MANAGEMENT OF ACCOUNTS RECEIVABLES AND PROFITABILITY OF SMALL SCALE ENTREPRISES CASE STUDY: IKONGO ENTERPRISES

BY MR. BWAMBALE JOSEPH REG. NO. 07/U/765 /E!T

SUPERVISOR MR. N"IBONERA ERIC

A RESEARCH REPORT SUBMITTED IN PARTIAL FULFILMENT OF THE RE#UIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE OF MAKERERE UNIVERSITY

MAY $0%%

ii

DECLARATION
I, Bwambale Joseph, declare that this work is an original of my own effort and has never been represented by any academic institution for any a ward. Signature. BW !B "# J$S#%& 'ate

(his report has been submitted for e)amination with my approval as a university supervisor. Signature. !*. +,IB$+#* #*I-

'ate..

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DEDICATION
I dedicate this work to my family and particularly my parents !r. .olera 'irian and !rs. .olera gness whose lives were the answers to my academic struggle and who might have foregone some of the basic needs during the time of my struggle.

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ACKNOWLEDGEMENT
I take this as an opportunity to put in writing my appreciation to my brother Baluku Julius .olera whose contribution has been profoundly felt from the nascent stages of my academic struggle up to the end. $n the same note, I e)tend my appreciations to the family of !r. !asereka %aul without whose assistance I would be constrained along my way. I further appreciate my relatives/ !uhindo 'avid, .olera Stephen, .olera (omas, .olera Jimy, .olera Juliet and .olera Janet, -osmus, and 0race. I feel indebted to all of you for the unsecured support, guidance and comfort given to me during the time of my academic struggle.

In a special way, I wish to acknowledge my supervisor !r. +1ibonera #ric who guided me in an effort to make this work reflect the re2uired academic standards of !akerere 3niversity. Special thanks go to my friends !r. *uman1i -ollins, !s. +akagwa 'oreen and !r. 0ule Swadik whose contribution to my struggle can not be under estimated I also acknowledge my friend (songo the importance of friendship. (hank you. (o you, I owe my support. ndrew and !ukamba Samuel with whom I felt

TABLE OF CONTENTS
'#-" * (I$+................................................................................................................iii '#'I- (I$+....................................................................................................................iv -.+$W"#'0#!#+(...................................................................................................v ( B"# $4 -$+(#+(S....................................................................................................vi "IS( $4 ( B"#S..............................................................................................................i) BS(* -(........................................................................................................................)i -& %(#* $+#................................................................................................................)ii 5.6 Introduction..................................................................................................................)ii 5.5 Back ground of the study.............................................................................................)ii 5.7 statement of the problem.............................................................................................)iv 5.8 %urpose of the study....................................................................................................)iv 5.9. $b:ectives of the study..............................................................................................)iv 5.; *esearch 2uestions.......................................................................................................)v 5.< Scope of the study........................................................................................................)v 5.=. Significance of the study.............................................................................................)v -& %(#* (W$.............................................................................................................)vii 7.6 "I(#* (3*# *#>I#W..........................................................................................)vii 7.5 Introduction................................................................................................................)vii 7.7 ccounts receivables.................................................................................................)vii 7.8 Justification for investment in account receivables..................................................)viii 7.9.6 ccount receivables management policy................................................................)i) 7.8.5 -redit policy............................................................................................................)i) 7.9.7 -redit standards.......................................................................................................)) 7.9.8 -redit terms..............................................................................................................))i 7.9.9 -ollection procedures..............................................................................................))i 7.; %rofitability.................................................................................................................))i 7.< *elationship between accounts receivables management and profitability..............))ii 7.= -onclusion...............................................................................................................))iii -& %(#* (&*##........................................................................................................))iv vi

8.6 !ethodology.............................................................................................................))iv 8.5 Introduction...............................................................................................................))iv 8.7 *esearch design........................................................................................................))iv 8.8 Study population.......................................................................................................))iv 8.9 Sample si1e and sample procedure...........................................................................))iv 8.; Sources of data...........................................................................................................))v 8.< 'ata collection methods and techni2ues....................................................................))v 8.= 'ata presentation and analysis...................................................................................))v 8.? "imitations of the study.............................................................................................))v -& %(#* 4$3*.........................................................................................................))vii 9.6 %resentation, interpretation and discussion of findings...........................................))vii 9.5 Introduction..............................................................................................................))vii 9.7.6 -haracteristics of respondents..............................................................................))vii 9.7.5 -lassification according to gender........................................................................))vii 9.7.7 -lassification according to age............................................................................))viii 9.7.8 -lassification according to education level.........................................................))viii 9.7.9 -lassification according to the time respondents have been in dealings with Ikongo enterprise......................................................................................................................))viii 9.8.6 4inding on accounts receivables management.......................................................))i) 9.9.6 4indings on profitability.......................................................................................)))v 9.;.6 4inding on the relationship between accounts receivables management and profitability..................................................................................................................)))vii -& %(#* 4I>#...............................................................................................................)li ;.6 Introduction..................................................................................................................)li ;.7.6 Summary of findings................................................................................................)li ;.7.5 ccounts receivables management...........................................................................)li ;.7.7 %rofitability...............................................................................................................)li ;.7.8 *elationship between accounts receivables management and profitability.............)li ;.8.6 -onclusion...............................................................................................................)lii ;.9 *ecommendations......................................................................................................)lii ;.; Suggested areas for further researchers......................................................................)lii

vii

*#4#*#+-#S................................................................................................................)liii %%#+'I-#S.................................................................................................................)liv %%#+'I@ IA 2uestionnaire to the management and employees of Ikongo enterprise..)liv %%#+'I@ II Buestionnaire to the customers of Ikongo enterprise..............................)lvi

