DEBTORS MANAGEMENT AND FINANCIAL PERFORMANCE OF BUSINESS

ENTERPRISES: A CASE STUDY OF SELECTED

HARDWARE BUSINESSES IN NTUNGAMO
TOWN COUNCIL

NINSIIMA SHALLON

11/BSU/BBA/236

A RESEARCH REPORT SUBMITTED TO THE FACULTY OF BUSINESS AND

DEVELOPMENT STUDIES IN PARTIAL FULFILLMENT OF

REQUIREMENTS FOR THE AWARD OF BACHELORS’

DEGREE IN BUSINESS ADMINISTRATION OF

BISHOP STUART UNIVERSITY.

MAY, 2014
 DEDICATION
This work is dedicated with joy and love to my husband Mr. Karanzi Caleb, My Parents Mr.
Turumu Laban and Mrs. Jovia Turumu, my closest friends for their encouragement, vision and
advice to take up this course and laid this foundation for my career.

ii
 DECLARATION
I hereby declare that this report is due to my own knowledge, effort and it has never been
submitted by any other person for degree in any University or institution of higher level.

Signed……………………………………………

NINSIIMA SHALLON

11/BSU/BBA/236

Date…………………………………………………

iii
 APPROVAL
This report on “debtors management and financial performance of business enterprises: a case
study of selected hardware businesses in Ntungamo Town Council” has been submitted with my
approval.

Signed……………………………………………………………. Date……………………….
MR. TUKAMWESIGA JOTHAM

(SUPERVISOR)

iv
 TABLE OF CONTENTS
DEDICATION..................................................................................................................................i
DECLARATION.............................................................................................................................ii
APPROVAL...................................................................................................................................iii
TABLE OF CONTENTS...............................................................................................................iv
LIST OF TABLE..........................................................................................................................viii
LIST OF FIGURES......................................................................................................................viii
LIST OF ACRONYMS..................................................................................................................ix
ABSTRACT....................................................................................................................................x
CHAPTER ONE............................................................................................................................1
1.0 Introduction................................................................................................................................1
1.1Background of the study.............................................................................................................1
1.2 Statement of the Problem...........................................................................................................3
1.3 Purposes of the study.................................................................................................................3
1.4 Objectives of the study..............................................................................................................3
1.4 Research questions.....................................................................................................................4
1.5 Scope of the study......................................................................................................................4
1.6 Significance of the study...........................................................................................................4
1.7 List of Items...............................................................................................................................4
CHAPTER TWO: LITERATURE REVIEW.............................................................................6
2. Introduction..................................................................................................................................6
2.1 Methods of debtor management of business enterprises...........................................................6
2.1.1 Rationale of credit...................................................................................................................7
2.1.2 Type of credit policy...............................................................................................................7
2.1.3 Costs associated with extending credit...................................................................................8
2.1.4 Nature of Credit Management Policies...................................................................................8
2.1.6 A lenient debt management policy.......................................................................................14
2.1.7 Stringent debt management policy.......................................................................................14
2.1.8 Cash Management Practices.................................................................................................14
2.2 To assess the business financial performance.........................................................................16
2.2.1 Financial performance..........................................................................................................16

v
2.2.2 Profitability...........................................................................................................................17
2.2.3 Liquidity...............................................................................................................................17
Liquidity ratios can be used, which tell about the firm’s ability to meet its short-term financial. 17
2.2.4 Measures of financial Performance......................................................................................18
2.2.5 Other factors affecting business financial performance.......................................................18
2.3. Relationship between debt management and business financial performance.......................20
2.4 Conclusion...............................................................................................................................22
CHAPTER THREE:METHODOLOGY..................................................................................23
3.0 Introduction..............................................................................................................................23
3.1 Research Design......................................................................................................................23
3.2 Study population......................................................................................................................23
3.3 Sample size and selection of respondents................................................................................24
3.4 Data Sources............................................................................................................................24
3.5 Data collection methods..........................................................................................................24
3.5.1 The Questionnaire.................................................................................................................24
3.5.2 Interview Method..................................................................................................................25
3.6 Research Procedure.................................................................................................................25
3.7 Data Processing and Analysis Methods...................................................................................25
3.7.1 Data editing...........................................................................................................................25
3.7.2 Data presentation..................................................................................................................25
3.7.3 Data analysis.........................................................................................................................25
3.7.4 Interpretation of the study results.......................................................................................26
3.8 Ethical Consideration...............................................................................................................26
3.9 Limitations during the research study......................................................................................26
CHAPTER FOUR : PRESENTATION, ANALYSIS AND INTERPRETATION OF THE
RESULTS.....................................................................................................................................27
4.Introduction.................................................................................................................................27
4.1 Background information of the respondents............................................................................27
4.1.1 The gender distribution of the respondents..........................................................................27
4.1.2 Age distribution of the respondents......................................................................................28
4.1.3 Level of education of the respondents..................................................................................29

vi
4.1.2 Marital status of the respondents..........................................................................................29
4.1.3 Religion of the respondents..................................................................................................30
4.2 Debtors management policy of hardware business enterprises...............................................31
4.2.1 Whether business enterprises were acquiring cash for running daily activities...................31
4.2.2 Sources of cash/funds in business enterprises as per respondents........................................32
4.2.3 Whether business enterprises Endeavour to manage debtors...............................................34
4.2.4 Debtors management policy of hardware business enterprises............................................34
4.2.5 Costs involved in debtors’ management...............................................................................37
4.2.6 Whether there are costs involved in debtors’ management..................................................37
4.3 Findings on factors affecting organizational performance of hardware business enterprise...38
4.4 Relationship between debtors’ management and business financial performance..................40
CHAPTER FIVE:SUMMARY OF THE STUDY FINDINGS, CONCLUSIONS,
RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER STUDIES.....................42
5.0 Introduction..............................................................................................................................42
5.1 Summary of the study findings................................................................................................42
5.1.1 Findings on methods of debtor management employed by hardware business enterprises. 42
5.2 Conclusions of the study..........................................................................................................45
5.3 Recommendations of the study................................................................................................47
5.4 Suggestions for further studies................................................................................................48
References......................................................................................................................................49
APPENDICES...............................................................................................................................49
APPENDIX I: RESPONDENTS’ QUESTIONNAIRE................................................................50

vii
 ACKNOWLEDGEMENT
I thank the Almighty God for making it possible for me to complete this piece of work. Special
thanks for the knowledge, wisdom, courage and determination he has granted me.

I extend my appreciation to my supervisor who clearly, systematically, consistently and persisted

guided me from research proposal to this practical writing. He really inspired me.

I am greatly indebted to my dear friends Apophia, Obed, mercy, Sengoba, Mackline, marion,
Doreen, Lodgers and Sande their financial support, parental care, love, prayers and courage, I am
so grateful my dear friends.

Thanks also go to my respondents who sacrificed their time in giving me relevant information
that backed my research.

My special thanks also go to the my brothers Coleb, Linard, Mucunguzi, Yoab ; my sister
Happy, Adrine, Damari, Amerious, Olivias whose pieces of advice, parental care and financial
support contributed greatly to my success.

Finally, I wish to acknowledge my respected friends. They were so cooperative in sharing

academic knowledge in which research was part of it. Your company and constructive ideas
made my life very easy at the University. I owe more than I can briefly described, thanks for
giving me your company.

viii
 LIST OF TABLE

Table 1: Showing level of education of the respondents...............................................................29

Table 2: Showing marital status of respondents............................................................................30

Table 3: Showing whether business enterprises acquire cash for running daily activities............31

Table 4: Showing sources of cash/funds used in business enterprises..........................................32

Table 5: Showing whether business enterprises Endeavour to manage debtors...........................34

Table 6: Showing debtors management policy of hardware business enterprises.........................34

Table 7: Showing whether firms sell on credits............................................................................36

Table 8: Showing whether there are costs in debtors’ management.............................................37

Table 9: Showing costs involved in debtors’ management...........................................................38

Table 10: Showing respondent response towards factors that affect business performance (only

50 respondent’s responses on question on factors that affect business performance)...................39

Table 11: Showing whether there is a relationship between debtors’ management and business

financial performance....................................................................................................................40

LIST OF FIGURES

Figure 1: Showing gender distribution of respondents..................................................................27

Figure 2: Showing age distribution of respondents.......................................................................28

Figure 3: Showing Religious affiliated of the respondents...........................................................30

ix
 LIST OF ACRONYMS
ROCE Return on capital employed
EBIT earnings before interest and taxes)
BDS business development services
UK United Kingdom
SMEs Small Medium Enterprises
US United States
% Percentage
NY New York
E.g. For example
& And
Xo2 Calculated chi-square
Xt2 Tabulation chi-square
D.f Degree of freedom

x
 ABSTRACT
The purpose of the study was to find the relationship between debtors’ management and financial
performance of hardware business enterprises as a case study of selected hardware businesses in
Ntungamo Town Council. Objectives of the study were; to evaluate methods of debtor
management employed by hardware business enterprises, to assess the business financial
performance of hardware business enterprises and to examine the relationship between debtor’s
management and business financial performance. It used data collected using a questionnaire
and interviews and during data collection purposive sampling was used. Both quantitative and
qualitative research methodologies were also used.

The study established that most respondents have no defined debtor management policy in place,
at times respondents are not reminded of debts, character of debtors is rarely evaluated before
extending credit, most respondents don’t evaluate capacity of debtor before extending credit, and
credit terms are at times not evaluated before extending credit. Lack of capital is another
impediment to businesses in their early stages. Results of the study indicated a significant
proportion of the respondents, this as a major problem. Poor record keeping as also a cause for
startup business failure. In most cases, this is not only due to the low priority attached by new
and fresh entrepreneurs, but also a lack of the basic business management and skills. Most
business people, therefore, end up losing track of their daily transactions and cannot account for
their expenses and their profits at the end of the month.
It also concluded that the kind of the relationship depends on how the cash is managed as when
cash is properly managed improves on the liquidity performance of small scale enterprises
resulting a positive relationship and other wise a negative relationship. This was evidenced by
the results from the findings, chi square calculated (Xo2) that was 26.13 while chi square
tabulated (Xc2) was 3.84 at 1 level degree of freedom from 5% level of significance. It is
recommended that hardware business enterprises should ensure that there is effective
management in coordination of its activities, owners of poultry firms should access loans to
resolve lack of capital problem which is another impediment to businesses in their early stages,
there should be poor record keeping as also a cause for startup business failure, owners of
poultry firms should have a control system or process for managing debtors, owners of hardware
business enterprises firms should have budgets for profit and loss analysis to really know what
you spend (or intend to spend) in each area of your business over 12 months.

xi
 CHAPTER ONE
1.0 Introduction
This chapter unveils the background of the study, statement of the problem, description of the
study area, objectives to the study, research questions, scope of the study and the significance of
the study.

