THE IMPACT OF CREDIT MANAGEMENT ON PROFITABILITY OF A FIRM-A CASE STUDY OF UNILEVER LAGOS

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THE IMPACT OF CREDIT MANAGEMENT ON PROFITABILITY OF A FIRM-A CASE STUDY OF UNILEVER LAGOS

ABSTRACT

This research investigates the intricate relationship between credit management practices and the overall profitability of a firm, with a focus on Unilever Lagos. Credit management plays a pivotal role in financial performance, influencing cash flow, liquidity, and ultimately, a firm’s bottom line. The study employs a case study methodology to delve into Unilever Lagos’s credit management strategies, exploring their impact on the company’s profitability.

The research aims to achieve a nuanced understanding of how credit policies, credit risk assessment, and receivables management contribute to or detract from Unilever Lagos’s financial success. Both quantitative and qualitative data collection methods are utilized, including financial statement analysis, interviews with key stakeholders, and a review of credit management policies.

The findings of this study provide insights into the specific credit management practices employed by Unilever Lagos and their implications for profitability. By understanding the dynamics of credit management in a real-world business context, the research contributes valuable knowledge that can inform not only Unilever Lagos’s financial strategy but also serve as a reference for other firms facing similar challenges.

The practical implications of this research extend to financial managers, credit professionals, and decision-makers within Unilever Lagos and the broader business community. By identifying effective credit management practices, the study aims to offer actionable recommendations for enhancing profitability through improved credit management strategies.

In conclusion, this research contributes to the ongoing discourse on the crucial link between credit management and profitability, utilizing a real-world case study to provide practical insights that can benefit firms navigating the complex terrain of credit risk and financial performance.

TABLE OF CONTENT

Chapter 1: Introduction

1.1 Background of the Study

1.2 Rationale for the Research

1.3 Research Objectives

1.4 Research Questions

1.5 Significance of the Study

1.6 Scope and Limitations

1.7 Organization of the Thesis

Chapter 2: Literature Review

2.1 Conceptual Framework of Credit Management

2.2 The Role of Credit Management in Financial Performance

2.3 Credit Policies and Profitability

2.4 Credit Risk Assessment Strategies

2.5 Receivables Management and Cash Flow

2.6 Previous Studies and Case Studies on Credit Management

2.7 Gaps in Existing Literature

Chapter 3: Research Methodology

3.1 Research Design

3.2 Case Study Approach

3.3 Data Collection Methods

3.3.1 Financial Statement Analysis

3.3.2 Interviews with Key Stakeholders

3.3.3 Review of Credit Management Policies

3.4 Sampling Technique

3.5 Data Analysis Procedures

3.6 Ethical Considerations

Chapter 4: Credit Management Practices at Unilever Lagos

4.1 Overview of Unilever Lagos

4.2 Credit Policies and Procedures

4.3 Credit Risk Assessment and Mitigation

4.4 Receivables Management Strategies

4.5 Relationship with Creditors and Debtors

4.6 Implementation Challenges

4.7 Comparative Analysis with Industry Standards

Chapter 5: Conclusion and Recommendations

5.1 Summary of Findings

5.2 Contributions to Knowledge

5.3 Practical Implications

5.4 Recommendations for Unilever Lagos

5.5 Suggestions for Future Research

References

Chapter One:

Introduction

1.1 Background of the Study

Credit management is a critical aspect of financial management that significantly influences the performance and profitability of firms. Effective credit management ensures a balance between liquidity and profitability, allowing businesses to maintain a healthy cash flow while extending credit to customers. The impact of credit management on the profitability of a firm is particularly crucial in industries with extensive credit sales, such as the consumer goods sector. This study focuses on examining the specific case of Unilever Nigeria Plc in Lagos, a multinational company operating in the fast-moving consumer goods industry.

Unilever, with a rich history and a diverse portfolio of products, faces the challenge of managing credit effectively to sustain its profitability. The economic environment, characterized by volatility, competition, and changes in consumer behavior, necessitates a thorough investigation into the credit management practices adopted by Unilever Lagos and their impact on the firm’s financial performance.

According to Achumba and Osuagwu (1994), marketing experts have long established that granting credit is one of the tools employed by an organization to expand the volume of sales. It provides a vital marketing link for the movement of goods from production through distribution stages to a large number of customers who do not have immediate payment capacity. Trade credit creates an account receivable under current assets in the firm’s statement of financial position, which the firm expects to receive in the future. Apart from increased sales volume, firms grant credit to customers for specific reasons such as to acquire a good share of the industry market, achieve envisaged level of profit, command customers’ loyalty, and retain them in the firm (Pandey, 2010).In credit sales, the economic value in goods passes immediately at the time of purchase while the seller expects an equivalent amount to be received on a later date. The partial or full payment delay at the time of salesmight impose some element of liquidity risk to the seller(Kaitibi1, Ganawah, Yokie1, Jalloh1, & Koroma, 2018).Therefore, credit sales imply both now and future transactions, which involves a receivable risk that should be cautiously analyzed and adequately managed. Although in every business circle, credit is unavoidable but remains a threat to the financial stability and performance of any business (Agu & Basil, 2013; Nwanna & Oguezue, 2017).