viii

LIST OF TABLES
(able 5A Showing composition of respondents by gender.................................................5< (able 7A Showing composition of respondents by age......................................................5= (able 8A Showing respondentsC level of education............................................................5= (able 9A Showing time respondents have been dealing with Ikongo enterprise................5? (able ;A Showing respondentsC response on the use of receivable management policy at Ikongo enterpise.................................................................................................................5D (able <A Showing responses whether Ikongo enterprise e)tends credit to customers.......5D (able =A Showing responses on the effectiveness of accounts recievables collection in Ikongo enterprise...............................................................................................................76 (able ?A Showing responses of respondents on whether the prevailing economic and social political factors might affect customers ability to pay............................................75 (able DA Showing responses on bad debt losses................................................................75 (able 56A Showing responses on cash discounts for early payment of credit...................77 (able 55A Showing responses on collateral security..........................................................78 (able 57A Showing responses on default of payments.......................................................79 (able 58A Showing responses on the growth of profitability at Ikongo enterprise between 766; and 7656....................................................................................................................7; (able 59A Showing the ratio of bad debts to profitability Enet profitF................................7< (able 5;A Showing calculation of the relationship between accounts recievables management and profitability using %earsonCs product moment correlation coefficient. .7=

i)

ABSTRACT
(he study was meant to establish the influence accounts receivables management on profitability of small scale enterprises in reference to Ikongo enterprise. Ikongo enterprise operates a diversity of business operations in and around .asese 'istrict. (he study covered the period between 766;G7656. (he ob:ectives of the study were/ to e)amine the receivables management policy applied by Ikongo enterprise, to determine the profitability of Ikongo enterprise and to determine the relationship between receivables management and profitability at Ikongo enterprise. Both simple random and stratified sampling were used. 'ata was collected by use of 2uestionnaires. 'ata was processed by editing, summari1ed, presented in tables and was manually analy1ed. In the findings, most of the respondents strongly agreed or agreed to the fact that receivable management influences profitability which was found to be a positive strong correlation coefficient of 6.D=. It was also established that Ikongo enterprise applies a stringent receivables management policy that ensures effectiveness in the collection of receivables and thus reduction in bad debt losses hence improving the profitability of the enterprise. 4rom the finding, the researcher recommended that/ accounts receivables constitute a significant portion of the current assets of a firm and thus all efforts should be coordinated to ensure optimal investment in them, the credit control department should be ade2uately staffed to make fast the collection process, enterprise should adopt a receivables management policy that ma)imi1es the e)pected profits and is compatible with other policy decisions.

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CHAPTER ONE

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(his chapter shows the background of the study, statement of the problem, purpose of the study ob:ectives, research 2uestions, scope and significance of the study.

%.% B.,/ 0()+&* )1 '23 4'+*5

ccording to .akuru :ulius E7666F, when a firm sells its products or services and does not receive cash for it, the firm is said to have granted trade credit to customers. (rade credit thus creates receivables which the firm is e)pected to collect in the near future. (he would be cash payment for goods and services by the buyer are made in a future period and customers from which receivables are collected in future period are called debtors. Business enterprises today use trade credit as a prominent strategy in the area of marketing and financial management. (hus, credit is necessary in the growth of the business. ccounts receivables occurs if a company gets an order from a customer with payment terms agreed upon in advance. In most firms accounts receivables are e)ecuted by generating an invoice which is delivered to the customer, who in turn must pay with in the agreed terms, for instance it can be net86 meaning payment is due at the end of 86days. Brealey and !eyers E5D??F, defined receivables as money due from another business or individual in payment for the performance of services or sale of goods on credit. *eceivables constitute a substantial portion of the current assets of several firms. In most firms, trade debtors, after inventories, are the ma:or components of current assets.

)ii

(rade credit is very important to a firm because it helps to protect its sales from being eroded by competitors and also attract potential customers to buy at favorable terms. long as there is competition is an industry, selling, on credit becomes inevitable. business will loose its customers to competitors if it does not allow credit to them. (hus investment in recievables may not be a matter of choice but a matter of survival E.akuru Julius, 7665F. 0iven that investment in receivables has both benefits and costs/ it becomes important to have such a level of investment in receivables at the same time observing the twin ob:ectives of li2uidity and profitability. (o ensure optimal investment in receivables, a firm re2uired an appropriate credit policy. -redit policy is designed to minimi1e costs associated with credit while ma)imi1ing the benefits from it. -redit policy is either lenient or stringent. lenient credit policy tends stringent to give credit to customers on very liberal terms and standards such that credit is granted for longer periods even to those whose credit worthiness is not fully known. is financially strong. %rofitability is the e)cess of income and e)penditure that can be e)pressed by the ratios like gross profit margin and return on e2uity E -- 4inancial reporting paper 4= 766DF. %rofitability is an indicator of an organi1ationCs competitive position in the market place and reflects the 2uality of the organi1ationCs management E!- +aughton and 'iet1, 5DD<F. 4irm should generate more profits in order to sustain day to day operations, more funds for reinvestment and to provide income to share holders through dividends. &igher level of investment in receivables enhance the li2uidity position of the firm at the e)pense of profitability due to costs associated while lower levels of investment in receivables leads to loss of li2uidity though enhances profitability E -- , 4inancial management, paper 4D, 766DF credit policy allows credit only to those whose credit worthiness has been ascertained and s

)iii

(o remain profitable, the firm must ensure proper management of its receivables E4oulks, 766;F. (he management of receivables is a practical problem. 4irm can find their li2uidity under considerable strain if the level of their accounts receivables is not properly regulated ESamuels and walkers, 5DD8F. (hus management of accounts receivables is important, for without it/ receivables will build up to e)cess levels leading to declining cash flows. %oor management of receivables will definitely result into dad debts which lower the firmCs profitability levels.

%.$ 4'.'363&' )1 '23 7()8936

$rgani1ations establish receivables management policy in order to ensure optimal investment in receivables so as to achieve sound financial position and profitable operations E.akuru Julius, 7666F. 'espite the efforts by Ikongo enterprise to achieve sound receivables management and profitable operations, the enterprise has continued to register accumulated debt balances and bad debt write offs, which lower down its profits E'ebtors valuations records, 766?F. (his put into 2uestion the relationship between receivables management policy and the profit levels of Ikongo enterprise.