1.1Background of the study

 Business enterprises form the bedrock of most economies in the world. They are frequently the
prime source of new jobs and play a crucial role in income generation, especially for the poor. 
Many governments and international donor agencies seek to promote the development of
business enterprises through establishing support agencies and enterprise development projects
Which provide business development services (BDS) such as training, advice, information,
business planning, marketing, technology, communications and other services. BDS are often
perceived as being useful in complementing credit, and in assisting business enterprises with
growth potential to become large-scale enterprises.    An important element for promoting
enterprise development is to have a suitable enabling environment for business survival and
growth.  The enabling environment refers, among other things, to policy and regulatory issues, to
financial and business development services.

 Although business enterprises represent the backbone of local economies in most developing
countries, are vehicles for accelerating economic growth, generating employment, foreign
exchange and tax revenues, they often face a lot of constraints and challenges in their operations.
These small entrepreneurs operate against heavy odds and slight changes in the external
environment hit them strongly. They are often confronted with limited financial planning skills,
access to information on market opportunities and debt management policies. These constraints
limit substantially the productive capacity and efficiency of business enterprises in Uganda to be
competitive within the context of globalisation. 

This is often reflected in the length of time debtors are taking to pay their accounts and in some
cases firms are being forced to take steps to recover monies due to them by using more formal
methods. Debtor management is an extremely important part of any business enterprise in that
the slow paying of accounts will almost invariably put stresses on the working capital ratios of
business. This may lead to the need for further capital injections by the proprietors or the taking
on of increased debt.

Omonuk (1999). Defines debtors as individuals and organizations that owe money to the
business and this means that goods and services are sold and no immediate cash is given to the
owner of the business. Selling on credit is an essential marketing tool, acting as a bridge for the
movement of goods through production and distribution stages to customers. Customers from
whom receivables or book debts have to be collected are called trade debtors and they represent a
firm’s claim or asset. Pandey (2004) agrees with the statement that receivables constitute a
substantial portion of current assets of several businesses. For example after inventories in the
balance sheet, trade debtors are the major components of the current assets.

The main source of income of all businesses is the sale of goods and services. Without a credit
facility, the sales of a business may not increase beyond a specific limit and these low sales have
an impact on the profits 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). Business enterprises
sell on Credit and yet most of their purchases are made on cash basis. In spite of this however,
the trend are often no formal credit policies in place, resulting in high incidence of bad debts and
liquidity problems.

Receivables management has been found to have an impact on the business financial
performance and if implemented in a manner which complements the area of business a firm is
operating in, may greatly assist in the efficient recovery of monies due in respect of goods and
services supplied. Financial performance in this study is looked at in terms of the firm’s ability
to meet its obligations as and when they fall due. The flow of money is the lifeline a business
organization and any business, which needs to extend credit to customers, must take care of.
(Roger lewis and Roger trevitt, 1995). This means businesses must take good credit control to
achieve sustainable growth in the business. The hardware enterprises here are not exceptional.

It’s worth noting that as substantial amounts are tied up in trade debtors, it needs careful analysis
and proper management. The overall debt collection policy of the firm should be that the
administration costs incurred in debt collection should not exceed the benefits received from
incurring those costs (Pandey, 2004). According to Julius Kakuru, 1998 the debt collection costs
include bad debt losses, administration costs, production and selling costs. He contends that the
use of a well formulated credit policy can minimize some of these costs to a greater extent. If
customers are allowed to take goods on credit with a promise to pay in future, the business will
soon run out of cash; this will be badly needed to replenish its stock and meet its operating
expenses (O’du’boa, 2003). Debtors’ management has been adopted by many business
enterprises as an essential component of finance operations (Komakech, 2002). Credit control
policy can help entrepreneurs ensure the collection of trade debts from customers.

The concern is that bad debts have persistently led to the decline of business enterprises. Most
business enterprises still report liquidity problems (Kazooba, 2006). This study was to address
how debtors can be managed efficiently in order to mitigate liquidity problems in hardware
business enterprises.

1.2 Statement of the Problem

Despite the efforts by many business enterprises in managing their debtors to achieve their set
goals, have a sustained growth and out compete the competitors, the companies have continuous
to have higher numbers of debtors that have resulted into poor financial performance of SMEs
(Kazooba, 2006). This study was to address how debtors can be managed efficiently in order to
mitigate liquidity problems in hardware business enterprises.

1.3 Purposes of the study

The main purpose of the study was to investigate the relationship between debtors’ management
and financial performance of hardware business enterprises.

1.4 Objectives of the study

(a) To evaluate methods of debtor management employed by hardware business enterprises.
(b) To assess the business financial performance of hardware business enterprises.
(c) To examine the relationship between debtors management and business financial
performance

1.4 Research questions

(a) What methods of debtor management are employed by hardware business enterprises?
(b) What is the business financial performance of hardware business enterprises?
(c) What is the relationship between debtor’s management and business financial performance?

1.5 Scope of the study

The study was carried out in western Uganda particularly in Ntungamo town council in
Ntungamo district and focus on selected Hardware businesses. The study focused on the evaluate
methods of debtor management employed by hardware business enterprises, to assess the
business financial performance of hardware business enterprises and to examine the relationship
between debtors management and business financial performance. The study focuses on financial
records and debtors records of the selected hardware businesses for the period of five years that’s
(2009-2014). This is because the researcher believed the information for this period was
available as the time was long enough to establish the relationship between the study variables.

1.6 Significance of the study

The study may enable business enterprises to appreciate the importance of debtor’s management.

The study helped the researcher to acquire skills on how to conduct research and May able to
solve business problems in the future time during the process of developing his carrier.

Scholars especially on the subject of debtors may also use the study as a point of reference and it
may contribute on the existing literature.

The study report will help the researcher to meet one of the requirements for the successful
completion of his course.

1.7 List of Items

Debt is an amount of money owed to a person or an organization and Debtors are persons or
organizations that owe money.

Debt management refers to ensuring that the collection of book debts is done (Saleemi, 2003).
Debt management policy is Guideline addressing how a company evaluates potential customers
who wish to buy on credit. It includes credit terms that specify discounts, interest rates, and
credit limits.

Finance is the money needed by an individual to pay for something. (Daniel Goleman, 2003).
Financial performance is the firm’s ability to meet its obligations as and when they fall due.

Liquidity is the ability to convert an asset to cash quickly at its market value.

Hardware business is businesses that deal in construction materials like cement, iron sheets,
nails, and iron bars among others.

CHAPTER TWO
 LITERATURE REVIEW
2.0 Introduction
This chapter shows what other scholars have written about to investigate the relationship
between debtors’ management and financial performance of hardware business enterprises and it
will be presented in themes namely; to establish the debt management policy of hardware
business enterprises, to establish why firms sell on credit, to identify the costs involved in
debtors management and to examine the relationship between debtors management and business
financial performance

2.1 Methods of debtor management of business enterprises

Debtors occupy an important position in the structure of current assets of a firm. They are the
outcome of rapid growth of trade credit granted by the firms to their customers. Trade credit is
the most prominent force of modern business. It is considered as a Marketing tool acting as a
bridge for the movement of goods through production and distribution stages to customers. It is
generally believed that credit policy stimulates sales as it helps in retaining existing customers
and winning clients from rivals. Trade debtors represent amounts owed to the firm as a result of
credit sale of goods or services in the ordinary course of business. The key function of credit
management is to optimize the sales at the minimum possible cost of credit.

A debt refers to assets issued by firms that promise to pay a specified rate of interest over a
specified period of time Richard. G. Lipsey and Christopher T.S (2001). In general
understanding a debt is incurred when a person buys goods or services on credit with a promise
to pay at a later date with or without interest. Pandey (2004) defines trade debtors as customers
from whom receivables or book debts have to be collected in the future and they represent the
firm’s claims or assets. Debtor’s management on the other hand is measures taken by a firm to
ensure that the debts are collected in time. Debtor’s management is an important aspect in
business, as most firms cannot do without selling on credit.

According to Pandey (2004), the term debt management refers to ensuring that the collection of
book debts is done. The formulation of debt management policy seeks to achieve a balance
between extending sales and the likelihood of these sales being profitable and collectable. The
debt management policy of firm depends on: The volume of credit sales, collection period of the
debts, and discount policy.
Credit Management Policy: Credit management policy is defined as the rules and guidelines
established by top management that governs the company’s credit department audits
performance in the extension of credit privileges Jim Franklin (2010). It is simply a set of
guidelines designed to minimize costs associated with credit while maximizing benefits from it
McNaughton (1996). Credit management policies entail the credit procedures, credit standards
and credit terms.

Mc Naughton, (1996) defines a credit policy as a set of guidelines designed to minimize costs
associated with credit while maximizing the benefits from it. He also notes that a good credit
policy should be one that ensures operational consistency and adherence to uniform and sound
practices. A good credit policy should involve effective initiation, analysis, credit monitoring and
evaluation. A credit policy is one of the essential tools in an organization. It is a primary tool as
well as a procedure established to provide management with reasonable assurance that the credit
system is functioning as it should. When credit is granted, accounts receivable are created and
expected to be collected in near future. A credit policy is built on three major variables and these
include credit terms, credit standards and collection procedures (Pandey 1995, Van Horne, 1994
and Kakuru ,2001).
2.1.1 Rationale of credit
According to Kakuru Julius (2001), firms use credit as a marketing weapon for expanding
business in a declining industry. In a growing competitive market, credit is used to increase a
firms markets share of minimize erosion of the firm’s market share by maintaining the firms
share and maintaining the firm market share. Furthermore, it helps to retain old customers and
create new ones by wining them away from competitors. To him, credit extension is a desirable
option on which companies can do business in a better way hence gaining competitive
advantage. Kakuru Julius goes further to define credit policy as a set of polices of action
designed to manage costs associated with credit, while maximizing the benefits from it. A firm
may follow a limited or a stringent credit policy.
2.1.2 Type of credit policy
Kakuru Julius (2001), identifies 2 types of credit policies; Lenient and Stringent Credit Policies.
To him, a lenient credit policy tends to give credit to customer on very liberal terms and
standards. He further notes that a stringent credit policy is highly selective and gives credit to
only those customers whose credit worthiness has been ascertained and who are financially
strong.
2.1.3 Costs associated with extending credit
Boggess W.P (1967), noted that carrying costs are those costs of capital measured as the
company’s internal required rate of return on funds committed in receivables where as normal
credit costs are those costs for supporting the credit function, for example legal collections.

