ANALYZING DEBT MANAGEMENT TECHNIQUES IN BUSINESS ORGANISATIONS IN NIGERIA (A CASE STUDY OF NIGERIA BOTTLING COMPANY PLC, ENUGU)
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ANALYZING DEBT
MANAGEMENT TECHNIQUES IN BUSINESS ORGANISATIONS IN NIGERIA (A CASE STUDY OF
NIGERIA BOTTLING COMPANY PLC, ENUGU)
CHAPTER ONE
1.0
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
In contemporary business setting, debt is seemingly
inevitable. Sometimes it emanates from short fund convenience with the
prevailing trade terms. Debt does not occur only when money is borrowed. It
equally occurs when there is exchange of goods or services with a deserved
payment. So each time goods or services are exchanged with a deferent of its
financial obligation, there is incidence of debt.
A good business may not always write to finances the
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 foregone, likewise a business firm for one version or the other may not
finance through equity aware only. The management may wish to source the fund
through debt. Even after the commencement, the firm may further need extra
funds for expansion or for speculative purposes. Hence, this project work looks
into the analysis of debt in a dual perspective:
i. In the accumulative of
fund, either for the commencement or expansion and
ii. In trading
relationship (trade debt).
(i) At the
commencement of a consciences organization, the owners try to maintain a favourable
capital structure. Ordinarily, it is normal for the business owners (equity
holder) to finance the business. But more often, the funding of a business goes
beyond that. The choice of the capital structure and the funding technique is
left at the mercy of the financial managers. On doing so however, he doesn’t
overlook or neglect the major organizational objective; maximization of the
owners wealth.
Business organizations usually strive to achieve a number of
objectives. These corporate objectives provide a set of criteria upon which
financial decisions can be based. In general terms of business organization
seek to achieve by obtaining funds from various sources and investing some
reasonably. It is important to recognize that the various types of funds raised
has its own cost and each has certain risks. For example, loans (secured and
unsecured), debentures, preference and ordinary shares. Loans raised ob the
security organizations assets tend to have fairly low rates of interest
although they imply certain risks. Failure to meet the terms of the loan on the
due date would empower the tender to confiscate the said assets with
potentially catastrophic consequence for the borrower.
In contrast,
an unsecured loan on which no assets is pledged, though escaped the last cited
risk cost higher. It has higher cost than the former. Preference share on the
other hand may have a relatively annual rate but its payment is binding irrespective
of whether profits were made or not.
Ordinary
share however has no fixed charge as such. Its dividend depends on the periodic
business profits yet excessive use of equity shares is determine to the
organizational control, if it is not technically handled. When the equity share
is used in marginal funding of the firm, it is only advisable when the return
from the issue is such that share prices would increase. One would not expect
an issue of share to be made with an expectation that share prices would fall
since that would reduce shareholders 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 the organizational objectives to maximize
the equity holders, wealth and random use of ordinary shares tantamount this.
The management would have no option than to resort to debt financing to
complement equity. This is one of the reasons why debt financing is almost
inevitable in the capital structure of a business organization of today. Then
with the attendant risk and return relationship, the financial manager always
seeks for a fair equilibrium to the best interest of the firm for its survival
and for attainment of its set objectives.
(ii) Trade Debt: -
with the exception of most types of retaining commercial sales are usually made
on credit. This means that cash settlement legs sometimes 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
tradition for convenience aid to the buyers and even to the sellers. This
trading terms leads to debt but it is encouraged for the following reasons
a) The recipient
will need to assure himself that the goods are satisfactory prior to payment.
b) Additional
safeguard will need to be introduced with regards to the cash collected.
Even when and where it would be reasonable practicable to pay
on delivery, customers are reluctant to forgo the traditional credit period.
Since they do so, it would increase their own financing costs.
The practice of allowing credit has thus come to be widely
accepted as normal. The use of credit however has certain costs associated with
it and the analyzing debt management requires a clear identification and
balancing of these various costs. To achieve this however, the financial
manager and the management had to consider the costs under two categories:
a) Cost of allowing
credit.
b) Cost of refusing
credit.