%.: P+(7)43 )1 '23 4'+*5.

(he purpose of the study was to determine the relationship between management of accounts receivables and profitability levels of small scale enterprises.

%. . O8;3,'-<34 )1 '23 4'+*5

i. ii. iii. (o e)amine receivables management policy applied by small scale enterprises (o determine the profitability levels of small scale enterprises (o determine the relationship between receivables management and profitability of small scale enterprises.

)iv

%.5 R343.(,2 =+34'-)&4.

i. ii. iii. What receivable management policy is applied by small scale enterprisesH What are the profitability levels of small scale enterprisesH What is the relationship between receivables management and profitability of small scale enterprisesH

%.6 S,)73 )1 '23 4'+*5

i. Sub:ect scope. (he study focused on the relationship between management of accounts receivables and the profitability levels of Ikongo enterprise. ii. 0eographical scope. (he research was carried out from the trading premises of Ikongo enterprise in Bwera branch and its branches in &ima, .agando,.atwe and .asese municipality. iii. (ime scope. (he study covered the operations of Ikongo enterprise for the period from 766; to 7656

%.7. S-0&-1-,.&,3 )1 '23 4'+*5

i. (he study findings will enable the management of Ikongo enterprise to identify the weakness in the instituted receivable management policy. If the management of Ikongo enterprise accepts this report, it will provide a good guide for the improvements in the enterprise receivables management. ii. (he study will provide literature review to the subse2uent researchers or scholars who will conduct research in the same field of study.

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iii. iv.

(he study will improve the researcherCs knowledge on reporting aspects, data collection and analysis. (he study will enable the researchers to 2ualify for the award of bachelor of commerce degree.

)vi

CHAPTER TWO

$.0 LITERATURE REVIEW

$.% I&'()*+,'-)&.
(his chapter carries out a review of the literature on the relationship between management of accounts receivables and profitability levels. It covers receivables, :ustification for investment in receivables, receivables management policy, profitability, the relationship between receivables management and profit levels and the conclusion.

$.$ A,,)+&'4 (3,3-<.8934.

ccording B%% %ublishers, 4inancial management E766DF, accounts receivables represent the firmCs claim on the assets of customers. *eceivables constitute a substantial proportion of the current assets of several organi1ations, thus represent investment. .akuru E7666F defines receivables as book debts which the firm is e)pected to collect in the near future and those receivables is money owed to the business for a short period of time. #skew E5D?DF noted that receivables are investments and should neither be too many nor too few but rather the test should be whether the level of return the firm is able to earn from receivables e2uals or e)ceeds the potential gain from other commitments. 'ickerson E5DD;F, also commented that if it is possible to sell on credit, then selling on credit becomes more profitable, for it leads to increased sales as well as profits. cash. nd helps to maintain and retain customers. (hus companies should sell on credit than on

)vii

&owever, firmCs potential to earn a favorable return on investment in receivables is dependent on the volume of credit sales, collection period and credit policy applied.

$.: J+4'-1-,.'-)& 1)( -&<34'63&' -& .,,)+&' (3,3-<.8934.

(rade credit is important to a firm because it helps to protect its sales from being eroded by its competitors and also attract potential customers to buy at favorable terms. In most economies, including 3ganda, trade credit is significant source of working capital E%andey, 5DD<F. .akuru E7666F, noted that different business firms depending on their si1e, the nature of the business dealt in and type of industry give various :ustifications for investment in receivables/ 4irm use trade credit as marketing tool. When a firm has :ust launched its products,

credit can be used to e)pand sales. In declining market, it can be used to maintain the market share. -redit is also e)tended so as to build long term relationships with the customer or as a reward for their loyalty i.e. building customer good will. 'epending on the status of the buyer, credit is granted. Because of bulk purchases and higher bargaining power, large scale buyers demand easy credit terms. Some companies may not grant credit to small scale retailers since it becomes hard to collect receivable from them. By e)tending large amounts of credit to big firms, the company e)tending credit will be at an advantage as it will collect the money in lump sums. (rade credit enhances a companyCs bargaining power. If a companyCs bargaining power is low, it will grant more credit so as to build and enhance its bargaining power unlike a company with a high bargaining power.

)viii

0ranting credit to customers may be a practice with in a given industry. (hus new entrants in the industry are left with no option but find it inevitable to offer credit. (his is done so as to win customers from competitors and later on maintain them using the same incentive. (herefore, if any firm is to survive in any competitive industry, granting credit becomes inevitable.

$. .0 A,,)+&' (3,3-<.8934 6.&.0363&' 7)9-,5.

(o ensure optimal investment in receivables, a firm re2uires an appropriate credit policy. .akuru E7666F define credit policy as a set of policy actions designed to minimi1e costs associated with credit while ma)imi1ing benefits from it. It is aimed at having optimal investment in receivables. $ptimal investment is that level of investment where there is a trade off between the costs and the benefits associated with a particular investment. firmCs credit policy should ma)imi1e the firmCs value. (he firmCs value is ma)imi1ed When incremental rate of return is e2ual to incremental costs of funds used to finance the investment E -- 4inancial management, paper 4D, 766DF.

$.:.% C(3*-' 7)9-,5.

(his refers to guidelines that are followed in managing credit in a business. -redit policy includes credit standards, credit terms and collection procedures. -redit sales are a function of total sales/ total sales depend on such factors as the economic conditions e.t.c credit sales are also influenced by the nature of the business and industrial norms. credit sales can be controlled is by making alterations in the firmCs credit policy. ll firm these factors are to a very large e)tent uncontrolled by a financial manger. (he only way therefore re2uires credit policy in its operations since a proportionately large amount of sales are made on credit and credit policy variables are the ones in the control of the manger E.akuru, 7665F. -redit policy is designed to minimi1e costs associated with credit while ma)imi1ing the benefits from it. -redit policy is either lenient or stringent.