Rosse and Wasterfield (1988), distinguished two costs; the carrying costs and opportunity costs.
To them, carrying costs are those associated with credit extension and investment in receivables.
They include the required rate of return from bad debts and the costs associated with credit
analysis, monitoring and collection efforts. They further argued that opportunity costs are costs
related to loss of sales and as a result of refusing to grant credit.

According to Van Horne (1989), a firm should evaluate its credit policy in terms of returns and
costs. The costs involved include; the selling costs, administration costs, collection costs and bad
debt losses. Van Horn however identifies these costs as involving in the implementation of credit
sales. He further emphasizes that a firm can realize sales because of credit sales, which leads to
larger profits.

Kakuru Julius (2001) noted that though extending credit is beneficial, it involves costs which are
inevitable in some cases, and these costs include; collection costs, bad debt losses, administrative
costs and opportunity costs. To him, collection costs are incurred at the time of collection of
receivables. These could be in form of sending reminding letters, meeting telephone charges and
making reminders through the press in some cases.

2.1.4 Nature of Credit Management Policies

Credit management policies are comprehensive set procedures and guidelines that must be
followed by banks in lending practices to achieve their goals (Agu, 1998). The term credit policy
is used to refer to the combination of three decision variables i.e. credit standards, credit terms
and collection efforts on which the financial manager has influence. Credit standards are criteria
to decide the types of customers to whom goods could be sold on credit. If a firm has more slow-
paying customers, its investment in accounts receivable will increase. The firm will also be
exposed to higher risk of default.
Credit Standards. These are the criteria, which the firm follows in selecting customers for
credit extension (BPP 2000). This is a very fundamental credit policy variable that requires
intensive analysis. According to Pandey, (1995), a credit standard is one of the controllable
decision variables that directly influence investment in trade credit. Graham, (1990) emphasized
that individual accounts of credit applicants need a great deal of scrutiny and that, for this reason,
it’s important that standards be set basin on the individual credit applicants. Gitman, (1982)
argues that credit standards provide guidelines for determining whether to extend credit to a
customer and how much credit should be extended. Kakuru, (2001) noted that it is important that
credit standards be set basing on individual credit applicants by considering credit information,
credit analysis, and credit limit and default rate.

Credit Standards; These are the criteria that the client should meet to qualify for credit and
according Kakuru (2000). These require intensive analysis to ensure effectiveness. To Bogeson
(1994) credit standards are the criteria that the firm follows when selecting customers for credit
allocation. It is vital for the credit standards to be set basing on individual credit applicant by
considering credit information, credit limits and default rate Kakuru (2001). Pandey (1993)
recognizes the 5Cs as measurement parameters in setting credit standards and these include;
.
Character: This refers to the willingness of the customer to settle his obligations. The financial
manager should judge whether the customers would make honest efforts to honor their debt
obligations. Moral factor is also considerable in evaluation in addition to bank references, marital
status, and level of education, occupational stability, and historical background of the client.
According to Pandey (1995) the credit manager attempts to ascertain the applicant’s willingness
to pay and settle his or her obligation. Much consideration is accorded to the moral factor. As
much as possible, the financial manger should ascertain whether the customer will make honest
efforts to meet the credit obligations of the firm. In making analyses about the customer’s
character, the firm should consider some of the aspect from the clients. These aspects include;
bank references, marital status, attachment to government agencies, level of education contact
operational stability and historical background.

Capacity; This refers to the customers’ ability to pay the credit advanced to him or her. Julius
Kakuru (1998) contends that the capacity of the client should be analyzed basing on the
following sources; financial statements, previous experience with the client, bank references,
assets owned by the client and the amount and purpose of the credit. According to Pandey
(2001), Capacity is the ability of a customer to pay credit advanced to him or her. In analysis his
or her capacity, the manager should look at financial statements, previous experience with the
firm, bank and trade references, amount and purpose of credit. Kakuru, (2001) also considers
that factors like profit margin, cash flows, acid taste ratio of business, and the duration one
has been in the business should be looked while analyzing capacity.

Condition : According to Kakuru (2001), this includes the assessment of prevailing economic
and other factors like social – political which may affect the customer’s ability to pay. In
addition, where customers incur substantially larger transport costs, one could be disruptive in
extending credit to such. This is because this high cost reduces their profits which may affect
their payments. All these views are shared by Pandy (2001). According to Pandey (1995), one
should evaluate the customer’s financial position by analyzing ratios and trends in cash and
working capital positions. The attributes to consider are how much the owner of the business has
put in the business as this determines the stake of the person in the business. Pandey (2001)
contends that, in some situations, the applicant may be required to offer securities before credit is
advanced. The security should be safe and easily marketable.
Capital: This refers to the general conditions of the firm. This is ascertained by the analysis of
the financial statements with special emphasis on the risks and the debt-equity ratios and also
evaluating the customer firm working capital positions Floucks (2001). The financial manager
can also assess the balance sheet to ascertain how much the owner has invested into the business
as his own personal stake BPP (2000).

Collateral: This refers to items like land, houses, commercial and residential estates or any other
property of value offered as security of the value of the loan extended to the borrower Kakuru
(2001). The collateral should be safe, easily marketed and that its value should be able to cover
up the debt when sold in case the borrower defaults to pay Van Horne (1995).

Credit terms: According to Pandey (1995), credit terms are stipulations under which a firm
grants credit to its customers. To him, immediately after the credit manager has verified the
credit applicant using set credit standards, decisions to extend credit is made . The firm
should try as much as possible to make terms more attractive to act as an incentive to clients
without incurring unnecessary high levels of bad debts. Therefore, the terms used should
conform to the average industrial terms and they include credit period and cash discount. Pandy
(2004) explains that credit terms specify duration of credit and terms of payments by customers.
He notes that investments in accounts receivables will be high if the customers are allowed
extended time period for making payments. The credit period and cash discount are much
considered here.

Collection procedures
Balstansky (1993) noted that collection procedures are efforts applied in order to accelerate
collections from slow paying customers and to reduce bad debt losses. Collection procedures
could be defined for each credit customer. This should be done in an organized manner that will
accelerate cash receipts without endangering the relationship with the debtor. Kakuru (2001),
gives a step by step procedure that is essential in collecting dues from slow paying customers and
these include; reminders, final write-off, insuring debtors, and factoring of debtors.

Credit Procedures
To achieve the good goals of credit management policy Franklin (2010) advised the adoption use
of credit procedures. To Franklin, credit procedures are specific ways in which top management
requires the credit department to achieve the credit management policies. The credit procedures
include instructions on what data to be used for credit investigation and analysis process, provide
information for data approval process, account supervision and instances requiring
management’s notification. Such credit collection efforts include the use of reminders, insurance
policy, the use of litigation and final write off as highlighted below:

Reminders : This basically involves sending a demand note to inform the debtor of the amount
due, and if no response is gotten, progressive steps using tighter measures are taken Pandey
(1998). These other measures include sending a polite letter to the customer and if no response,
the customer is contacted through the telephone or actually visiting him or her and as the last
resort tending towards legal measures Kasozi (1998).

Insurance policy: This involves a business firm undertaking to insure all the debts that are rated
bad. The firm should insure all the debts that are above the money level BPP (2002). Insurance
companies undertake to compensate the creditor firm in the event that the debtor defaults and as
such the insurer must accept such an arrangement only when the client company has an effective
credit policy Kakuru (2001).

Factoring debtors: This involves the sale of debts to the financial institutions. The debtor
factoring is a cushionary measure to safeguard the company money since credit firm obtains in
advance the credit cash from the insurer and that it incurs lower costs involved with credit
Flouck (2001). In this way creditor gets relieved off the collection and administrative costs of
debts and other risks involved in managing such loans.

The use of litigation: This involves taking legal action against the customer who fails to meet his
obligations. This arises when credit is a bad debt where there is a major break down in the
repayment agreement resulting in undue delays in collection in which it appears that legal maybe
required to effect collection (Kasozi 1998). This is resorted to as the last measure and more so
where the firm’s relationship with the customer has soared.

Final write off: This is where in the books of the company the debt is declared uncollectible and
therefore, it is written off as bad debt. If debts are deemed to bad and that they have been lost, it
is then better to scrap them from the books of accounts to give them a true and fair view of the
company’s financial position BPP (2000).

2.1.5 Designing credit policy

Kakuru Julius (2001), contends that, the only away a firm can control its sales is through altering
its credit policy. He says that credit policy is based on three controllable variables which are
credit standards credit terms, and collection procedure.
Credit Investigations and Analysis
Van Horne (1989), emphasizes that, credit analysis considers the character of the company, its
management and the financial strength of the firm in order to avoid imbalances. To him, credit
analysis can be done by using techniques like credit scoring where characteristic of an applicant
are quantitatively rated and credit decisions made on the basis of the total score. Characteristics
like the marital status, level of education occupational stability can be rated.
Credit Limit
According to Kakuru Julius (2001), credit limit is the maximum of credit the firm can extend to
customers at any point of time. He suggests that the analyst should carefully sensitize the amount
of contemplated sales and the customer’s financial strength and that if a problem arises, it may
make it inevitable to review the credit limit.