Previous studies have shown that low liquidity to initiate viable investments leading to reduced profitability level to continue operations were responsible for the failure of many quoted manufacturing organizations in Nigeria (Owolabi & Obida, 2012; Ifurueze,2013). A good number of the liquidity problem were traced to bad debts from customers who could not pay for the goods sold to them on credit when due. Some manufacturing companies allow a lot of credit to customers to expand sales volume and control a fair share of the industry market at the detriment of liquidity. Adequate liquidityenables a company to meet its short term operating obligations to creditors when due and invest in viable projects. The result of appropriate investments such as in projects with positive net present value, as well as prompt creditor’s payment and cash discount advantage would positively affect profitability (Eljelly, 2004).A prolonged credit without appropriate credit policy to manage debts will negatively affectliquidity and profitability (Olagunju, David, & Samuel, 2012). Therefore, an organization should employ credit analytical tools and strategies developed by credit professionals to measure, manage credit, and avoid bad debts.In a bid to solve the problem of a firm’s bad debts and improve cash inflow, management employs sound credit sales to increase debt collection, achieve economy of credit costs, and extend credit only to creditworthy customers. Also, firms should develop competitive credit terms to beat the competition (Ofoegbu, Duru, & Onodugo, 2016).

Owolabi and Obida (2012) recommended that management should control credit to ensure adequate liquidity by developing appropriate credit model that would provide a collection of receivables at the due date. The strategy includescredit terms and customers’ risk assessment, credit collection, and enhanced debt recovery at low cost. Ifurueze (2013) noted that adequate liquidity has a significant moderating influence on the profitability of an organization. This assertion has led to a questionof how does credit management strategies influence the level of liquidity and consequential profit?The answer to this research question has been omitted in the quoted chemical and paint manufacturing subsector in Nigeria. Therefore, further research is needed to assess the impact of credit management strategies on the firms’ liquidity and profitability. The general objective of this study is to investigate the effect of credit management strategieson the liquidity and profitability of quoted chemical and paint manufacturing firms in Nigeria. To achieve the main objective, the subsidiary objectives include: to explore the effect of credit terms and risk assessment on the customer’s ability to pay; to examine the influence of debt recovery strategy on the level of bad debt; and to evaluate the impact of credit collection policy on the company’s cash flow.

1.2 Statement of the Problem

Credit management involves making decisions about credit policies, credit terms, and monitoring credit risk. The efficiency and effectiveness of these credit management practices can significantly influence a firm’s profitability. In the case of Unilever Lagos, the relationship between credit management and its impact on profitability is a critical concern. Factors such as the credit terms extended to customers, credit risk assessment procedures, and the timely collection of receivables can all impact the financial health of the firm. Understanding these factors and their implications is essential for developing strategies to enhance Unilever Lagos’s financial performance.

1.3 Objectives of the Study

The main objectives of this research are as follows:

To evaluate the credit management policies and practices adopted by Unilever Lagos.

To analyze the impact of credit terms on the firm’s liquidity and profitability.

To assess the effectiveness of credit risk assessment procedures in minimizing bad debts.

To investigate the relationship between the timely collection of receivables and the firm’s cash flow and profitability.

1.4 Research Questions

To guide the study, the following research questions are formulated:

What are the credit management policies and practices implemented by Unilever Lagos?

How do credit terms extended to customers influence the liquidity and profitability of Unilever Lagos?

How effective are the credit risk assessment procedures in minimizing bad debts for Unilever Lagos?

What is the relationship between the timely collection of receivables and the cash flow and profitability of Unilever Lagos?

1.5 Significance of the Study

This study holds significant importance for Unilever Lagos and other firms operating in similar industries. The findings will provide valuable insights into the impact of credit management on profitability, offering practical recommendations for improving financial performance. Additionally, researchers, financial analysts, and policymakers will benefit from a deeper understanding of credit management practices in the context of a multinational consumer goods company.

1.6 Scope of the Study

The study focuses specifically on Unilever Nigeria Plc, Lagos, and its credit management practices. Data will be gathered from the company’s financial records, credit policies, and relevant stakeholders. The temporal scope will cover the past five years to allow for a comprehensive analysis of trends and patterns.

1.7 Research Methodology

A mixed-methods research approach will be employed, combining quantitative analysis of financial data and qualitative examination of credit management policies and practices. Financial statements, credit reports, and relevant documents will be analyzed, and key stakeholders within Unilever Lagos will be interviewed to provide in-depth insights.

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