)i)

L3&-3&' ,(3*-' 7)9-,5 (his policy tends to give credit to customers on very liberal terms and standards. -redit is granted for period of time even to those customers whose credit worthiness is not fully known or whose financial position is doubtful. -redit is granted at high discount rates.

S'(-&03&' ,(3*-' 7)9-,5. stringent credit policy gives credit on highly selective basis only to customers whose credit worthiness has been ascertained and is financially strong. -redit periods are shorter and discounts are lower. It involves low costs but may be detrimental to sales returns. firm needs to formulate a credit policy which is optimum. -redit policy involves three variables. i.e. credit standards, credit terms and collection procedures E.akuru, 7666F

$. .$ C(3*-' 4'.&*.(*4.
(hese focus on the person who wants credit and thus determines who 2ualifies for the credit. -redit standards are the criteria, which the firm follows in selection of customers for credit e)tension. In order to analy1e customers and set credit standards, the firm should consider the average collection period E -%F and the default rate. verage collection period is the period in which the debts remain outstanding. $n the other hand, default rate is the rate of uncollected receivables to total receivables. 4rom the default ratio, the firm is able to determine that the customer will not meet his credit obligation. (o estimate the probability of default, a financial manager should consider the ;cCs of credit i.e. character, capacity, condition, capital and collateral. i. C2.(.,'3(. (his is the willingness of a customer to settle his credit obligations. (he financial manager should ascertain whether the customer would make honest efforts to honor his debt obligation.

))

ii.

C.7.,-'5. (his is the ability of a customer to pay the credit advanced to them. (he manager should look at financial statements, previous e)perience with the client, trade references, bank references, amount and the purpose of credit.

iii.

C)&*-'-)&. It involves assessment of the prevailing economic and other factors like social, political which may affect the customersC ability to pay. e.g./ it is undesirable to grant credit during inflationary conditions.

iv.

C.7-'.9. (his is the contribution or interest of the customer in his business. It is undesirable to grant credit to customers who have little capital in their business.

v.

C)99.'3(.9. (his is security against failure to pay. (he person seeking credit should offer security before credit is granted. (he security should easily be marketable.

$. .: C(3*-' '3(64.
(hese are stipulations under which a firm grants credit to customers. -redit terms should be more attractive to act as an incentive to clients without incurring high level of bad debt losses. (hus the terms offered should confirm to the average industrial terms.

$. . C)993,'-)& 7(),3*+(34.
(hese are effort applied in order to accelerate collections from slow paying customers and to reduce bad debt losses. -ollection procedures include sending reminders, use of litigation, insuring debtors, e.t.c.

$.5 P()1-'.8-9-'5.
%rofitability is the difference between the cost of providing goods or services and the revenue derived from the sale E!utenyo, 766=F.

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(he scholars noted that accountants define profits as the difference between costs and revenues. (hey further noted that in business, profit was put by the sandilands committee/ I is the ma)imum value which the company can distribute during the year and still e)pect to be as well off at the end of the year as it was at the beginningJ. ccording to traditional economist, profit ma)imi1ation is taken as the ob:ective of a business. %rofit is the end result of an organi1ation and a reward to entrepreneurs for undertaking risks E!utenyo, 766=F %andey E5DD<F further noted that a company should earn profits to survive and grow over a long period of time. Sufficient profits should be earned to sustain the operations of the business and to contribute towards the social overheads for the welfare of the society. Stoner E5DD<F defines profitability as the e)cess of income and e)penditure that can be e)pressed by the rations like gross profit margin, net margin and return on e2uity. Besides the management of the company, creditors and shareholders are also interested in the profitability of the firm/ creditors want to earn interest on repayment of the principal amount while shareholders want to get a reasonable return on their investment. (his can only be possible when the firm earns profits.

$.6 R39.'-)&42-7 83'>33& .,,)+&'4 (3,3-<.8934 6.&.0363&' .&* 7()1-'.8-9-'5.

4or effective management of accounts receivables, a firm must put in place an appropriate credit policy. -redit policy influences the level of book debts. firm should be discretionary in giving debts to customers depending on the trust in them and should be prompt in collecting them E.akuru, 7666F. &owever with other current assets, the financial manager can vary the level of receivables in keeping with the trade off between profitability and li2uidity. "owering credit standards increases the level of sales leading to an increase in profits. But also there is an additional cost corresponding to an increase in receivables as well as greater risk of bad debt losses.

))ii

Brockington E5DD8F, argues that there is an opportunity cost of additional receivables resulting from increased sales and the slower average collection period and that, if new customers are attracted by the liberal credit standards, collections from these customers are likely to be slower than collection from e)isting customers. (hus a liberal e)tension of credit may cause certain customers to be rela)ed in the payment of debt obligations on time. .akuru E7666F, notes that a liberal credit policy may be undesirable because the firm may not attain its benefit at the least possible cost and hence a danger of higher costs. $n the other hand a stringent credit policy may be advantageous in the low costs are involved. But this may slow down sales returns.

$.7 C)&,9+4-)&.
With regards to the literature used in this research, it has been observed that there is wide data about the variables under study and that it is not easy to establish a perfect system of receivables management that will guarantee ma)imum profitability. (his is because of the conflicting interests of the firm i.e promoting profitability while maintaining a certain level of li2uidity. (hat to achieve one, there is an opportunity cost of loosing another. (hus it becomes necessary to strike a balance where investment in receivables is at optimum. (he need to achieve optimal investment in receivables calls for a firm to institute a credit policy.

))iii

CHAPTER THREE

:.0 M3'2)*)9)05

:.% I&'()*+,'-)&
(his chapter e)plains the methods that were used to conduct the research in the collection of data and a plan of how the study was conducted. It presents research design, sampling design, study population, sample si1e, source of data, data collection methods and techni2ues, data presentation and analysis, then limitations of the study.

:.$ R343.(,2 *34-0&

(he study was both descriptive and e)planatory and based on both 2uantitative and 2ualitative data.