Credit standards setting in practice

According to Kakuru Julius (2001), in order to analyze customers and set standards, two aspects
are considered; the average collection paid and the default rate. To him, average collection paid
refers to the period in which debts remain outstanding, and default rate is the ratio of uncollected
receivables to the total receivables. Credit standards are the criteria, which a firm follows in
selecting customers for the purpose of credit extension. This credit policy variable requires
intensive analysis and individual accounts of credit applicant need to be understood. The quality
of the firm’s customers is influenced by this variable in terms of time taken to pay credit
obligation and the magnitude of the default rate (bad debt losses). When choosing a credit
standard to estimate the probability of default the financial manager must consider the following
aspects about the client;

Credit terms
According to Pandy (1995) credit terms are stipulations under which a firm grants credit to its
customers. To him, immediately after the credit manager has verified the credit applicant using
set credit standards, decisions to extend credit is made. The firm should try as much as possible
to make terms more attractive to act as an incentive to clients without incurring unnecessary high
levels of bad debts. Therefore, the terms used should conform to the average industrial terms and
the include credit period and cash discount. Pandy (2004) explains that credit terms specify
duration of credit and terms of payments by customers. He notes that investments in accounts
receivables will be high if the customers are allowed extended time period for making payments.
The credit period and cash discount are much considered here.
Credit period; this refers to the length of time for which credit is extended to customers.

Cash discount; this is a reduction in payment offered to customers to induce them to repay
credit obligations within a specified period of time (Pandey, 2004). This period of time will be
less than normal period of credit period.

Collection procedures
Balstansky (1993) noted that collection procedures are efforts applied in order to accelerate
collections from slow paying customers and to reduce bad debt losses. Collection procedures
could be defined for each credit customer. This should be done in an organized manner that will
accelerate cash receipts without endangering the relationship with the debtor. Kakuru, (2001),
gives a step by step procedure that is essential in collecting dues from slow paying customers and
these include; reminders, final write-off, insuring debtors, and factoring of debtors.

2.1.6 A lenient debt management policy

This gives credit to customers on liberal terms and standards, long credit period and the credit is
given with high discount rates even to customers whose credit worthiness is not fully known.

2.1.7 Stringent debt management policy

This gives credit to customers whose credit worthiness is fully known, financially strong and the
credit period is shorter and discount is low.
Looking on the above credit or debt management policies, it’s the management decision to
choose the one that fit the specific firm. The need for optimum debt management policy is
necessary in the firm. In establishing an optimum credit policy, the financial manager should
consider important decision variables, which influence the level of debtors.

2.1.8 Cash Management Practices

According to Pandey, (1999), all businesses have to meet incidental expenses in the course of
operation so it requires them to carryout book keeping which refers to the recording of business
transactions in the books of accounts. Accounting reports are based on summarized information
and are accurate only if initial record f the individual transaction is correct. The operation of the
firm results into numerous individual transactions taking place and incase of large companies
there is likely to be a massive volume of these inflow and out flow of goods therefore it’s the
responsibility of the manager to ensure there is an efficiency system of accounting.
This must be designed both to record and control individual transactions to enable the production
of summarized results in form of accounting reports. For example a retail shop that makes a large
number of relatively small sales must have control to ensure that all items that leave the shop are
paid for and all the cash received is recorded. The study revealed that the profitability of many
Businesses in early stages lack sufficient funds to operate successfully (Longnecker, 2006).

According to (Biryabarema, E, 1998) poor record keeping is also the cause of inadequate cash
among business. Most small-scale businesses do not keep a record of their transactions they
make and also lack basic business management and skill. So they end up losing truck of their
daily transactions and cannot account for their expenses and profits at the end of the month.

Biryabarema, (1998) emphasizes the importance of proper record keeping in that it enables small
business to have accurate information on which to base decisions such as projecting sales and
purchasing or determining the breakeven point and making a wider range of other financial
statements. However persistent lack of proper records has a poor cash management, thereby
making it a significant issue for business performance.

During the early stages some Business startups, owners were unable to separate their business
and family/ domestic situations business funds were kept for personal use and thus used in
setting domestic issues. This has a negative impact on portability and sustainability. Some
owners/managers employ family members simply because of kinship relation. In some cases,
these have turned out to be indiscipline and ineffectual factor that has lead to wrong way of
handling cash and misusing it which leads to shortages and thus affecting performance in a long
run (Longnecker, 2006).

Most business do not plan well for their each. 17% was listed as a cause of inadequate capital
during their start up phases. Less than 30% prepare a formed business plan prior to starting up
and 37% do not plan at all. The survey found that most business just with out plans so these
businesses end up with set targets or goals to meet (Barry Elliot and Jimie Elliot, 2001). For
proper management it is essential to have a good business plan whether formal or informal. Also
small business should aim at fixing prices that will enable them to earn sufficient profits for
survival and grow.
Also according to small business management, (2006) it ascertains that though some small co-
operation experience poor management. Small businesses seem particularly vulnerable to this
weakness. Many small firms are marginal or unprofitable business struggling to survive from day
to day. At best they earn a bore living for their owner. They operate but say that their
management could be an exaggeration.

2.2 To assess the business financial performance

2.2.1 Financial performance
Stoner (1996) describes performance as the ability to operate profitably, efficiently and
accomplishment of organizational goals and plans. It involves setting targets and comparing
actual results with expected targets. Financial performance is the firm’s ability to meet its
obligations as and when they fall due implying the aspect of profitability, efficiency and its
ability to sustain for a long time in the industry. In this research, financial performance will cover
the area of liquidity and profitability by business enterprises.

Stoner (1997) describes business performance as the ability to operate efficiently, profitably,
survives, grow and lead to opportunities and threats. Stoner (1997) singled out the production
process efficiently as the key factor governing business performance. There is also emphasis
upon innovation for profitability, assets management and overall entrepreneurship for achieving
lasting performance. Considering the definitions therefore, business performance can be defined
as in terms of profitability, liquidity, and growth and expansion prospects for the business.

According to Dean, (1994), Organizations; the term ‘organizational performance’ is used

comfortably in three time- senses - the past, present, and the future. In other words, performance
can refer to something completed, or something happening now, or activities that prepares for
new needs.

Profitability, for example, is often regarded as the ultimate performance indicator, but it is not
the actual performance. The actual performance occurred some time back - first with decisions
and then the actions that followed the decisions. Profit is therefore an indicator of previous
performance. In this sense, performance is the outcome or ‘end’. If you are also interested in
current behaviors that are associated with good or high performance, then you must identify and
assess them as they occur. These behaviors start with the strategic planning process and continue
into implementation, monitoring, and assessment. In this sense, performance is the ‘activity’ or
‘means’. are also interested in predictors of performance - conditions and behaviors that have
been shown over time to lead to better performance. In this sense, performance is a package of
behaviors around strategic planning and programming.

According to Ghobadian, (1994), There are numerous, major methods and movements to
regularly increase the performance of organizations. Each includes regular recurring activities to
establish organizational goals, monitor progress toward the goals, and make adjustments to
achieve those goals more effectively and efficiently. Typically, these become integrated into the
overall recurring management systems in the organization (as opposed to being used primarily in
one-time projects for change.

2.2.2 Profitability
Most growing businesses ultimately target increased profits, so it's important to know how to
measure profitability. The key standard measures are:
Gross profit margin - this measures how much money is made after direct costs of sales have
been taken into account, or the contribution, as it is also known.
Operating margin - the operating margin lies between the gross and net (see below) measures
of profitability. Overheads are taken into account, but interest and tax payments are not. For this
reason, it is also known as the EBIT (earnings before interest and taxes) margin.
Net profit margin - this is a much narrower measure of profits, as it takes all costs into account,
not just direct ones. So all overheads, as well as interest and tax payments, are included in the
profit calculation.
Return on capital employed (ROCE) - this calculates net profit as a percentage of the total
capital employed in a business. This allows one to see how well the money invested in business
is performing compared with other investments one could make with it, like putting it in the
bank.
2.2.3 Liquidity
Liquidity ratios can be used, which tell about the firm’s ability to meet its short-term financial
obligations. The liquidity of a firm refers to the firm’s ability to meet its financial obligations as
and when they fall due (Pandey, 2004) Cash and liquid assets are used to meet the firm’s
obligations. Business enterprises measure their efficiency of operations by closely monitoring
how the firm is able to meet its daily obligations and failure to meet daily obligations is viewed,
as a sign of collapsing business. Pandey (2004) notes that current assets should be managed
efficiently to help in safeguarding the firm against the dangers of illiquidity and insolvency. He
notes that investment in debtors affects the firm’s profitability and liquidity in business

2.2.4 Measures of financial Performance.

When determining performance of a business, the following have to be considered according to
(Balunywa, 1998)
Increased market share. This is where the company expands on its activities by occupying a
large position of the existing markets. This can be in terms of sales and the range of products in
the market hence a sign of good performance.

Return on gross investment. This is in terms of profits obtained from investment you made.
Therefore, high rates of profitability show a sign of good performance

Total waste reduction. When a company performs well, waste reduction is minimized because
every activity is done in the right time and right place thus not wasting firm’s resources
(Bakunda, 2001). “For world class companies, the ultimate goal is zero costs. All costs are
unnecessary unless proven otherwise.”

Meeting standards. Usually when a company meets standards set in a particular field, it will
indicate a good performance level. Others include cost reduction, improved facilities, and good
reputation. Despite important advances made in determining what qualifies to be a good
indicator of business performance, much more needs to be done to develop a satisfactory
understanding of the subject because no measure works in isolation of the other, all factors must
be combined and exploited efficiently to achieve performance targets.

2.2.5 Other factors affecting business financial performance

Competition: Competition comes in existence from situations where two or more business
organizations produce identical products, share the same market. Many Economists believe that
competition is a fact, which must be considered if the business is to prosper (Porter, 1992). In
order to match increasing competition, most companies will produce products that can be bought
at relatively low prices. However, this may compromise quality in that customers may purchase
infrequently hence affecting performance (Drucker, 1989).

Customers influence: David and Houston (2000) argues that the most important factor that
impact on any organizations operations function is to manage value adding activities inside the
business in such a way that customer requirements are meet in full. For each element of product
or service that is of concern to the customer, organizations will have an internal response that
facilitates the satisfaction of the customer preferences thus, performance. The most successful
businesses are those that can most effectively configure their operations to meet customer
requirements.
Planning: Dune (1995) stresses the importance of financial planning in the business to prosper
effectively. A retailer or any business owner invests money in merchandise for profitable resale
to others but this will be impossible of the choice of merchandise if made without effective
planning, and the result is always low profits or loss.

