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ANALYSING DEBT
MANAGEMENT TECHNIQUE BUSINESS ORGANIZATIONS IN NIGERIA
ABSTRACT
Previously debt can be talked of when individual, group of
society, economic position suffers inadequately it was the only time measure of
organizational or individual economic expansion.
This research work delves into the business meaning of “debt”
analyzing its management in a business organization. The fruit of its efficient
management in an organization. The researchers did not relent in their efforts
to point out where and why the impact of debt is felt mostly in business life.
It has found that debt exist throughout the life of a business organization
from the initial capital outlay, in the time of further expansion, in daily
transactions or with the suppliers
With the close look of the eastern bottlers limited Enugu
(makers of limca) the research has employed both primary source involves oral
interview, the use of practical or personal observation from sourced documents.
Secondary sources on the other hand are data sourced from published textbooks,
journal and dailies.
Observation has revealed however, that one can be a debtor as
well as a creditor. A god financial manager can source fund by debt invest it
and make a profit before the maturity of the debt. To do this, some speculative
factors can be considered and handled so that risk and return can be sought for
and a fairly equilibrium point.
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
In contemporary business setting, debt is seemingly
inevitable. Sometimes it emanated from short of fund. Convenience with the
prevailing trade terms.
Debt does not
occur only when money is borrowed, it equally occurs where there is exchange of
good or services with a deserved payment, each time good or services is
exchange without its financial obligation there is incidence of debt, debt also
occurs where there is exchange of good or service without immediate payment.
A good
business organizations may not always finance, there commencement of his
business from his personal savings, if he does so many things may happen either
that the business is under financed or the business is forgone, likewise a
business firm for one version or the other may not finance through equity share
only. The management may wish to source the found through debt, even after the
commencement the firm may further need
Extra/additional funds for expansion or for speculative
purpose. Hence, this project work look into the analysis of debt management is
a dual perspective
· In the
accumulation of fund, either for the commencement of expansion and
· In trading
relationship (trade debt)
1. At the commencement of a business organization, the owners
try to maintain a favorable capital structure, ordinary it is normal for
business owners (equity holder) to finance the business but sometimes, the
funding of a business goes beyond that, the choice of the capital structure and
the funding technique is left at the control of the financial managers
However, he does not over look or neglects the major
organizational objective maximization of the owner wealth. Business organization
usually strives to achieve a number of objectives. These corporate objective
provide a set of criteria upon which financial decision can be base in general
terms of business organization seek of achieve their objective by obtaining
funds from various sources and investing some reasonably it is important to
recognize that the various types of fund raised, each has its own lots, and
each and certain risks. For example, loans (secured and unsecured), debentures,
preference and ordinary shares. Loans raised on the security organization
assets tend to have fairly low rates of interest, although they imply certain
risk. Failure to meet the terms of the loan on the due data would empower the
tender to confiscate the said asset with potentially catastrophic consequences
for the borrower.
In contract, an unsecured loan on which no asset is pledge,
though escaped the last cited risk, cost higher. It has higher cost than the
former.
Prefer share
on the other hand may have a relatively annual rate, but its payment is binding
irrespective of whether profit is made or not
Ordinary
share however, has no fixed change as such its dividend depends on the periodic
business profit, yet excessive use of equity share is determine to the
organizational control it is not technically handled when equity share is used
in marginal funding of a firms, it is only advisable when the returns from the
issue are such that share price would increase one would not expert an issue of
share to be made with an expectation that share prices will fall, since that
would reduce share holder wealth. So it can be said that the minimum return
required from a new issue is that which would leave the share price at its
present level.
Since it is one of organization objective to maximize the
equity holder’s wealth and random used or tantamount to this, the management
had no option than to resort to debt financing to complement equity. This is
one of the reason by debt funding id almost inevitable in the capital structure
on a business organization of today. Then with attendant risk and return
relationship, the financial manager always seek for a fair equilibrium to the
best interest of the firm a for its survival and for attainment of its set
objectives.
2
trade debt
With the exception of most types of retaining commercial
sales are usually made on credit.
This means
that cash settlement sometime behind the delivery of the goods or the
consumption of the service to which the payment relates. The main reason for
these practices are attributed to the present commercial trading for convinces
aid to the buyers and seller. These trading terms called debt can be encouraged
for the following reason.
· The recipient
will need to assume himself that the goods are satisfactory prior to payment
· Additional
safeguards will need to be introduced with regards to cash collected
Even when and where it would be reasonable to pay on delivery
customer are reluctant to forgo the traditional are reluctant to forgo the
traditional credit period. Since they do so it would increase their own
financial cost
The practice of
allowing credit has thus come to be widely accepted as normal the use of credit
however, has certain cost associated within and the analyzing debt management
requires a clear identification. To achieve this however the financial manager
and the management had to consider the cost under two categories.