1.2
STATEMENT OF THE PROBLEMS.
Debt has implication in the life of every business
organization. Poor analysis of debt management affects a firm adversely. It
could be recalled that the effective capital structure of a firm emaciate from
the ability of the financial manager and the management to blend debt with
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 the sale relationship, the credit term shall be determined
with an absolute review of the overall business environmental factor. While
resisting debt for its risks, the goodwill of the customer shall not be
overlooked entirely.
This work tends to deal debt in its relation with a business
organization. It brings about a number of problems which includes among others:
i. The cost of capital in financing market
is an extra charge to the business organization. Such a cost eats deep into the
owners fund.
ii. Secured debts do
not only affect the liquid assets of the firm but also dare to extend its
effects into the fixed assets of the firm.
iii. Preference share
has a fixed periodic charge, which accumulates inconsiderate of whether a
profit is made or loss suffered. This gives a firm an adverse concern
especially during an unfavorable business atmosphere.
iv. Inability to melt
the financial obligation of a business organization eventually lead to the
organizational liquidation, which is an economic death of the firm as an
entity.
In the business tending policy, a firm tries as much as
possible to minimize credit for the following reasons:
a. It brings about
bad debt, which is a deadly disease to a business.
b. Later settlement
of debt in beating the stipulated credit return destabilizes the liquid
stability on the firm and eventually leads to bad debt.
c. Protracted debt
denies the business organization the chance of using their business
opportunities as they fall due.
This project is not pessimistic to debt at all neither does
it intend to criticize debt and anything about it, rather it delves into the
problems and consequences of debt and analyzing its management situation.
Despite the above-cited deaneries, debt has a number of
merits. In the optical structure, some financial mangers commend debt financing
for the following reasons:
i. Difficulties in raising ordinary
share capital.
ii. Peoples reluctance to spearhead
risks
iii. For expansion and speculative
purpose, that debt funding is preferable since further use of equity may dilute
the control of the firm.
iv. It may even affect the price of the
stock properly handled.
On the transactional terms, absolute refusal of credit for
debt aversion has its own adverse effects:
a) It reduces the
sales volume and hence the profit prospects
b) It affects the
goodwill of the business hence firms in the fac3e of its customer and degrades
its inedibility in market scene.
c) The firm can
only stand in an absolutely monopolistic market and this is verily obtainable.
1.3 PURPOSE
OF THE STUDY.
From the look of things, it is self evident that modern
business can hardly survive and meet the objectives and expectations of the
interested parties without debt. Debt on the other hand cannot be purged on its
attendant merits and demerits. Since the impact of debt is being felt from the
inception of a business (from commencement) to the cessation date (the day it
is wound up). The financial manager starts his decisions on debt from the
setting of the capital structure.
Sometimes the business may need additional fund either for
improvement, innovation and expansion or for speculative purpose. These came as
an opportunity to the firm, which the management may not like to miss. But very
often, the retained earnings may not be enough to cater for this. as such, the fund is sourced externally.
In the trading activities of the firm, credit cannot be
eliminated completely. The firm can either be a recipient, a giver or both.
This is possible in its relation with its suppliers and customers. And wherever
there is a creditor, there must be a debtor. So credit and debt are just like
two sides of a coin. So in an economic system, “what cannot be avoided must be
managed”.
So this research will take a closer look into the strategies
of analyzing debt management situation, relate same to the contemporary
business environment in Nigeria with a particular overview or reference to
Nigeria Bottling Company PLC: Coca- cola, Enugu, their trading terms,
collection period, the incidence of bad debt and capital tied down as a result
of delay in debt collection.
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 Nigeria
bottling company plc. However, for further reference and clarity, emphasis are
made from other reasons and these are consider vital, thus such emphasis are an
profitability, solvency, flexibility, conservation and control.
1.5 RESEARCH
QUESTIONS.
(a) How
does debt financing bring about an optimal capital structure in a business
organization?
(b) Will
good analysis of trade debt management help measure an effective working
capital management in every business organization?