Marketing function: Kotler, (1995) cited marketing function as one of the major weapons to be
used for the better results of business operations. All business organizations have to continuously
encourage through potential customers to buy their products and they must achieve this as
efficiently as possible through implanting marketing function. Adock (1995) advises business
organizations with no formal marketing function, in order to succeed to use specialists or
managers who initially understand market requirements. Biimble (1990) advises business
operators or owners to acknowledge that, a business, which carries out advertising as part of
marketing function, increases its market share, which indicates good performance.

Economic changes: In situations where high currency is charged, business is forced to increase
prices for sustainability of business hence affecting their performance. This can be because of
importation in periods for example, when the currency rate is very high. Other economic changes
as inflation also causes prices to increase eventually cost of production increases as a result
demand reduces hence affecting performance Brown, (1990).

Generally, it can be seen that the theoretical models have only served as a rough guides and have
not specifically analyzed the imposition of a tax on business performance. Even Brown (1990)
who tried to analyze economic changes never pointed out how taxation affects business
performance that the present study wants to investigate.

According to Mbaguta, (2002) lack of capital is another impediment to businesses in their early
stages. Results of the study indicated a significant proportion of the respondents, 64(48%) raised
this as a major problem. First, these businesses were started with limited capital. Secondly, micro
businesses lack collaterals such as cars or land titles that can be deposited to get loans from the
traditional commercial banks. On the other hand, the loans provided by microfinance institutions
are small, with a short repayment period and high interest rates.

Snyder (2000) points poor record keeping as also a cause for startup business failure. In most
cases, this is not only due to the low priority attached by new and fresh entrepreneurs, but also a
lack of the basic business management and skills. Most business people, therefore, end up losing
track of their daily transactions and cannot account for their expenses and their profits at the end
of the month.

High rental charges have impeded the success of many businesses as some charges are pegged to
the United States dollar, which in most cases appreciates against the Uganda shilling Bagazonzya
(2003). One businessperson mentioned that their rent is US$200 for a space of 12 feet by 10 feet.
Expansion of towns has led to increased demand for business premises, which means that some
small businesses have been pushed away from the busy areas of the town to the periphery. This
has increased costs and resulted in poor sales and negative cash flow, thus minimizing the
chances for most businesses to succeed.

Arden, (2003) points’ lack of effective management during their early stages is also a major
cause of business failure for small businesses. Owners tend to manage these businesses
themselves as a measure of reducing operational costs. This study uncovered the example of
businessperson who locks the shop for a full day whenever he goes shopping in Kampala. He
does this once every week, a total of four days a month. One result of this is loss of customer
loyalty.

2.3. Relationship between debt management and business financial performance

The primary goal of debt management is to avoid extending credit to customers who are unable
to pay their accounts. The debt management policy for some larger businesses can be quite
formal, involving things such as: specific documented guidelines, customer credit applications,
and credit checks while for most small businesses tends to be quite informal and lacks the items
found in the formal debt management policy of a larger business. Many small business owners
rely on their instincts as their debt management policy.

Debt management has a direct effect on the cash flow of a business. A credit policy that is too
strict will turn away potential customers, slow sales, and eventually lead to a decrease in the
amount of cash inflows to the business. On the other hand, a credit policy that is too liberal will
attract slow paying (even nonpaying) customers, increase in the business's average collection
period for accounts receivable, and eventually lead to cash inflow problems. A good credit policy
should help to attract and retain good customers, without having a negative impact on cash flow.

According to Pandey (2004) the debt policy of a firm affects its working capital by influencing
the level of debtors. He argues that a liberal credit policy, without rating the credit worthiness of
customers will be detrimental to the firm’s liquidity. Debt policy in a firm is able to control slow
payment of accounts which would stress the working capital ratios of businesses hence good
working capital management. The two important aims of working capital management are
profitability and solvency. Working capital refers to the firm’s short-term capacity that enables
the firm to operate the long-term assets on a day-to-day basis to produce the desired goods and
services (Julius Kakuru, 1998).

For businesses to succeed it is essential to have a good debtor management In addition,

businesses should aim at fixing prices that will enable them to earn sufficient profits for survival
and growth. Further, every businessperson needs effective and efficient management skills to go
into business and new, effective, and efficient management skills to stay there. Namajja (2003)
recommends debtor management systems. She asserts that small to medium sized businesses
should have system or process for managing debtors. It is even more important during uncertain
financial times that you manage your debtors effectively, and there are several different methods
for doing this. According to Balunywa (1996); medium sized businesses should have budget
profit and loss analysis to really know what you spend (or intend to spend) in each area of your
business over 12 months?

2.4 Conclusion
In orgarnisations,although there are other ways of driving the business to success like
competitive aggressiveness, visionary, leadership, trained staff and costumer focus, debtor
management provides a reflector of past and a drive to achieve better performance for effective
measurement.

CHAPTER THREE
 METHODOLOGY
3.0 Introduction
This chapter entails the research and sampling designs, sample size, sample selection, data
collection methods and the tools, how the data was edited, processed and analyzed and the
limitations the researcher anticipates to encounter while carrying the study.

3.1 Research Design

The research study used both the research design was cross-sectional qualitative and quantitive
were used. This design was appropriate in investigating the empirical relationship analysis
between the variables. The researcher considered quantitative method to appropriately establish
the debtor’s management and financial performance of business enterprises of selected Hardware
Business in Ntungamo Town Council. The qualitative research design and quantitative research
design was descriptive in nature and this enable the researcher to meet the objectives of the
study. A statement was used to assign variables that may not adequately measure using numbers
and statistics, form of mathematical numbers and statistics assigned to variables that may not be
easily measured using statements or theme.

The longitudinal research approach was allowed for measurement of behaviour (involving
several other research methods) at a number of points in time during a finite time span (Galliers,
1992). Longitudinal research measures prevalence at several points in time, and can provide
information on causation, prognosis, stability, and change (Rutter, 1988, cited in Sanson et al.,
2002). Longitudinal studies were also allowed researchers to differentiate between change over
time in aggregate (group) data and changes in individuals or populations at risk. While cross-
sectional research can only measure the prevalence of a factor of interest at a certain point in
time, allow investigation of differences between individuals; Repeated measures allow for the
detection of change in individuals or their environments from one data point to the next (Hunter
et al., 2002)

3.2 Study population

Data was collected from different groups of respondents that are proprietors, employees,
creditors and customers. The researcher involved all these categories in the study since assumed
that such respondents in this category had the information needed to complete the study in time.
A sample size of 55 respondents was selected from the study area to save both time and money
during the process of data collection.

3.3 Sample size and selection of respondents

Simple random sampling design was adopted this is to provide equal chance to all respondents.
A total of 55 respondents were selected randomly from sampled hardware business owners and
the employees.
Table: Showing Sample size
Category of Population Sample Selection Method
Proprietors of businesses 10 Purposive sampling
Employees of businesses 15 Purposive sampling
Creditors 10 Random sampling
Customers 20 Random sampling
Total 55
Source : Primary Data 2014

3.4 Data Sources

Both primary and secondary data was the main sources of data to use in this study. Concerning
the primary data method, this included both qualitative and quantitative and this was obtained
through observation and direct communication with the respondents. The researcher collected
secondary information from different sources such as: reports from the management of the
market, commercial office as well as the district office. Data was obtained from records of Town
council, public libraries and internet places and this type of information was used in the study to
supplement the collected data from different categories of the respondents.

3.5 Data collection methods

3.5.1 The Questionnaire
Both closed and open-ended questionnaires were designed and this was the major instrument for
collection of primary data. Because apart from covering many respondents within a short period
of time, questionnaires give privacy.

3.5.2 Interview Method

Interview is a two-way systematic conversation between an investigator and an informant,
initiated for obtaining information relevant for specific study. These are scheduled set of
questions, which are administered through verbal communication in one to one relationship
between the interviewer and the interviewee. These were face to face with the researcher and the
respondent; while the researcher records the information about debtors’ management.

3.6 Research Procedure

The study observed all those procedures followed in research. Using the letter of introduction
obtained from the Dean Faculty of Business and Development studies, the researcher were
introduced to every respondent reached at, fully explaining the purpose of research. After getting
their consent, he conducted the research. The researcher also built the confidence of the
respondents by assuring them that their views were confidential and was used only for academic
purposes.

3.7 Data Processing and Analysis Methods

Data collected was handled as follows;
3.7.1 Data editing; editing of collected data was done to make the data ready and simpler for
presentation. The filled questionnaires were edited one by one to correct errors that were done by
the study respondents. Data were edited in order to check for accuracy, completeness,
consistency and uniformity.

3.7.2 Data presentation; The edited data was ready for presentation. Presentation of data
involved the use of tables that were generated from the questions relevant to the study variables.

3.7.3 Data analysis; The edited data were analyzed both quantitatively and qualitatively as
follows; Quantitative data was grouped and statistical description such as tables showing
frequencies and percentages and pie- charts as well as graphs for better interpretation. However,
qualitative data was analyzed in a way of identifying the responses from respondents that are
relevant to the research problem. Mainly such data was analyzed by explaining the facts
collected from the field under which the researcher was able to quote respondents’ responses.

3.7.4 Interpretation of the study results

Interpretation and discussion of the results were done by the researcher explaining the strength of
the study variables basing on the frequencies and percentages, charts and graphs. Statistical
conclusions were further made during the interpretation of the study results.

3.8 Ethical Consideration

Before commencing the research, an introductory letter from the University sought and the
purpose of the study explained to the authorities to avoid inconveniences and misunderstandings
about the purpose. The information collected was kept highly confidential.

3.9 Limitations during the research study

The researcher had a problem in timing of respondents. This is because business owners are
always busy and they were not willing to answer the questionnaires. But could be convinced that
the study was for only academic purposes

The researcher was faced with limited adequate skills to conduct the study. However with the
guidance of the university supervisor the researcher was able to successfully conduct the study.

The researcher further face a problem of some respondents not providing information for the
study as information relating to the study variables, however to this, researcher explain to them
that the information was only for the academic purpose while making them to understand the
study variables.