· Cost of
allowing credit
· Cost of
refusing credit
1.2
STATEMENT OF THE PROBLEM
Debt has an implication I the life at every business
organization. Poorly analysis of debt management affect a firm adversely. It
could be recalled that the effective capital structure of a firm emanated from
the ability of the financial manager and management to blend debt eighth
equity. It is pertinent to note that many businesses have gone into compulsory
liquidation due to poor analysis which leads to poor debt management. The cost
of capital therefore shall be bargained with critical consideration of the
organizational internal rate of return (IRR)
On sales relationship, the credit term shall be determined
with an absolute review of the overall business environment factor. Whole
resisting debt for its risks, the good will of the customers shall not be over
looked entirely.
This work tends to deal with debt in its relation with a
business organization it brings about a number of problem which include among
others
· The cost of
capital in financial market is an extra charge to the business organization,
such a cost eat deep into the owner fund
· Secured debts
do not only affect the liquidity assets of the firm but dare to assets of the
firm
· Preference
share has a fixed periodic charge, which accumulate inconsiderate of whether a
profits made or loose suffered this gives a firm an adverse concern especially
during an unfavorable business atmosphere
· Inability to
meet the financial obligation of a business organization eventually lead to the
organizational
Liquidation, which is
an economic death of the firm as an entity
This project is
not pessimistic to debt at all either does it intend to criticize debt and
anything about it rather it delves into the problem and consequences of debt
and analyzing its management situation.
1.3 PURPOSE
OF THE STUDY
The main objective of this study is a follow
· To determine
how debt financing brings about optimal capital structure in an organization
· To find out
how inherent debt management problem could be solved
· To ascertain
how trade debt analysis help measure an effective working capital management in
business organization
· To identify
the strategies or techniques in analyzing debt management situation in
contemporary business environment in Nigeria
1.4 SCOPE OF
THE STUDY
The scope of the study covered was on analyzing debt
management technique in Nigeria business organization with much concerned to
eastern bottlers limited. However, for further reference and clarity, emphasis
are made from other reasons and these are considered vital such emphasis are
profitability, solvency, flexibility, conservation and control of debt in
organizations
1.5 RESEARCH
QUESTIONS
· How does debt
financing bring about an optimal capital structure in a business organization?
· What effort
will be made to reach every latent problem inherent in analyzing debt
management in areas or organization capital structure
· How can
decision about debt management help to control financial activities surrounding
organization.
· Will the
analysis of trade debt management help measure an effective working capital
management in every business organization?
1.6 HYPOTHESIS
Ho, effective debt financing does not bring about an optimal
capital structure in a business organization
Hi, effective debt financing bring about an optimal capital
structure in a business organization
Ho, good analysis of trade debt management is not a good
measure of an effective working capital management in a business organization.
Hi, good analysis of trade debt management is a good measure
of an effective working capital management in a business organization.
1.7 SIGNIFICANCE
OF THE STUDY
1. This
project is carried out significantly in respect of analyzing debt management
techniques in business organization.
Ii this project work
is carried out as a channel of business expansion and sourcing fund through financial
institutions.
2.
Academic
This project will be of immense benefit to those who are
interested in researching in other area of debt management techniques in
business organization in Nigeria. Definitely, the project will service as a
very useful material for those in academic
4.
Government: the government is highly interested in making policies that
regulate the conduct of any business operation in Nigeria, such as Agricultural
bank and community bank are set – up to help individual farmer to source loan.
5. Monitoring
business organization: this is a means of checking and controlling financial
activities in the organization.
1.8
LIMITATION OF THE STUDY
Analyzing debt management situation is not a shallow topic to
be handled haphazardly; it is not only technical but also sensitive and broad.
This project is restricted to the business organization.
Eastern bottlers limited Enugu (maker of Limca) is a sampled out as a base for
the research work.
There, were
problem that militated against the research.
(i)
Inadequate finance: the financial requirement to make the work more
thoroughly extensive was not available
(ii) Time
Frame: the time frame within which this project work is expected to be turned
in is rather too short when considered again the backdrop of the fact that one
hard to combine it with other academic work.
(iii) Sources
of facts: this research his convinced me that so many authors share almost the
same view on this topic as such are going to a library having about ten
textbook of different author at least you found out that they are singing the
something in different tongue.
(iv)
Reluctant to co – operate: the management of the same business
organization are two reluctant to disclose the require information and more so
when it comes to disclosing or exposing of the organizational books record. The
idea equally effected the quality of fact given in the research. Some do pact
to suit their firm.
1.9
DEFINITIONOF TERMS
i.
debt money or something owned by or owned to someone a liability or an
obligation
ii.
debtors: one who owes the liability or obliganition
iii.
management : a body of knowledge or process of planning, organizing,
directing, co – ordination and controlling man, machine, money and material
resources toward achieving a set objective
iv. credit:
trust or confidence in buyer’s ability intention to pay at some future time,
exhibited by out rushing him with goods or services without pretend payment.
v.
Capital structure: debt / equity relationship it is configuration of
equity capital and loan capital in the long term financing of an organization
vi.
Equity: this risk bearing, porting of the ling term capital of a
business organization
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