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.