The study was expensive in terms of stationary. However the researcher tries to mobilize
financial resource from her friends for the study to be completed successfully in time with the
help of her supervisor.

CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF THE RESULTS
4.0 Introduction
This chapter of the study presents the results, shows analyses and interpretation of the findings.
The presentation of the study findings is done in line with the research objectives that guided the
study.

4.1 Background information of the respondents

On the background of the respondents, a number of variables were investigated. The researcher
regarded investigating the background variables about the respondents a necessary undertaking,
because it determines the extent of respondents’ acquaintance with their debtors’ management
and the financial performance of business enterprises, which subsequently gave the researcher a
direction on the mode of investigation. The results on the background information of the
respondents are indicated in the following presentation.

The study involved respondents of varying characteristics, which enabled the researcher to get
sufficient information on the study variables. The characteristics of the respondents investigated
ranged from sex, age and level of education.

4.1.1 The gender distribution of the respondents

The researcher determined the gender distribution of the respondents. This was an important
element because learning approaches affect different people (women and men differently). The
results on the gender distribution of the respondents are indicated in figure 1
Figure 1: Showing gender distribution of respondents

Source: Primary Data, May 2014.

The gender distribution of respondents was in such a way that males outnumbered the females.
According to the study findings, most of the respondents constituting 37(67%) were males while
the remaining 18(33%) respondents were females as presented in the chart above. The given
gender distribution of respondents would imply that men could still be dominating women in
debtors management of business enterprises in Ntungamo Town Council. However, the unequal
gender distribution of respondents did not affect their readiness to bring out relevant issues about
the study variables. The females were able to present their views as they observed the event was
under the study investigation in addition to males’ views.

4.1.2 Age distribution of the respondents

The age distribution of the respondents was also analyzed to assess the views of the respondents.
The age distribution included those between 20-30, 30-40, 40-50, below 20 and above 50 as
shown in the figure below.
Figure 2: Showing age distribution of respondents
Error: Reference source not found
Source: Primary Data, May 2014.

The research findings revealed that 7(13%) of the respondents were below 20 years, 18(33%)
were between 20-30 years, 15(27%) were between 30-40 years, 11(20%) in the age group of 40-
50 years and those above 50 years had 4(07%) of the study respondents. Most of the respondents
fell in the category 20-30years with 18 (33%) and these were mostly study respondents who
were both single and married in the position of managing debtors for business Enterprises in
Ntungamo Town Council. This was followed by those who lied between 30-40 years and this
category of the study respondents comprised of most married respondents. To this, had the
business owners as well as their employees who were selected from the study area.

4.1.3 Level of education of the respondents

The researcher also based on the levels of the education of the respondents to get the findings.
This involved respondents who had never been to school, reached primary level, secondary and
tertiary level of education as shown below;
Table 1: Showing level of education of the respondents
Level of education Frequency Percentage
Never been to school 02 03
Primary level 15 27
Secondary level 25 46
Tertiary level 13 23
Total 55 100
Source: Primary Data, May 2014.
Table 1 above shows that majority of the respondents had reached secondary level, primary level
tertiary level, and those who had never been to school respectively. These were represented by
25(46%) for those who had secondary level of education, 15(27%) with primary level of
education and 13(23%) with tertiary level. The remaining 02(03%) had never been to school as
such respondent did not actually specify why and of which was among those selected from
business employees. It was further discovered by the researcher that majority of the respondents
had attained secondary level of education and these were mainly the respondents who were the
business owners in the area of study. Still that majority of the respondents in with tertiary level
of education comprised of those respondents who were in the position on managing debtors for
business Enterprises in Ntungamo town council.

4.1.2 Marital status of the respondents

The marital status of respondent was also analyzed and presented to get their views about
debtors’ management and financial performance of business enterprises. This comprised of the
single, married, widowed, and divorced/separated as shown in table below.
Table 2: Showing marital status of respondents
Marital status Frequency Percentage
Single 20 36
Married 35 64
Widowed 00 00
Divorced /separated 00 00
Total 55 100
Source: Primary Data, May 2014.
According to the study findings in table 2 above, it was found out that out of 55 respondents, the
majority 35(64%) were married, followed by 20(34%) as single and non of the study respondents
were divorced /separated as well as widowed. According to the study findings, most of the
respondents who were married comprised of business owners in the study area as well as leaders
in the area of the study. However most of the single respondents comprised of those respondents
who were youth members and employees of the business enterprise.

4.1.3 Religion of the respondents

The researcher also based on the Religious affiliated of the respondents to get the findings and
this was established as shown below;

Figure 3: Showing Religious affiliated of the respondents

 22%
35%
Protestant
Catholic
14% Moslems
29%

Source: Primary Data, May 2014.

Chart above shows that majority of the respondents were protestant in religious belief, catholic,
others and Moslems. These were represented by 19(35%) for those who were protestant,
16(29%) who reported to be catholic, others as 12(22%) and only 08(15%) who were Moslems
among the selected study respondents.

It was discovered by the researcher that majority of the respondents who were protestant had
attained secondary level of education and these were mainly the respondents who were the
business owners in the area of study. Still that majority of the respondents in with tertiary level
of education comprised of those respondents who were in the position on managing debtors for
business Enterprises in Ntungamo town council.

4.2 Debtors management policy of hardware business enterprises

One of the research objectives was set to establish the debtors management policy of hardware
business enterprises and to fulfil this objective data was collecting and this was established as
follows;
4.2.1 Whether business enterprises were acquiring cash for running daily activities
The above aspect was covered by the study and according to the study findings the following
was revealed as in table 3 below;
Table 3: Showing whether business enterprises acquire cash for running daily activities
Response Frequency Percentage
Yes 29 53
No 6 11
Rarely 20 36
Total 55 100
Source: Primary Data, May 2014.
As seen in table 3 above, most of the study respondents cited that business enterprises acquire
cash for running daily activities as was reported by 16(53%) of the study respondents followed
by the who revealed that business enterprises rarely acquire cash for running daily activities with
11(37) of the respondents then 03(10%) who reported that business enterprises do not acquire
cash for running daily activities of which all of them come from the respondents who were in the
category of causal workers. The same respondents also claimed that privately owned and
operated business enterprises have a small number of employees and relatively low volume of
sales as they can not acquire loans from financial institutions.

The above study findings clearly show that business enterprises owners acquire cash for running
daily activities of their businesses as majority of the study respondents were in the agreement
with the statement that business enterprises acquire cash for running daily activities.

4.2.2 Sources of cash/funds in business enterprises as per respondents

The study further sought of establishing the sources of fund/cash in business enterprises after
understanding that different business enterprises were acquiring funds to run their business daily
Table 4: Showing sources of cash/funds used in business enterprises
Response Frequency Percentage
Only one 07 13
Between one and two 00 00
Between two and three 14 25
All the above 34 62
Total 55 100
Source: Primary Data, May 2014.
The table above 4 shows that of the 55 respondents (business managers) covered by the study,
majority revealed that were using more than three sources of fund for financing their business
enterprise as this was cited by 34(62%) of the managers covered by the study. The other
respondents totaling 14(25%) in the same category cited that were using sources of funds ranging
between two and three, then 07(13%) reported of using only one source as none of the
respondents cited of acquiring the funds from the sources in the range of between one and two.
On further findings by the study, it was established that the respondents who reported of using
different kinds of funds were able to reveal the following sources as;
The study established loan as one of the sources of funds used by business enterprises. In a loan,
the study established that the borrower initially receives or borrows an amount of money, called
the principal, from the lender, and is obligated to pay back or repay an equal amount of money to
the lender at a later time. That typically, the money is paid back in regular installments, or partial
repayments; in an annuity, or monthly as each installment is the same amount. The loan is
generally provided at a cost, referred to as interest on the debt, which provides an incentive for
the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is
enforced by contract, which can also place the borrower under additional restrictions. On this
same issue respondents said that businesses owners could also borrow some funds from their
friends in the study area.

Financing through the sale of stock in the business was also revealed among the sources of fund
during the time of study. Respondents said that business enterprise owners use equity financing.
However during an interview with the respondents selected from the study area, they also
reported that debt financing (for example issuing bonds) can be done to avoid giving up shares of
ownership of the company adding that unofficial financing known as trade financing usually
provides the major part of a company's working capital (day-to-day operational needs).

The use of trade credits from suppliers by the business owners was also reported among the
sources of fund. The study revealed that trade credits is important source of fund to small and
fast growing businesses. During an interview with the study respondents, it was revealed that
trade credit is one of the cheapest of short-term finance, in addition to being flexible source of
fund.

The study also revealed retained earnings and provisions among the sources of business
enterprises funds. Here respondents reported that part of the profits which belongs to the
ordinary shareholders are sometimes not paid to them but re-invested in the business enterprises
but no given to them in the periods they are earned. It was established that retained earnings
form the most important source of funds for business expansion as respondents regarded it as
cheaper and painless method of raising additional capital for business enterprises.

In addition, the study established provision for depreciation among the sources of finance for
business enterprises. To this, respondents claimed that the fact the business enterprises are to pay
tax on their profits, there is always time lag between time the profits are made and the time when
the tax is paid over to the government. That during this time these funds are standing on
provision for taxation account can be utilized for the expansion of the business activities if the
business continues to make reasonable and constant profits as it will have at least one year’s
taxation provision fund which can be utilized for expansion.

Still that business enterprise owners mortgage their properties for the purpose of acquiring loans
from financial institutions to finance their business operations. The study established that
mortgaging of assets owned by the business owners is an importance long fund source for
commercial undertakings.