:.: S'+*5 7)7+9.'-)&

(he study population was made up of the management, staff and the customers of Ikongo enterprise. (here are D management staff and ;6 employees with a 2uite number of customers.

:. S.6793 4-?3 .&* 4.6793 7(),3*+(3

(he researcher purposively selected ; management staff and 5? employees Both stratified and simple random sampling was used to select 5= customers. (he sample population was divided into strata from which the researcher used simple random in selection of customers so as minimi1e bias.

))iv

:.5 S)+(,34 )1 *.'.

'ata was obtained from both primary and secondary sources. i. ii. %rimary data. (his provided first hand information through 2uestionnaires. Secondary data. (he researcher used information from management meeting minutes/ company recorded e.g. debtorCs valuations records and information from previous research reports.

:.6 D.'. ,)993,'-)& 63'2)*4 .&* '3,2&-=+34.

Buestionnaires. -losed end 2uestions were designed and distributed to all respondents for answering.

:.7 D.'. 7(343&'.'-)& .&* .&.954-4.

(he data collected was edited, coded to ensure reliability and completeness. It was the presented using fre2uency tables and percentages.

:.@ L-6-'.'-)&4 )1 '23 4'+*5

i. With the economic of scarcity of resources, the researcher did not e)haust all the data. Several costs were involved e.g typing and printing, transport and telephone calls among others. ii. Withholding information. Some of the respondents were not willing to disclose the Information/ some were not in the moods of discussions.

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iii.

(ime limit. 0iven other academic demands like course works, test and final e)ams, the researcher did not have enough time to enable him e)haust all the study variables. &owever, he apportioned time so as to arrive at valid conclusions.

))vi

CHAPTER FOUR

.0 P(343&'.'-)&A -&'3(7(3'.'-)& .&* *-4,+44-)& )1 1-&*-&04.

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$n obtaining the data from both primary and secondary sources, the findings were coded, edited, presented inform of tables, fre2uencies and percentages from which discussions and findings were based.

.$.0 C2.(.,'3(-4'-,4 )1 (347)&*3&'4.

(he respondents were classified according to se), age, education level so as to get a fair representation of the study population.

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T.893 %: showing composition of respondents by gender. se) fre2uency 4emale 59 !ale 7< total 96 SourceA primary data (op mgt 7 8 ; employees < 57 5? customers < 55 5= percentage 8; <; 566

4rom the table above, <;K were males and 8;K were females. It is also evident from the table above that the males were more than the females by a small margin thus it can be believed to be a good representation of the study population.

))vii

.$.$ C9.44-1-,.'-)& .,,)(*-&0 ') .03

T.893$: Showing composition of respondents by age geEyearsF 7;and below 7<G8; 8<G9; 9<G;; ;< 4re2uency ? 59 (op mgt G G 7 7 5 ; #mployees 9 ? 8 7 5 5? customers 9 < ; 7 G 5= %ercentage 76 8; 7; 5; ; 566

56 < and 7

above (otal 96 S)+(,3: 7(-6.(5 *.'.

4rom the table above, 8; K were between the age of 7<G8;, 7;K were between 8<G9; years, 76K were below 7; years, 5;K were between 9<G;; and ;K were above ;< years of age. Since all the groups were represented, it meant that their view all were captured and thus a good representative of the population

.$.: C9.44-1-,.'-)& .,,)(*-&0 ') 3*+,.'-)& 93<39.

T.893 :: Showing respondentsC level of education. Bualification 4re2uency Secondary ? -ertificate 57 'iploma 59 'egree < (otal 96 SourceA primary data (op mgt G G 7 8 ; #mployee G ? 56 G 5? -ustomers ? 9 7 8 5= percentage 76 86 8; 5; 566

4rom the table above, 8;K had attained diploma level, 86K had attained certificate level, 76K had completed secondary level and 5;K had up to degree level. It can be concluded that the education level was generally ade2uate to make respondents knowledgeable enough about the sub:ect matter of the study.

.$. C9.44-1-,.'-)& .,,)(*-&0 ') '23 '-63 (347)&*3&'4 2.<3 833& -& *3.9-&04 >-'2 I/)&0) 3&'3(7(-43.
T.893 : showing time respondents have been dealing with Ikongo enterprise. ))viii

years "ess than 7 7G< =G56 55 and

4re2uency 7 5? 59 <

(op mgt G G 7 8 ;

#mployees 7 ? < 7 5?

-ustomers G 56 < 5 5=

percentage ; 9; 8; 5; 566

above (otal 96 SourceA primary data

4rom the table above, 9;K of the respondents had dealt with Ikongo enterprise for years from 7G<, 8;K for years from =G56, 5;K for years above 55years and ;K for less than 7 years. It can be observed that the years respondents had worked or dealt with Ikongo enterprise were ade2uate enough for respondents to provide reliable and information bout the enterprise. Since all the characteristic classifications were represented with the ma:ority of the respondents having worked or dealt with Ikongo enterprise for a period greater than 7 years the information obtained was believed to be reliable.

.:.0 F-&*-&0 )& .,,)+&'4 (3,3-<.8934 6.&.0363&'.

(he study sought to establish whether the enterprise had receivables management policy and the following were the findings.

))i)

T.893 5: Showing respondentsC response on the use of receivables management policy at Ikongo enterprise. *espondentsA (op management and employees *esponses 4re2uency %ercentage Strongly agree 57 ;7 gree 55 9? +ot sure 6 6 Strongly disagree 6 6 'isagree 6 6 total 78 566 SourceA primary data 4rom the statement above, 57 respondents out of 78 strongly agreed that Ikongo enterprise has receivables management policy and these represent ;7K, 55 respondents agreed to the same thus representing 9?K T.893 6: 42)>-&0 (347)&434 >23'23( I/)&0) 3&'3(7(-43 3B'3&*4 ,(3*-' ') ,+4')63(4 *espondentsA ll respondents 4re2uency 76 5? 7 6 6 96

*esponses Strongly agree gree +ot sure Strongly disagree 'isagree total SourceA primary data

%ercentage ;6 9; ; 6 6 566

4rom table above, ;6K were in strong agreement to the fact that Ikongo enterprise gives credit to customers, 9;K agreed to the same and ;K were not sure if the enterprise gives credit to customers. It could be true that those who strongly agreed or agreed might have got or not got credit from the enterprise but they are aware of credit e)tension in Ikongo enterprise. lso it could be concluded that the ;K had not got any credit from the enterprise and therefore are not sure whether or not the enterprise gives credit.

