THE EFFECTS OF CREDIT MANAGEMENT ON LIQUIDITY POSITION OF A
MANUFACTURING COMPANY (A CASE STUDY OF NIGERIAN BREWERIES PLC, ENUGU STATE)
CHAPTER ONE
1.0
INTRODUCTION:
1.1 HISTORICAL BACKGROUND OF NIGERIAN
BREWERIES:
Nigerian Breweries Plc was founded in 1946 and since then has
matured to become the absolute pinnacle of corporate Nigeria.
Today, Nigerian Breweries most recent extension, the new Ama Brewery, has
taken the company into a new chapter in its history. Nigerian Breweries: more than half a century
of efforts to achieve world class status in Africa.
Over a period of slightly more than fifty (50) years, Nigerian Breweries
has had success after success and has succeeded in anchoring itself firmly in
the Nigerian beer market, the business community and indeed in the very hearts
of Nigerian themselves.
The “Rising Star” or Nigerian Breweries has, for many decades now, been
synonymous with success, quality and commitment. The organization can boast a wide portfolio
of brands that cover the three segments of the Nigerian beer market (Larger,
Stout and Malt): Star, Gulder, Heineken,
Legan Extra Stout, Maltina, and Amstel malta.
In 1949, three years after its foundation, the first bottles of star were
being filled on the bottling line of the brand new brewery in Lagos.
Three more breweries have been founded since then: Aba, Kaduna and Ibadan. Enugu brewery was acquired in 1993.
For decades, Nigerian Breweries had tow large shareholders, one of which,
Heineken had always focused on providing the breweries with technical
support. In year 2000, Heineken seized
the opportunity of acquiring a 54.2% majority interest in Nigerian Breweries, a
decision which underlined Heineken’s commitment to the African continent.
Thanks to the process of democratization that started to emerge towards
the close of the 1990s, plus the brewery’s alert anticipation of what would
happen in the new situation. Nigerian
Breweries successfully managed to accelerate a growth in sales from 2.5 million
hectoliter in 1998 to 5.5 million hectoliter (hi) in 2003. This was so successful in fact that a luxury
problem arose: the demand for Star,
Gulder, and Maltina started to outstrip actual supply. Nigerian Breweries and Heineken therefore
started up the LAKIE output optimization project (Lagos, Aba, Kaduna, Ibadan,
Enugu).
An investment of 280 million euros in new bottling lines and brewing
plants substantially increased the capacity of these breweries.
The experts were more than aware that an expansion of the existing
breweries alone would be insufficient to meet the constantly increasing demand
for Star and Gulder. And because of the
rose-coloured prospects in the medium term, early in 2001 Nigerian Breweries
and large shareholder Heineken decided to build an ultra-modern brewery fitted
with the latest innovations and the most up-to-date plant equipment. A world-class brewery befitting a world-class
company.
The entire brewing community is envious of the new Ama brewery near
Enugu. The construction of a high-tech
brewery, in corporating the absolute latest in technological developments and
major innovations in a rural tropical environment is a feat which has never
before been achieved in the brewery industry.
Nigerian Breweries assigned Heineken Technical Services to design and
develop the new brewery and to supervise the construction of this 220 million
euro (30 billion naira) project.
There were frowns of concern when the first plans for Ama were
presented. Would it be possible to
operate such a high-tech, state-of-the-art brewery in Nigeria? The start-up phase has proven that it
certainly is. There are two main reasons
for Ama’s success. First of all,
Nigerian Breweries invested heavily in the recruitment of young technical
professionals straight from technical school and then giving them additional
training. Many key operators and all the
managers were sent to Holland and Germany for this additional training, months
before the first beer was brewed in Ama.
The others were given the training on recently upgraded equipment in the
breweries at Lagos, Aba, Kaduna and Ibadan.
The second success factor is the actual organizational structure. A state-of-the-art brewery such as Ama calls
for a small number of highly professional employees; employees who perform at
their best when working in a hierarchically small operation consisting of only
three layers. Work here is based on
Total Productive Management (TPM), which for Nigerian Breweries is a new
concept introduced by Wiggert Deelen, the Technical Director.
The brewery has an initial capacity of more than 300 million litres of
beer and can be extended even further.
The average production is in excess of 1.1 million creates per week. The Ama brewery uses only natural ingredients
for the brewing process, the brewing water being pumped up from five wells two
hundred metres below the ground. This is
excellent quality water and needs very little correction to make it suitable
for brewing.
The malted barley and hops used are imported from Europe, the malted
surghum and maize grits are produced by local farmers, malters and
millers. Ama brewery uses 51,000 tonnes
of grain per year, 2,550 truck-loads in all.
The brewery has one brew-house that produces twelve brews of 660
hectolitres high gravity wort per day.
The brew-house is in operation 24 hours a day, seven days a week.
After the boiled wort has been cooled down it is mixed with the yeast and
then pumped to the fermentation “celler”.
While the celler is the traditional name for the location where
fermentation takes place, in the brewery the 30 fermentation tanks of 5,000
hectolitres each are situated in a building above ground.
The beer is subsequently transported from these tanks to the brewery’s
bottling lines.
Here there are four bottling lines, two of which are reserved for the
popular brand, Star, and one for Gulder.
Each bottling line has a filling capacity of 30,000 bottles per hour
(60cl bottles).
The high level automation and the use of ultra-modern technical equipment
make it possible for the brewery to also produce Heineken beer. Preparations were started for the local
production of Heineken beer only six months after the first brew had left the
production line.
