Due to the increase in debts from clients, it is of paramount importance to introduce debt management practices so as to enhance performance in an organisation. Organizations must ensure that the management of accounts receivables is efficient and effective. Delayed recovery of amounts owed by debtors may result in cashflow challenges which may affect the company’s ability to timely service its short term obligations.
BACKGROUND OF THE STUDY
The primary source of income of all businesses is the sale of goods and services. Without a credit facility, the sales of a company may not increase beyond a certain limit and these low sales have an impact on the profitability and the liquidity of the firm. On the other hand if trade debts are not recovered in time they result in losses to the organization (Saleemi, 2003). Debtors occupy the largest portion of current assets and are the most liquid, this makes them to be very important in facilitating business transactions. Huge amounts of debtors is likely to reduce the firm’s profitability and consequently its value and as such there is need to have the best debtors management practices in place.
According to Salek (2005), an invoice has to be converted to cash in a timely manner, otherwise it becomes meaningless to raise the invoice in the first place, he further emphasizes that as long as an invoice has not been paid there is no sale and since there is no sale , there is no money. Charitou, Elfani and Lois (2010) define debtors’ management as a strategy that entails the process of designing a policy that governs how a company extends credit to its customer base and monitoring those systems. According to Pandey (2004), the term debt management refers to ensuring that the collection of book debts is done. Debtors (accounts receivables) are the individuals or organisations that owe money to the business and are comprised of invoiced amounts. This means that goods and services have been sold but no immediate cash is received by the company from the client. Therefore there is need for efficient and effective management of debtors which will help the company in increasing its profitability.
Delaying collecting cash from debtors has severe financial implications in the form of affecting customer relations and increases in bad debts. Profitability is reduced if payment is made late, and when there is failure to pay, then a total loss is incurred. Bearing this in mind, it is simply good business to put debt management at the front end by managing it strategically
STATEMENT OF THE PROBLEM
Many business organisations make their sales on credit which they might be unable to collect as and when they become due. When a company extends credit to its customers, it is not possible to say with certainty whether the credit will be paid as per the terms of the agreement, thus the company is bound to face a certain degree of credit risk and therefore the company has to have effective practices in as far as debtors management is concerned. Telone has been having financial problems as it has been experiencing a rapid increase in bad debts over the years which is as a result of ineffective debtors management which has seen the company being unable to recover outstanding debts from clients (both corporates and individuals). This has led to the continuous decrease in revenues as a result of loss of key customers and thus threatening its market share, cash flows and performance. Therefore the study intends to address how debtors can be managed efficiently in order to reduce financial problems at Telone.
PURPOSE OF THE STUDY
Debt management provides a base and support to the liquidity and working capital requirements of a company. The main purpose of the study is to investigate the effectiveness of debt management practices on the performance of Telone pvt ltd.The research objectives are as follows:
1. To understand the relationship between debt management and the financial performance of Telone;
2. To investigate the effectiveness of debt management practices on the performance of Telone Pvt Ltd
3. To establish the effects of debt management policies on financial performance;
4. To identify the costs involved in managing debtors and the challenges that are being faced by the entity in managing its debtors.
5. To recommend the best practices that can be instituted towards debt management
• What methods of debt management are being employed by Telone?
• What are the challenges that are being faced by the current debtors management system?
• What are the effects of poor debtors management practices on the performance of Telone?
• What are some of the ways that can be implemented by Telone in order to effectively manage their debtors?
SIGNIFICANCE OF THE STUDY
The study will help management in developing debtors management programs that will enable them to design policies with regards to granting credit and the processing of credit sales. It will also help them in evaluating customer credit worthiness; to establish credit periods and surcharge of late payments.
The study will help policymakers in formulating and ensuring the effective implementation of operational guidelines in as far as debtors management is concerned.
SCOPE OF THE STUDY
DEFINITION OF KEY TERMS
LIMITATIONS OF THE STUDY
Some of the information is kept confidential by the company
Research methodology is a process used to collect information and data for the purpose of making business decisions. Research methodology is a systematic way to solve any research problem. The methodology may include publication research, interviews, surveys and other research techniques and could include both present and historical information.
Research design is defined as a conceptual structure within which to conduct research (Kothari,2004). It contains the outline for data collection, measurement and analysis. The research design focuses on turning research objectives and questions into a research project and considers research choices, strategies and time horizons (Saunders, Lewis ; Adrian, 2009).
The researcher will use several methods in the collection of primary and secondary data.
Primary data is the information collected by the researcher through any or all of the following methods:
Observation – this is through workshops, seminars, but mostly in practice.
Questionnaires – this is a list of preset questions given to respondents to collect information, they usually supply the researcher with quantitative data, and they will be supplied to various groups in the industry.
Interviews- these will be used when the researcher wants to hear the ideas and thoughts of other players in the industry and what they say about the fact that the researcher will be gathering on the research topic.
The researcher will also use published data sources in the form of business journals, newspapers, and other related data sources.
The internet, journals, magazines, and case studies are also amongst the other methods of data collection that will be used.