)))

T.893 7: S2)>-&0 (347)&43 )& '23 3113,'-<3&344 )1 .,,)+&'4 (3,3-<.8934 ,)993,'-)& -& I/)&0) 3&'3(7(-43. *espondentsA (op management and employees *esponses 4re2uency %ercentage Strongly agree D 8D gree 58 ;= +ot sure 5 9 Strongly disagree 6 6 'isagree 6 6 total 78 566 SourceA primary data 4rom the table above, 58 respondents out of 78 agreed that receivable collection in Ikongo enterprise has been effective, thus representing ;=K, D respondents strongly agreed, I was not sure, thus representing 8DK and 9K respectively. (he most important information to the researcher was not what was perceived as strongly agree or agree, but the fact most respondents acknowledge the effectiveness of receivables collection in Ikongo enterprise.

T.893 @: S2)>-&0 (347)&434 )1 (347)&*3&'4 )& >23'23( '23 7(3<.-9-&0 3,)&)6-, .&* 4),-.9 7)9-'-,.9 1.,')(4 6-02' .113,' ,+4')63(4C .8-9-'5 ') 7.5. *esponses Strongly agree gree +ot sure Strongly disagree 'isagree total *espondentsA (op management and employees 4re2uency %ercentage 58 ;= = 86 5 9 6 6 7 D 78 566 )))i

SourceA primary data 4rom the table above, ;=K were in strong agreement to the fact that economic and social political factors affect customersC ability to pay, 86K agreed to the statement, DK disagreed and 9K were not sure. &owever, the ma:ority consented to the statement. #conomic factors like inflation reduce the value of money and increase the cost of borrowing. lso political instabilities disrupt business environments as it comes with looting, theft, destruction hence affecting customersC ability to pay. T.893 D: 42)>-&0 (347)&434 )& 8.* *38' 9)4434. *espondentsA (op management and employees 4re2uency %ercentage 6 6 = 86 6 6 8 58 58 ;= 78 566

*esponses Strongly agree gree +ot sure Strongly disagree 'isagree total SourceA primary data

4rom the table above, ;=K disagreed to the fact that Ikongo enterprise e)periences bad debt losses, 86K agreed to the same while 58K were not sure. It can be interpreted that Ikongo enterprise e)periences bad debt losses on small scale and this is confirmed by the 86K who agreed. receivables. T.893 %0: 42)>-&0 (347)&434 )& ,.42 *-4,)+&'4 1)( 3.(95 7.563&' )1 ,(3*-'. *espondentsA ll respondents 4re2uency 5< 77 7 )))ii lso ;=K disagreement can be confirmed by the responses in table E?F where ma:ority of the respondents confirmed effectiveness in the collection of

*esponses Strongly agree gree +ot sure

%ercentage 96 ;; ;

Strongly disagree 'isagree total SourceA primary data

6 6 96

6 6 566

4rom the table above, ;;K of the respondents were in agreement to the fact that Ikongo enterprise offers cash discounts for early payment of credit. 96K agreed to the same and ;K were not sure. It could be that the ;K might have never got any credit or have not always paid their obligations early and thus are not sure of the cash discounts. lso the ;;K and 96K agreement and strong agreement respectively is in conformity with table D. -ash discounts induce customers to pay early their credit obligations so as to pay a lesser amount of the credit hence the enterprise e)periencing low or no bad debt losses.

T.893 %%: 42)>-&0 (347)&434 )& ,)99.'3(.9 43,+(-'5. (he researcher sought to establish if customers were re2uired to present collateral security so as to 2ualify for credit. (he following were the findings. *espondentsA -ustomers 4re2uency 56 ; 7 6 6 5=

*esponses Strongly agree gree +ot sure Strongly disagree 'isagree total SourceA primary data

%ercentage ;D 7D 57 6 6 566

4rom the table above, ;DK were in strong agreement to the statement that Ikongo enterprise re2uires collateral security before credit is e)tended, 7DK agreed and 57K

)))iii

were not sure. It can be said that the 57K who were not sure might have never got any credit from the enterprise

T.893 %$: 42)>-&0 (347)&434 )& *31.+9' )1 7.563&'4. *espondentsA -ustomers 4re2uencyA 6 ; 6 8 D 5=

*esponses Strongly agree gree +ot sure Strongly disagree 'isagree total SourceA primary data

%ercentage 6 7D 6 5? ;8 566

4rom the table above, of the respondents ;8K disagreed to have ever defaulted payment, 7DK were in agreement to the same and 5?K strongly disagreed to have ever defaulted payment. It can be observed from the table that a small portion of the respondents had defaulted payment (his can be attributed to fact that Ikongo enterprise has a receivables management policy as it was observed in table E;F. )))iv

. .0 F-&*-&04 )& 7()1-'.8-9-'5.

(he study sought to establish the profitability of Ikongo enterprise. (he following were the findings.

)))v

T.893 %:: 42)>-&0 (347)&434 )& '23 0()>'2 )1 7()1-'.8-9-'5 .' I/)&0) 3&'3(7(-43 83'>33& $005 .&* $0%0. *espondentsA (op management and employees *esponses 4re2uency %ercentage Strongly agree ? 8; gree 57 ;7 +ot sure 8 58 Strongly disagree 6 6 'isagree 6 6 total 78 566 SourceA primary data 4rom the table above, ;7K agreed as to the growth in profitability at Ikongo enterprise, 8;K strongly agreed to the same and 58K were not sure of the statement. (he growth in profitability can to some e)tent be attributed to low levels of bad debt losses due to effectiveness in receivables collection resulting from the receivables management policy at Ikongo enterprise. (he reasons given were that Ikongo enterprise was e)panding itCs operations. In 766<, Ikongo enterprise .atwe branch was instituted, currently/ the enterprise has shifted its operations from a formerly occupied housing in .atwe to a relatively bigger building in the same place. (his e)pansion is enough to show growth in the profitability of the enterprise.