4.2.3 Whether business enterprises Endeavour to manage debtors

The study sought of understanding whether business enterprises Endeavour to manage debtors
and this was determined as in table below;
Table 5: Showing whether business enterprises Endeavour to manage debtors
Response Frequency Percentage
Yes 49 89
No 06 11
Total 55 100
Source: Primary Data, May 2014.
According to the study findings as seen in table 5above most of the study respondents said that
business enterprises endeavour to manage debtors as it was revealed by 49(89%) of the
respondents covered by the study followed by those who did not agree with statement that
business enterprises endeavour to manage debtors with 06(11%) of the study respondents
covered. These same respondents claimed that most business enterprise owner dealing in
hardware tend to manage their business enterprises themselves ignoring the people to work in
that field with skill to debtors management as most still were tending to use their family
members in running businesses.
4.2.4 Debtors management policy of hardware business enterprises
Table 6: Showing debtors management policy of hardware business enterprises
Debtors management policy Frequency Percentage
Lenient 49 89
Stringent 06 11
Total 55 100
Source: Primary Data, May 2014.
The table above 6 shows that of the respondents covered by the study majority revealed that
debtors management policy of hardware business enterprises is lenient with 49(89%) as
compared with the least of the study respondents who revealed that debtors management policy
of hardware business enterprises is stringent with 06(11%) of the respondents covered by the
study.
The study further revealed that those respondents who said of the business enterprises debtors
management policy of hardware being stringent were the same respondents who did not agree
with statement that business enterprises endeavour to manage debtors as they revealed that
business owners tend to ignore qualified people in the field of managing debtors and used their
family member while sometimes with no education background. However the respondents, who
cited of hardware business enterprises using lenient policy in the process of debtor’s
management, still said that the owners of the business of hardware enterprises use such to get
their business resources paid. The study further established credit management policy as a set of
guidelines designed to minimize costs associated with credit, while maximizing benefits from it.
That a business credit policy can be based on 3 main controllable variables such as follows;

Credit standards. The study established that credit standards are the criteria that client should
meet if he/she is to quality for credit. That, the purpose of these standards is to enable the
business organizations select clients who have the ability and willingness to pay back. On further
establishment by the study, it was established that these standards could be set basing on the
lc5’s of credit as were revealed including;
Character- the business enterprise attempts to evaluate the traits of the applicant, which give an
indication as to the willingness to meet his/her credit obligations. This can be through bank
references, marital status, level of education, and previous dealings with the business enterprise.
Capacity as the ability of a customer to pay the credit advanced to him the business enterprise
here analyses the applicant’s financial status, bank references, and trade references, credit rating
reports. Capital. This is the general financial condition of the business enterprise as indicated by
an analysis of its financial statements with special emphasis on risk ratios debt: equity, current
ratio.

Collateral in some situations the applicants may be required to offer security before credit is
advanced. This security should be safe (no encumbrances) and easily marketable. Condition.
This refers to the prevailing economic and other conditions which may affect the customer’s
ability to pay for example; inflation, transport costs, insecurity, among others.

The second controllable variables in credit management were reported by the study as credit
terms. To this, respondents said that these are the stipulations under which the business
enterprise sells on credit to its customers. They include; cash discount and credit period. Credit
period is the length of time for which credit is extended to customers. It is generally stated in
terms of a net date for example credit terms are “net 45” that is; customers are expected to repay
their credit obligations in 45 days. On the other hand, cash discount was established as a
reduction in the amount to be paid to induce customers to repay credit obligations within
specified period of time, which is less than the normal credit period.
Respondents also said that credit terms include: the rate of cash discount, the cash discount
period and the net credit period. To this idea, respondents reported that if a customer is given
credit under the term”2/10, net30” it means if he meets his credit obligations within 10 days, he
will pay the whole amount which should be made within 30 days.

The third one was collection procedure/ collection effort: The study revealed that these are
procedures used to collect cash from debtors once credit has been extended. This should be done
in an organized manner that will accelerate cash receipts from debtors without damaging the
relationships with them. That the procedures to collect dues form slow paying of non-paying
customers include: - Reminders as should be a step by step process that involves, Sending credit
notes to inform the debtor of the accounts due, send a stronger letter to remind the customer,
send polite letter to remind him of the amount due, make personal contacts wither on phone or
make actual visits, if all the above steps fail, resort to legal action (litigation) however, that this
should be as a last resort as it may include higher costs and loss of customers goodwill.
Table 7: Showing whether firms sell on credits
Response Frequency Percentage
Yes 55 100
No 00 00
Total 55 100
Source: Primary Data, May 2014.
The table7 above established that all 55(100%) the respondents selected during the study
revealed of firms selling on credits, as none of the study respondents was able to say that firms
do not sell on credits. The study respondents also said that accounts receivables are created when
credit is offered to a firm’s customers who cannot make immediate payment. Still that at any one
time if you look at the balance sheet of a firm, you will find that a substantial amount of
recourses us tied up as debtor’s balances.

Respondents in addition said that it is therefore important to manage these debtors so that cash
collections from them can be used to improve the liquidity position of the firm. In an ideal
situation, a firm would wish to have its sales on cash basis because cash sales are totally risk
less- (i.e. no inflation effects, no exchange rate exposure, economic value in the good/ services
passes immediately at the time of sale, and others) and provide instant liquidity to the firm.
However, firms will insist on making sales on credit because of the following reasons as per the
study respondents; that credit is used as a marketing tool to expand sales or to push weak
products on the market. It is important to note that, the primary objective of any credit policy is
to increase sales.

Still, credit can be used as a weapon to manage competition. In this case, respondents said that
investment in debtors helps to attract new customers, retain old customers and to increase market
share. Most of the firm’s customers may not be able to operate without credit being extended to
them. Firms sometimes extend credit to their clients to help build long-term relationship with
them or as a reward for their loyalty. In addition, that some firms offer credit because buyers
demand for it especially where they purchase in bulk (high bargaining power) and if the practice
for firms in again industry is to give credit, new entrains in the industry will find it inevitable to
extend credit to their customers too.

4.2.5 Costs involved in debtors’ management

According to the study findings, it was found out that debtors’ management involved a lot of
costs. This is because of the respondents all cited that in the process of managing business
debtors the business owners incur a lot of costs and the information in relation to this view was
established as follows;

4.2.6 Whether there are costs involved in debtors’ management

Table 8: Showing whether there are costs in debtors’ management
Response Frequency Percentage
Yes 55 100
No 00 00
Total 55 100
Source: Primary Data, May 2014.
The table 8 above established that all 55(100%) the respondents selected during the study agreed
with the statement that there are costs in debtors’ management as none of the study respondents
was able to disagreed with the statement that there are costs in debtors’ management. The study
on further findings established the following costs as involved in the debtors’ management.

Table 9: Showing costs involved in debtors’ management

Costs in debtors in debtors management Frequency Percentage
Opportunity costs 08 15
Administration costs 25 45
Bad debt losses 11 20
Production and selling costs charges 03 5
Costs of litigation 08 15

Total 55 100
Source: Primary Data, May 2014.

The table 9 above shows that of the respondents covered by the study majority revealed
administration costs as costs involved in the debtors management as was revealed by 25(45%) of
the study respondents, this was followed by Bad debt losses as was reported by 11(20%) of the
respondents, then 08(15%) of the respondents that was reported by opportunity costs as well as
costs of litigation (going to court).

On further established by the study, it was established by the study that the above costs affect the
debtors’ management in the following ways; Opportunity costs –Funds are tied up in debtors
hence business opportunities such as expansion are foregone.

Administration costs as having a department in the organization to supervise and investigate

debtor’s accounts. Such costs were also cited to involve the amount given to the administrators
of the business firms to collect credits inform of transport, collection costs includes cost of
sending reminding letters, phone, production and selling costs charges, costs of litigation, (going
to court), bad debt losses as some accounts receivables may be un-collectable and would require
debts being written off.

4.3 Findings on factors affecting organizational performance of hardware business

enterprise
Lack of capital is another impediment to businesses in their early stages. Results of the study
indicated a significant proportion of the respondents, this as a major problem. First, these
businesses were started with limited capital. Secondly, micro businesses lack collaterals such as
cars or land titles that can be deposited to get loans from the traditional commercial banks. On
the other hand, the loans provided by microfinance institutions are small, with a short repayment
period and high interest rates.

Poor record keeping as also a cause for startup business failure. In most cases, this is not only
due to the low priority attached by new and fresh entrepreneurs, but also a lack of the basic
business management and skills. Most business people, therefore, end up losing track of their
daily transactions and cannot account for their expenses and their profits at the end of the month.

High rental charges have impeded the success of many businesses which means that some small
businesses have been pushed away from the busy areas of the town to the periphery. This has
increased costs and resulted in poor sales and negative cash flow, thus minimizing the chances
for most businesses to succeed.

Lack of effective management during their early stages is also a major cause of business failure
for small businesses. Owners tend to manage these businesses themselves as a measure of
reducing operational costs.

Table 10: Showing respondent response towards factors that affect business performance
(only 50 respondent’s responses on question on factors that affect business performance)
Factors Lack of Poor management High rental Planning High costs
capital records charges
Strongly 23 46 14 28 8 16 16 32 5 10 19 36
agree
Agree 21 42 12 24 15 30 28 54 10 20 24 48
Not sure - 9 18 17 34 14 28 4 8
Disagree 4 8 7 14 6 12 4 8 8 16 2 4
Strongly 2 4 8 16 4 8 2 4 13 26 1 2
disagree
Total 50 100 50 100 50 100 50 100 50 100 50 100
Source: primary data 2014
From table 10 shown above; 46% of the respondents strongly agreed that lack adequate of capital
affect their businesses, 42% agreed, 8% disagreed and 4% disagreed. This shows that lack of
adequate capital affects the company’s performance substantially.

As indicated in table 10 shown above; it can be observed that 28% of the respondents strongly
agreed that poor records affects the company’s performance, 24% agreed, 18% not sure , 14%
disagreed and 16%Strongly disagreed This implies that poor records affects the company’s
performance.

From table 10 shown above; 16% of the respondents strongly agreed that management affect
their businesses, 30% agreed, and 34% not sure, 12% disagreed and 8% strongly disagreed. This
implies that management affects their businesses.

As indicated in table 10 shown above; it can be observed that 32% of respondents indicated that
high rental charges affect their businesses, 54% agreed, 8% disagreed and 4% strongly disagreed.
This implies that high rental charges affect their businesses.

From table 10 shown above; 10% of the respondents strongly agreed that lack of planning affect
their businesses, 20% agreed, 28% were not sure,16% disagreed and 16% strongly agreed. This
shows that lack of effective planning affects the business performance substantially.

As indicated in table 10 shown above; it can be observed that 36% of respondents indicated that
high costs affect their businesses, 48% agreed, 8% were not sure, 4% disagreed and 2% strongly
disagreed. This implies that high costs affect their businesses.

