An efficient credit management system reduces the amount of capital tired up with debtors and minimizes bad debts. Good credit management system is vital to business cash flow and success and ensures effective business operation.
The study investigated the impact of financial management of trade credit on firm’s performance; using Guinness Ghana brewery limited (GGBL) as case study. The choice of the topic was influenced by the impact of short term financial management of trade credit on profitability of companies.
Secondary data was used for the study. It noted that, average collection period of 39.6 days was maintained by GGBL over the period. Average payment period was also 96.2 days, which was encouraging. This means that, supplies made to GGBL on credit were utilized to turn over sales cycle three times before payments were eventually made to suppliers. The performance in terms of profitability evidenced by ROE (Return On Equity), was 36% and OPM (Operating Profit Margin) was 12.4%. This goes to highlight the importance the impact of efficient credit management have on profitability of firms.
The study further observed that ACP and APP were positively related to profit margin (OPM), but negatively related to return on equity. The study was observed to be consistent with other studies conducted by Poutziouris, Michaelas and Soufani (2005)
The recommendations made include;
- Policy makers should have the interest in promoting efficient management of working capital to facilitate performance management.
- Top management of every firm should manage their trade credits prudently in order to remain profitable and competitive.
1.1 BACKGROUND OF THE STUDY
An efficient credit management system reduces the amount of capital tied up with debtors and minimizes bad debts Finlay (2009). Peter D. (2005) conceived that there is a positive correlation between credit management and profitability. According to Dina A. (2007), good credit management is vital to business cash flow and ensures business operations. Good credit management involves optimizing cash flow to ensure stability and provide maximum potential for growth. Credit arises when a firm sells its products or services on credit and does not receive cash immediately. It is an essential marketing tool, acting as a bridge for the movement of goods through production and distribution stages to customers. A firm grants trade credit to protect its sales from the competitors and to attract the potential customers to buy its products at favorable terms. Trade credit creates receivable or book debts which the firm is expected to collect in the near future. The book debts or receivable arising out of credit has three characteristics:' first, it involves an element of risk which should be carefully analysed. Cash sales are totally riskless, but not the credit sales as the cash payment are yet to be received. Second it is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while the seller expects an equivalent value to be received later on. Third, it implies futurity. The cash payment for goods or services received by the buyer will be made by him in a future period. The customers from whom receivable or book debts have to be collected in the future are called trade debtors or simply as debtors and represent the firm's claim or asset.(Ramamoorth,1976,p.183).