male Female

4. Age: 18-25 years 25-35 years 35-39 years

39-46 years Over 46 years

5. Marital status

Married Single Divorced

6. Academic qualification

Degree holder Diploma holder Professionally qualified

UACE UCE and below

35

7. For how long have you been employed by Nile energy company?

Less than a year 1-3 years 3-5 years

5-8 years Over 8 years

SECTION B

Tick the most appropriate option in the boxes given below for each question

1. Are there are set limits in authority to acquire fuel?

Strongly agree Agree Uncertain

Disagree Strongly disagree

2. Do you issue vouchers are raised, authorized and approved before issuing fuel?



3. Invoices and purchase order are matched before fuel is issued



4. The company often asks for bank references before granting credit to a customer



5. The nature of your creditor’s business is permanent



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6. Are there set credit limits to all the clients?



7. Do you follow the credit policies?



8. Is the credit worthiness of a customer ascertained before granting him credit?



9. Do you request for security (collateral) before extending credit?



SECTION C: Credit terms analysis

10. In your view what type of credit policy and terms does the company operate?

Stringent Lenient Optimum

11. What is your credit period?

1 day 1 week 2 weeks 1 month

3 months 3 months and above

12. Do you offer cash discounts to all customers?

Yes No

37

SECTION D: Collection procedures/efforts

Tick as appropriate

1. Do you often send invoices to our credit customers?



2. Do you always send credit notes to inform customers of the amount due?



3. Do you send reminding letters to let creditors know their amounts due?



4. Our firm makes personal contact with customers in order to clear their debt

obligations.



SECTION E: Relationship between credit management policy and bad debts

1. Do you think poor credit management policy has an adverse effect on bad debts?



2. High levels of bad debts are due to weak credit management.



38

3. In your opinion, what suggestions do you think should be in place in order to

reduce on the bad debt levels in Nile Energy.

………………………………………………………………………………………

Thank you for taking time to complete this questionnaire

39

MAKERERE UNIVERSITY

Dear respondent,

This questionnaire is intended to facilitate the study above the effect of credit

management policies and bad debts in Nile Energy (U) Ltd./Gaz fuel stations. The study

is purely for academic purposes and is carried out in partial fulfillment of the

requirements for the award of a Bachelors Degree in Commerce. As a stakeholder your

response will be highly appreciated and treated with utmost confidentiality.

To be completed by the customer

1. Position held:……………………………………………………………………….

2. Gender: Male Female

3. Age: Below 20 years 21-25 years 26-30 years

31-35 years 36-40 years 41 and above

4. Type of business

Registered company

Not registered

5. Did you fill any application form to be a dealer or corporate customer?

Yes No

6. Does Nile Energy require you to pay in advance?

Yes No

7. Is there any binding contract between you and your supplier?

Yes No

8. Does the company ask for collateral security before granting credit to you?

Yes No

40

9. In your opinion how do you rate the company’s credit policy?

Very effective Effective Inefficient

Very inefficient

10. Do you get any reminder from Nile Energy if payment is due?

Yes No

11. If your answer is yes in (10) above then how?

Postal address Telephone

Personal visit Email

12. For how long have you been dealing with Nile Energy?

Less than 6 months Less than 1 year

About 2 years Over 2 years

13. Do you keep books of accounts?

Yes No

14. How long do you take to clear your debt?

The same day after one day after 3 days

After 1 week after 2 weeks over a month

15. Do you want to continue trading on credit?

Yes No

Thank you for taking time to complete this questionnaire

Documents

CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY · CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY ... Pandey therefore put it that, there is only one way in which the credit