)))vi

T.893 % : 42)>-&0 '23 (.'-) )1 8.* *38'4 ') 7()1-'.8-9-'5 EN3' 7()1-'F. Lear %rofitability Bad debts EShs666F ?6,<6 =?,9D =;,;6 =;,76 =6,;? <?,7< percentage ?.D ?.8 =.? =.; <.= ;.? EShs666F 766; D6,?<D 766< D9,766 766= D<,;96 766? DD,?66 766D 569,?<6 7656 55<,9D< SourceA Secondary data

4rom the table above, it is observed that there is growth of profitability and reduction in bad debts every year. (he growth in profitability can be attributed to the reduction in bad debt losses coupled with other factors like increase in market share, reduction in operational costs, economic of e)pansion Eeconomies of large scale operationsF, and e.t.c. (he reduction in bad debts can also be attributed to the receivables management policy at Ikongo enterprise. #very year that goes, the enterprise gain e)perience and revises the management of its accounts receivables, improves collection methods, and introduces new ways to improving credit recovery. It could be true that in the early years, the enterprise had no a receivables management policy that could guarantee effective recovery of receivables leading to a reduction in bad debts like in the later years. (he optimal receivables management policy ensures that credit is e)tended for lesser periods such that money that would be used for e)pansion and investment in productive activities is not tied up in credit.

.5.0 F-&*-&0 )& '23 (39.'-)&42-7 83'>33& .,,)+&'4 (3,3-<.8934 6.&.0363&' .&* 7()1-'.8-9-'5.
(he study sought to establish if there was any relationship between receivables management and profitability. 4rom the findings, it was established that a fle)ible or lenient receivables management policy leads to increase in the level of credit e)tended/ increase in credit involves additional costs and increased bad debt losses thus limiting profitability. lso a stringent receivables management policy means that credit is e)tended to customers whose credit

)))vii

worthiness has been ascertained thus reduces bad debt losses hence increasing the profitability levels of the firm. (herefore the profitability levels of any firm will vary depending on the receivables management policy adopted by that particular firm. T.893 %5: C.9,+9.'-)& )1 '23 (39.'-)&42-7 83'>33& .,,)+&'4 (3,3-<.8934 6.&.0363&' .&* 7()1-'.8-9-'5 +4-&0 P3.(4)& 7()*+,' 6)63&' ,)((39.'-)& ,)311-,-3&' *espondentsA (op management and employees *esponse *eceivables !anagement E)F Strongly agree ? 5< D 57 EyF %rofitability @
7

L7

)y

gree

55

57

7;<

77;

796

+ot sure Strongly agree 'isagree (otal

6 6

8 6

D 6

9 6

< 6

6 78

6 78

6 7?5

D 79=

6 7;?

SourceA primary data

(he relationship between accounts receivables management and profitability using product moment correlation coefficient M is given by/

)))viii

rN

P)

y G

P ) Py

Q ROP )7 S EP )F 7T RP y7 S EP )F 7T
Where/ r N %earsonCs product moment correlation coefficient

P N Summation
O N +umber of observations ) N number of respondents Eindependent variable i.e receivables managementF y N number of respondents Edependent variable i,e profitabilityF

Q
r N

N S2uare root

E78 ) 77?F G E78 ) 78F

Q RE78 ) 7<;F S E78F7T RE78) 76?F S E78F7T

r N ;799 G ;7D

Q RE<6D; G ;7DFT RE9=?9 G ;7DFT

r N 9=5;

Q
r N

R;;<<T R97;;T
9=5;

Q
r N

78<?886

9=5; 9?<<.;;

)))i)

r N

6.D<?

6.D=

)l

CHAPTER FIVE

5.0 I&'()*+,'-)&.
(his chapter presents the summary of finding, conclusion and recommendations derived from the findings.

5.$.0 S+66.(5 )1 1-&*-&04 5.$.% A,,)+&'4 (3,3-<.8934 6.&.0363&'

It was established that Ikongo enterprise has a receivables management policy. !ost of the respondents strongly agreed or agreed to the same. (his is true as it is in conformity with the previous studies carried out on the same topic.

5.$.$ P()1-'.8-9-'5
It was further established that between 766; and 7656, the enterpriseCs profitability was improving. (he indicators of improvement in profitability were e)pansion of operations renovations of the e)isting facilities e.g. e)tension of .atwe branch. Improvement in profitability was to some e)tent attributed to the use of receivables management policy which ensures optimal investment in accounts receivables and thus minimi1ing bad debt losses.

5.$.: R39.'-)&42-7 83'>33& .,,)+&'4 (3,3-<.8934 6.&.0363&' .&* 7()1-'.8-9-'5

It was found out that the relationship between receivables management and profitability was very strong with a correlation coefficient ErF of 6.D=. (hus the profitability of a firm will vary depending on the receivables management policy adopted by the particular firm.

)li

5.:.0 C)&,9+4-)&
4rom the finding it can be concluded that Ikongo enterprise uses a stringent receivables management policy. (he way receivables are managed profoundly affects profitability. (he researcher emphasi1es that receivables constitute a significant portion of the firmCs current assets and thus should be managed properly.