(c) What
effort will be made to reach every latent problem, inherent in analyzing debt
management in areas of organizational capital structure?
(d) How
does the important element in decision about resource helps to finance the
ambiguity- surrounding concept of the cost capital.
1.6 RESEARCH
HYPOTHESIS
In a continued effort to reach an appreciable equilibrium in
the problems and consequences of debt and its effective management, we
(researcher) employed a selected statistical to enable us reach a fair
conclusion.
In the light of the above, therefore the following major
hypothesis have been formulated. Hypothesis mean a tentative statement made by
a researcher, subject to tests) with a view to forming basic to study a
phenomenon.
These hypothesis when tested, can confirm or repute the
extent at which these advanced statement can be upheld.It can equally place the
researcher on the solid ground of drawing his conclusion and a subsequent
recommendation.
HYPOTHESIS
1. Ho: Effective
debt financing does not brings about an optional capital structure in a
business organization. (NULL)
Hi: Effective debt financing brings about an optional capital
structure in a business organization. (ALTERNATIVE)
2. Ho: Good
analysis of trade debt management is not good measure of an effective working
capital management in a business organization. (NULL)
Hi: Good analysis
of trade debt management is a good measure of an effective working capital
management in a business organization. (ALTERNATIVE)
1.7
SIGNIFICANCE OF THE STUDY
The significance of analyzing debt management situation is a
broad as the scope of the business in question and its economic environment and
as length as the life of business poor or financial management in a business
organization is first evidenced in its inefficient debt management and
epitomized in its liquidation. This is the reason why the researcher endeavours
to look into a firm and consequences of debts.
In the
capital structure of a firm, the debts prospect of the organization project is
to be considered and a careful decision made to avoid setting off with a long
toot. These are the areas this work look into, in a trading business firm, the
role of the marketing manager and the financial manager of deciding on the
organizational credit policies is brought to light with dare recommendation.
This work
tends to strike a fair balance in their turn and risks of debt. This will be of great importance to
the interest groups and prospective scholars in the field. This is done by
through review of the post, which is related to the present and employed in the
recommendation for a better future.
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.
For the purpose of this project, it is restricted to the
business organizations. It excluded every non-business concern. Also for want
to time resources, Nigeria Bottling Company-coca-cola, Enugu, is sampled out as
a base for the research work.
So many factors are deemed to militate against quicker and
easier completion of this work. These include among others:
(a) COST:
Inadequate fund may stunt this work beyond our taste. Lack of fund (money) may
also affect not only the period of the research but also its quality. To exults
everything about analyzing debt management situation and come out of legacy for
the posterity, one needs to travel far and near. At least one ought to touch
various industries in the four basic geographical area of the country.
(b) TIME: Time is
as costly as money, it is ever easier facing financial problems than time. Time
lost as hardly regained. Financial markets do exist but time existed for time.
With the school academic leader, the period for the research work is too short,
putting other courses into the budget.
(c) SOURCES OF
FACTS: This research has convince me that so many authors share almost the same
view on this topic as such, are going to a library having about ten textbooks
of different authors, at last you find out that they are saying the same thing
in different tongue, invariably you are having a book or more.
(d) RELUCTANT TO
CO-OPERATE: The management of some business organizations are two reluctant to
disclose the required information and more so, when it comes to disclosing or
exposure of the organizational books record. The idea equally affected the
quality of facts given in the research. Some do piths pact to suit their firm.
1.9 DEFINITION
OF TERMS
(i) Debt: Money or something owned by or someone
- a liability
or an obligation.
(ii)
Debtor: One who owes the liability or obligation
(iii)
Management: The process of planning, organizing, leading, and
controlling the work of organization members and of using all available
organization resources to reach stated organizational goals.
(iv) Credit:
Trust or confidence in a buyer’s ability intention to pay at the same future
time, exhibited by out rushing him with goods and services without present
payment.
(v) Capital
structure: Debt or equity relationship, it is configuration of equity capital
and loan capital in the long term financing of an organization.
(vi) Equity:
The risk bearing portion of the long term capital of a business organization.
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