1.2
STATEMENT OF PROBLEM:
However, the research will be specifically concentrated on
the problems which arise when the brewery sells beer to its customers for the
purpose of receiving payment in future.
In view of these, the following critical questions demand answers:
1. What
effects does credit management have on liquidity position of Nigerian Breweries
Plc, Enugu?
2. Does credit sales reduces liquidity of
this brewery?
3. Does credit sales increase the profit
level of the brewery?
4. Is
there any relationship between credit sales and liquidity position of this
brewery?
5. Has
the brewery’s credit policy and credit terms any effect on its liquidity?
1.3
RESEARCH OBJECTIVE:
The primary objective of this study is to find out how
effectively and efficiently the Nigerian Breweries Plc has managed its trade
credit (selling been on credit to customers) to achieve optimum level of
liquidity, which will in turn result in the promotion of the corporate image of
the brewery and win the patronage of the public.
The project also aims at making suggestions on how the brewery, based on
research findings, can improve its business through greater profitability and
growth can be assured.
1.4
STATEMENT OF HYPOTHESIS:
In order to achieve the above objective, the research will
make the following hypothesis:
1. Liquidity
of Nigerian Breweries Plc Enugu in a function of proper credit management.
2. Credit
sales do not reduce liquidity of Nigerian Breweries Plc Enugu.
3. Credit
sales increase the profitability of Nigerian Breweries Plc, Enugu.
1.5
SIGNIFICANCE OF THE STUDY:
In carrying out this study, it is intended that it will be of
immense help to the accounting staff of Nigerian Breweries Plc Enugu,
especially its credit management officers.
This study exposes the intricacies involved in extending credit to
customers.
To the customers, this study will enumerate the several benefits that can
be derived by making prompt settlements of their debts. This serves as a means of increasing
organizational efficiency.
This study also is particularly important for the financial manager of a
small company because a small company has relatively limited access to the
capital markets, it relies heavily on trade credits for its short-term
financing.
This study will be helpful guide for him.
Thus any company or individual through this study can have a reasonable
knowledge of what credit transactions are all about and how it can be
effectively managed to attain the much needed profit maximization.
1.6
LIMITATION AND SCOPE OF
THE STUDY:
In a study like this type, a lot of set-backs are bound to
come up, this work is restricted by many variables.
The greatest identifiable ones are time, finance, respondents and general
economic problem.
(1) Time:
Since the research will be carried out at student’s level, the researcher
will have to allot his time such that the demand for their courses will have to
be met.
Moreover, since the interview will be conducted during the working days
of the work the researcher will have to forfeit some of his lectures in order
to successfully conduct the study. The
time that will be lost in terms of lecture missed will be a substantial loss in
itself.
(2) Finance:
Insufficient funds will be another factor inhibiting this research
project. The work will be
single-handedly sponsored by the researcher.
And as a student, the project will be sponsored from his meager pocket
money. As a result, he may find it
difficult to cover some inevitable expenses like transport, stationeries,
typing and binding labour and so on.
This in turn is bound to affect the sample size and the geographical area
of coverage of the study.
(3) Respondent:
The inability of the officials concerned to produce adequate and relevant
information required for the research project has been one of the most
frequently encountered constraints by researchers.
Apart from the fact that some of the staff that will be required to give
data are not technically skilful in the area of study, many of them may think
that the researcher is one of government functionaries that come to question
their activities or to assess them for tax payment.
This may be due to the fact that the school authority has been reluctant
to introduce the researcher to the establishment formally by issuing identity
papers or introduction papers to the students.
(4) General Economic Problem:
The last but not the least limiting factor is this work will be the
general economic problem facing the entire country as at this point in time
when the research will be carried out.
Considering the above constraints, the researcher will concentrate on few
areas of trade credit management that lead to high profitability, optimum
liquidity level and efficient utilization of all the brewery’s financial
assets. Such areas include – historical
overviews and origin of credit, trade credit and credit management; credit
policy; five Cs of credit; effects of credit on liquidity and profitability,
and important areas of trade credit management.
1.7
DEFINITION OF TERMS:
Haven going this far, the
researcher sees it reasonably enough to define some key terms or phrases
intended to be used in this research project as they operationally apply to the
problem:
The terms include:
1. Trade
Credit:
This is the quantity of goods (beer) the brewery sold to its customers
with the purpose of collecting cash in the future.
2. Credit
Management:
This is the process by which the brewery properly maintains its credit
sales so as to achieve optimum liquidity level.
Or, put in this way, credit management is a way of controlling the
brewery’s credit granting attitude in order to maximize the brewery’s value of
achieving a balance between risk and profitability.
3. Liquidity:
This is the volume of cash the brewery has at hand and/or in the
bank. It is the actual total money (most
liquid assets) the brewery has as a balance after all expenses (including cost
of financial credit) have been made.
4. Profitability:
This is the total net profit or gain made by the brewery from its selling
activities (both cash and credit sales).
5. Optimum
Liquidity:
This is the level of cash (at hand and/or in the bank) at which all the
brewery’s assets (resources) are efficiently employed and utilized.
6. Company:
This is a legal person or entity created by the association of number of
persons in accordance with the law for the purpose of a defined objective.
7. Management:
This is the process of allocating an organisation’s inputs (human and
economic resources) by planning, organizing, directing and controlling for the
purpose of producing outputs (goods and services) directed by its customers so
that organization objectives are accomplished.
8. Credit
Sales:
These are sales made by the brewery without immediate payment.
They are goods (beer)
the brewery exchanged for money but with the intention to receive the cash in
the future