Limitations Of The Study Finance Essay - Free Essay Example

Business organizations have always procured goods as raw materials from suppliers and at the same time sold finished products to consumers on credit and defer payment for such products to the future. It is important that organizations manage such credit arrangements in a manner that should make them recoverable in the long run. Most organizations fail to manage their account receivables in the sense that there are no conscious effort on the part of management to track whatever amount are due them as companies. Inefficiencies and ineffectiveness in the analysis and review of debtors lists have always contributed to financial challenges in most organizations particularly, public organizations. The management of account receivables is of vital importance to the success of organizations as it prevents revenue leakage, reduce bad debt, increase companys cash flow and also improves delivery of value services to customers. According to Roberto, Short, and Patricia (2001) accounts receivables management is the process of establishing an effective system for credit policy, credit risk management, credit risk procedure, and recognition of bad debt expense. It is established that huge ledger balances of receivables indicate a flawed credit policy and any slack in the collection period of these organizations lead to a higher possibility of bad debts. A major component of accounts receivable is the trade credit offered to trading partners by an organization. Trade credit can be viewed as a loan a su pplier provides to its customers in respect of product sales. Ferris (1981) states that short-term loan is tied in both timing and value to the exchange of goods therefore a company would want to collect receivables sooner rather than later as this will enable the company to increase its frequency of reinvestment, or turnover, of its capital. The ability to liquidate the receivables should be of great concern to companies since non-payments and late payments by credit customers can negatively affect the business operation (Zainudin, 2008). There are risks attached to offering trade credits to customers due to the duration between the time of delivery of service or products and the time the customer pays, in this case if a company sells on credit, its money is tied to the products until the customer pays. But, importantly though credit collection function is, it is often neglected and managed inefficiently. The problem, however, is not new and not confined to any particular industry or country. Ghana Water Company Limited, Kumasi within which this research is being conducted is of no exemption. The companys primary objective is to provide reliable and affordable water supply to meet the needs of its customers. However, achieving this objective seems almost illusory in the numerous challenges the company is confronted with. The Ghana Water Company Limiteds Monthly Revenue Report for May (2012), has revealed that sizeable amount of money stands in the books as arrears which its numerous customers are supposed to pay. In managing account receivables, there should be a policy that will help maximize revenue collection. It will need to take into account a companys current and desired cash position, as well as its ability to satisfy expected demand. Past and present governments of the Republic of Ghana have been trying various ways of getting funds to improve the water systems in the country in order to provide potable water for the good people of this country. Th ey have not relented in their efforts, yet it seems that not enough funds have been solicited to enable Ghana Water Company to execute this very important task. Several studies have indicated that it costs the company almost GHÂÂ ¢0.80 per meter cube to produce, transport and distribute a unit volume of potable water. Water tariffs have, however, been held around GHÂÂ ¢0.20 per meter cube. GWCL has already been operating at a level constrained by insufficiency of funds without regard to actual operational needs. In this case if Ghana Water Company Limited do not properly manage their accounts receivable well, they may be faced with debt servicing challenges and will be forced to impose higher tariffs the effects of which may be unbearable to the consumers of its services. Organizations should therefore be practically oriented and be systematic of managing accounts receivable to enhance their continual growth, profitability and survival in their businesses. 1.2. Statement of the Problem The significant role in which an effective management of accounts receivable plays in every organization cannot be overemphasized. Companies that concentrate on credit sales without monitoring their collection will soon find much of their current assets tied up in bad debts. The offer of service on credit base to customers needs an effective credit system management that allows companies to collect its accounts due on time and not inherit risk. Ghana Water Company Limited deliver their service on credit basis and that has created huge arrears or debtors figure in their financial statement making it difficult for the company to manage its account receivables taking into consideration the size of its indebtedness. Ironically, GWCL has always been given the mandate by the Public Utility Regulation Commission (PURC) to increase its tariffs a little higher but still complains of lack of adequate funds to enable them operate effectively and efficiently. This cause reaction from the ge neral public of the poor quality of service being provided by GWCL because the health of the masses of every country largely depend on the source of water they drink or use, that is the more reason why it is said that water is life. It is believed that there are more to the problem and therefore an increment in tariffs without better management of accounts receivable will always cause obstacles in the production of service to customers. This study therefore seeks to look into these problems in the context of GWCL and identifies how the company can manage its account receivables build-up in order to ease the financial burden it currently finds itself. It further draws a practical conclusion to the billing system of the Ghana Water Company Limited, their collection strategies, credit policy and generally how these huge arrears are or should be managed by GWCL and other business organizations which may find this work beneficial to them. 1.3 Research Questions The statement of the problem induces the researcher to formulate the following sub questions: What are the credit policies of Ghana Water Company Limited? Do consumers of Ghana Water Company abide by the credit policy? What are the difficulties faced by GWCL in the collection of accounts receivable? How does this affect the smooth operations of the company? What is the relationship between GWCLs credit policy management and its debt collection performance? 1.4 Research Objectives The overall aim of this study is to evaluate the management of accounts receivable in service organizations and to suggest ways to overcome its challenges. The specific objectives are to: Examine the credit policy adopted by Ghana Water Company Limited to collect account receivables from customers. Examine customers awareness of the credit policy and the constraints in abiding by this policy? To identify problems/constraint associated with account receivable collection by GWCL To identify constraints associated with GWCL account receivable payment by customers Establish whether there is a relationship between GWCLs credit policy management and its debt collection performance. 1.5 Significance of the Study The study seeks to bring out the problems involved in the huge debtors figure in the financial statement of GWCL and other utility companies as they sell mostly on credit bases. It would also provide a framework with which the management of the organizations or companies can or may examine the prudence ways of managing their account receivables. The purpose of this study therefore is to investigate the underlying factors that have militated against the ability of GWCL to discharge or deliver on its responsibilities. It is the expectation of this research study to identify the factors responsible for this state of affairs and to propose appropriate means to address these in the affected region. The findings of this research may as well form a basis for further research into the management of accounts receivable and positive steps will be taken to improve this situation. 1.6 The Scope of the Study This study is limited to the management of account receivable but not the management of working capital in totality. The intention was to concentrate on debtors management which has been a source of worry to GWCL and most of the utility industries. GWCL was selected among most of the utility industries and the location of Kumasi due to the companys interest in this topic and the accessibility of information by the researcher. 1.7 Limitations of the Study The study took GWCL, Kumasi as a single entity and selection of few of its customers (debtors) and staff for this research. The selection does not cover all the GWCL customers in Kumasi who are in arrears or indebted to the company. Again, since Kumasi was specifically selected for these studies, the diversity of billing and customer indebtedness challenges, in other parts of the country of Ghana were not wholly covered. The study is also limited by the fact that, due to administrative secrecy, certain vital information was not released to the researcher. Nevertheless, the study as much as possible provides a fair view of the topic under consideration. 1.8 Organization of the Study The study is organized into five main chapters. Chapter one introduces the study which concerns itself with the background of the study, statement of the problem, objectives of the study, research questions, significance of the study and the limitation of the study. Chapter two examines existing literature and the reviews of related literature work on accounts receivable. There is also an empirical evidence of related research work. Chapter three presents the methodology used in gathering both primary and secondary data with a detailed account of how the research will be conducted. The background of the study area, the study type, the study design, study variables, sample size and sampling technique method, data collection method, data analysis method and the ethical consideration are all involved. Chapter four contains the analysis of data, interpretation of the findings. Chapter five summarizes, concludes and offer recommendation for further study.