5. R3,)663&*.'-)&4
fter analy1ing the findings and found out the relationship between receivables management and profitability, the researcher made the following findings. In the management of receivables, credit worthiness of customers should be assessed. (he costs and risks of maintaining any credit customer should be matched with the returns from such a customer. -redit rating should be emphasi1ed and adopted, such that if the probability of a particular customer to default is high, the customer can be denied credit. *ational decisions should be whether to or not to trade with a customer to who credit risk has been attached. (here should be ade2uate work force in the credit control department so as to make fast the process of credit collections. (he enterprise should adopt a credit policy that is compatible with other policy decisions e.g dividend policy, investment decisions and at the same time ma)imi1es the e)pected profits.

5.5 S+0034'3* .(3.4 1)( 1+('23( (343.(,23(4.

4urther researcher should be conducted in the following areas i. *eceivables management and customer retention. ii. -ustomer turnover and profitability. iii. *eceivables management and li2uidity position.

)lii

REFERENCES
5. 7. -- ,E766DF, F, 4inancial !anagement, B%% learning media -- ,E766DF, 4inancial *eporting, B%% learning media *aymond E5DD8F, 4inancial !anagement. "ondon '%

8. Brealey, *ichard E5D??F, principles of corporate finance, +ew LorkA !cgrawGhill 9. Brockington, %3B"I- (I$+. ;. 'ickerson E5DD;F, 9th edition, &arcourt Brace college publisherCs. <. 4oulks lynch E766;F. 4inancial management and control, the official professional te)t, 4(- fouls lynch publications, "ondon. =. .akuru Julius E7666F. 4inancial 'ecisions and the businessE5 st editionF. (he business publishing group .ampala ?. .akuru Julius E7665F. 4inancial 'ecisions and the business E7nd editionF. (he business publishing group .ampala D. !-. +aughton, ' E5DD<F. Banking institutions in developing markets, building a strong management and responding to change. >ol.5. world Bank. 56. !utenyo,E766=F, Introduction to micro economics E5st editionF. (he +ew vision printing and publishing company "td 55. %andey 5 . ! E7668F 4inancial management E=th #ditionF house, pvt ltd "ondon 57. %andey 5.! E7668F 4inancial management E? th editionF house EpvtF "td "ondon. 58. Samuels, J.m E5DD8F, !anagement of company finance, "ondonA +ew Lork, -hapman and hall. 59. Stoner, James .4 E5DD<F, !anagement. +ew 'elhiA %rentice hall of India im >ikas publishing ima >ikas publishing

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APPENDICES
APPENDI! I: =+34'-)&&.-(3 ') '23 6.&.0363&' .&* 3679)5334 )1 I/)&0) 3&'3(7(-43
'ear respondent, (he researcher is a bachelor of commerce student of !akerere 3niversity, conducting an academic study under the topic I!anagement of accounts receivables and profitabilityJ. (he research is not meant for any other reason other than for academic purposes i.e for the fulfillment of the awards of bachelor of commerce degree. It is only through your participation that the study can be completed. Lou are therefore re2uested to allocate little time to answer the following 2uestions. Be assured that each individual response will be treated with due confidentiality. (hank you. PERSONAL BACKGROUND INFORMATION (ick where applicable or fill the space below. G3&3(.9 -&1)(6.'-)&. 5aF se) iF 4emale bF ge iiF 7< G8; years iiF 9< S ;;years vF bove ;< years iiF !ale

iF 7; years and below iiiF 8< S 9; years cF #ducation level iF -ertificate

iiF 'iploma

iiiF 'egree

ivF %ost graduate

dF Lears worked in Ikongo enterprise iF "ess than 7 years ivF 55years and above )liv iiF 7G< years iiiF =G 56year

$. R3,3-<.893 6.&.0363&' EP93.43 '-,/ >23(3 .77()7(-.'3F Strongly agree Ikongo gives customers (he enterprise has policy enterprise credit to gree +ot sure Strongly disagree 'isagree

receivables management customers (he losses (he prevailing enterprise that is used to select

e)periences bad debt

economic and socialG political factors may affect customer ability to pay. *eceivables collection in Ikongo enterprise has been effective (he credit control

department -ollects and receives payments.

)lv

(he enterprise offers cash early credit. discounts payment for of

:. P()1-'.8-9-'5 E P93.43 '-,/ >23(3 .77()7(-.'3F Strongly gree %rofitability Ikongo of gree +ot sure Strongly disagree 'isagree

enterprise

has been growing between 766; and 7656 *eceivables management policy has an effect on profitability customer failure to pay back their credit effects profitability Ikongo enterprise usually faces li2uidity problems.

APPENDI! II #+34'-)&&.-(3 ') '23 ,+4')63(4 )1 I/)&0) 3&'3(7(-43.

'ear respondent,

)lvi

(he researcher is a bachelor of commerce student of !akerere 3niversity conducting an academic study under the topic I !anagement of accounts receivables and profitabilityJ. (he research is not meant for you other reasons other than for academic purpose i.e. for the fulfillment of the award of the award of the degree of Bachelor of commerce. It is only through your participation that the research study can be completed. Lou are therefore re2uested to allocate a little of your time to answer the following 2uestions. Be assured that all responses will be treated with utmost confidentiality. (hank you. P3(4)&.9 8.,/0()+&* -&1)(6.'-)&. T-,/ >23(3 .779-,.893 5. What is your se)H iF !ale 7. What is your marital statusH iF Single 8.What is your ageH iF 7; years and below iiiF 8< S 9; years iF Secondary level $thers ;aF re you in businessH iF Les iiF +o iiF 7< G8; years iiF 9< S ;;years iiF -ertificate vF bove ;< years iiiF 'iploma vF 'egree iiF !arried iiF 4emale

9. What are your academic 2ualificationsH

bF If yes how long have been in businessH

)lvii

<. &ow long have you been dealing with Ikongo enterprise iF "ess than 7 years iiF 7 G< years iiiF =years and above

=. Strongly agree Lou ask for credit from Ikongo enterprise. Lou present collateral to 2ualify for credit Lou have ever defaulted payment of your credit obligation. gree +ot sure Strongly disagree 'isagree

)lviii

-redit e)tension in Ikongo enterprise. Is rigorousV stringent. 'iscounts for prompt payment improve credit collection.

)li)