4.4 Relationship between debtors’ management and business financial performance

The above aspect was also covered by the study and according to the research findings different
views as per respondents were revealed regarding relationship between debtors’ management
and business financial performance as follows.
Table 11: Showing whether there is a relationship between debtors’ management and business financial
performance
Relationship Percentage Frequency
Yes 54 98
No 01 02
Total 55 100
Source: Primary Data, May 2014.
Calculated Chi square (Xo2) = 51.07 Degree of freedom = 1
Tabulation Chi square (Xt2=0.05, 1) = 3.84
(Xo2 = 51.07> Xt20.05, 1 = 3.84)
From the table 11 above majority of the respondents said that there is a relationship between
debtors’ management and business financial performance and this comprised of 54(98%) of the
study respondents while only one of respondents said that there is no relationship between
debtors’ management and business financial performance as this was cited by 01(02%).

The study established that the respondents who revealed that there is a relationship claimed that
proper debtors’ management improves on the business financial performance and that in most
situations the relationship depends on the management of debtors, as can either be negative or
positive relation. The respondents said that when debtors’ is properly managed, the relationship
between the two variables of debtors’ management and business financial performance is
positive and that when it is poorly managed the relationship between debtors’ management and
business financial performance becomes negative.

On testing the results from the findings, chi square calculated (Xo2) was 51.07 while chi square
tabulated (Xc2) was 3.84 at 1 level degree of freedom from 5% level of significance. Since chi
square observed was greater than chi-square tabulated, it made the findings statistically
significant. Therefore, basing on the findings from most of the respondents, this lead to the
conclusion that there is a relationship between debtors’ management and business financial
performance.
 CHAPTER FIVE
DISCUSSION OF THE STUDY FINDINGS, CONCLUSIONS, RECOMMENDATIONS
AND SUGGESTIONS FOR FURTHER STUDIES
5.0 Introduction
The proceeding section of this study report, dealt at length with addressing the objectives of the
study namely; to establish the debt management policy of hardware business enterprises, to
establish why firms sell on credit, to identify the costs involved in debtors’ management and to
examine the relationship between debtors’ management and business financial performance. This
chapter also summarizes the main findings of the study by making conclusions and
recommendations and suggestions for further studies.

5.1 Discussion of the study findings

The study findings showed that business enterprises owners acquire cash for running daily
activities of their businesses as majority of the study respondents were in the agreement with the
statement that business enterprises acquire cash for running daily activities.
5.1.1 Findings on methods of debtor management employed by hardware business
enterprises
Further more, the study findings established that business enterprises endeavour to manage
debtors as it was revealed by 49(89%) of the respondents covered by the study followed by those
who did not agree with statement that business enterprises endeavour to manage debtors with
06(11%) of the study respondents covered. These same respondents claimed that most business
enterprise owner dealing in hardware tend to manage their business enterprises themselves
ignoring the people to work in that field with skill to debtors management as most still were
tending to use their family members in running businesses.

The study sill revealed that debtors management policy of hardware being stringent as well as
lenient policies as respondents agree with statement that business enterprises endeavour to
manage debtors. However the respondents who cited of hardware business enterprises using
lenient policy in the process of debtor management still said that the owners of the business of
hardware enterprises use such to get their business resources paid.
The study further established Credit Management Policy is a set of guidelines designed to
minimize costs associated with credit, while maximizing benefits from it. That a business credit
policy can be based on 3 main controllable variables such as follows;

Credit standards. The study established that credit standards are the criteria that client should
meet if he/she is to quality for credit. That, the purpose of these standards is to enable the
business organizations select clients who have the ability and willingness to pay back. On further
establishment by the study, it was established that these standards could be set basing on the
lc5’s of credit as were revealed including character- the business enterprise attempts to evaluate
the traits of the applicant, which give an indication as to the willingness to meet his/her credit
obligations. This can be through bank references, marital status, level of education, and previous
dealings with the business enterprise, capacity as the ability of a customer to pay the credit
advanced to him the business enterprise here analyses the applicant’s financial status, bank
references, and trade references, credit rating reports. Capital-this is the general financial
condition of the business enterprise as indicated by an analysis of its financial statements with
special emphasis on risk ratios debt: equity, current ratio, collateral-in some situations the
applicants may be required to offer security before credit is advanced. This security should be
safe (no encumbrances) and easily marketable finally condition as refers to the prevailing
economic and other conditions which may effect the customers ability to pay for example;
inflation, transport costs, insecurity, among others

The second controllable variables in credit management were reported by the study as credit
terms. To this, respondents said that these are the stipulations under which the business
enterprise sells on credit to its customers. They include; cash discount and credit period. Credit
period is the length of time for which credit is extended to customers. It is generally stated in
terms of a net date for example credit terms are “net 45” that is; customers are expected to repay
their credit obligations in 45 days. On the other hand, cash discount was established as a
reduction in the amount to be paid to induce customers to repay credit obligations within
specified period of time, which is less than the normal credit period.

The study also showed that firms would insist on making sales on credit because of the following
reasons as per the study respondents; that credit is used as a marketing tool to expand sales or to
push weak products on the market. It is important to note that, the primary objective of any credit
policy is to increase sales.

Still, credit can be used as a weapon to manage competition. In this case, respondents said that
investment in debtors helps to attract new customers, retain old customers and to increase market
share. Most of the firm’s customers may not be able to operate without credit being extended to
them. Firms sometimes extend credit to their clients to help build long-term relationship with
them or as a reward for their loyalty.

In addition, that some firms offer credit because buyers demand for it especially where they
purchase in bulk (high bargaining power) and if the practice for firms in again industry is to give
credit, new entrains in the industry will find it inevitable to extend credit to their customers too.

According to the study findings, it was found out that debtors’ management involved a lot of
costs. This is because of the respondents all cited that in the process of managing business
debtors the business owners incur a lot of costs and the information in relation to this view
established costs like administration costs as costs involved in the debtors management, Bad debt
losses, opportunity costs as well as costs of litigation (going to court). On further established by
the study, it was established by the study that the above costs affect the debtors’ management in
the following ways; Opportunity costs –Funds are tied up in debtors hence business opportunities
such as expansion are foregone.

5.1.2 Findings on factors affecting organizational performance of small scale business

enterprise

Lack of capital is another impediment to businesses in their early stages. Results of the study
indicated a significant proportion of the respondents, this as a major problem. First, these
businesses were started with limited capital. Secondly, micro businesses lack collaterals such as
cars or land titles that can be deposited to get loans from the traditional commercial banks. On
the other hand, the loans provided by microfinance institutions are small, with a short repayment
period and high interest rates.

Poor record keeping as also a cause for startup business failure. In most cases, this is not only
due to the low priority attached by new and fresh entrepreneurs, but also a lack of the basic
business management and skills. Most business people, therefore, end up losing track of their
daily transactions and cannot account for their expenses and their profits at the end of the month.

High rental charges have impeded the success of many businesses which means that some small
businesses have been pushed away from the busy areas of the town to the periphery. This has
increased costs and resulted in poor sales and negative cash flow, thus minimizing the chances
for most businesses to succeed.

Lack of effective management during their early stages is also a major cause of business failure
for small businesses. Owners tend to manage these businesses themselves as a measure of
reducing operational costs.

5.1.3 The relationship between debtors’ management and business financial performance
Still that, there is a relationship between debtors’ management and business financial
performance and this comprised of 54(98%) of the study respondents while only one of
respondents said that there is no relationship between debtors’ management and business
financial performance as this was cited by 01(02%). The study established that the respondents
who revealed that there is a relationship claimed that proper debtors’ management improves on
the business financial performance and that in most situations the relationship depends on the
management of debtors, as can either be negative or positive relation. The respondents said that
when debtors’ is properly managed, the relationship between the two variables of debtors’
management and business financial performance is positive and that when it is poorly managed
the relationship between debtors’ management and business financial performance becomes
negative. This was evidenced by the results from the findings, chi square calculated (X o2) that
was 51.07 while chi square tabulated (X c2) was 3.84 at 1 level degree of freedom from 5% level
of significance. Since chi square observed was greater than chi-square tabulated, it made the
findings statistically significant this lead to the conclusion that there is a relationship between
debtors’ management and business financial performance.

5.2 Conclusions of the study

According to the study objective one, the researcher wanted to establish the debt management
policy of hardware business enterprises. The study concluded that hardware business enterprises
use both lenient and stringent policies in the process of managing their debtors. The above
findings can be related with Pandey (2004), that debt management refers to ensuring that the
collection of book debts is done. The formulation of debt management policy seeks to achieve a
balance between extending sales and the likelihood of these sales being profitable and
collectable. The debt management policy of firm depends on: The volume of credit sales,
collection period of the debts, and discount policy. Also Saleemi (1998) notes that the overall
debt management policy of the firm should be that the administrative costs incurred in debt
collection should not exceed the benefits received from incurring those costs. The firms’
profitability has direct relationship with debt management policy. Efficient debt management in
the firm increases profitability and they are able to operate effectively.

However, Julius Kakuru (1998) explains that the debt management should be able to minimize
costs associated with debt while maximizing the benefits from it. He further put forward debt
management policies that can be adopted by management. Adding that lenient debt management
policy gives credit to customers on liberal terms and standards, long credit period and the credit
is given with high discount rates even to customers whose credit worthiness is not fully known
but Stringent debt management policy gives credit to customers whose credit worthiness is fully
known, financially strong and the credit period is shorter and discount is low.

The above can be compared with Barry Elliot Jimmie (2006) who said that the sources of capital
funding among business are banks, Non government Organizations and credit lending schemes
for example micro finances. he further goes ahead to say that until the recent 1920’s as the
present day Germany’s External capital finance in UK was mainly in the hands of bankers and
trade creditors. As the main users of published financial statements, they focused on the
company’s liability to pay trade creditors and interest on loan to meet the scheduled date of loan
repayment and that were interested in short term liquidity of the business. Under study objective
two, which sought to establish why firms sell on credit. It is concluded that firms commonly sell
on credit due to many reasons including; that credit is used as a marketing tool to expand sales or
to push weak products on the market as it to note that, the primary objective of any credit policy
is to increase sales, used as a weapon to manage competition, build long-term relationship with
them or as a reward for their loyalty, buyers demand for it especially where they purchase in bulk
(high bargaining power) and if the practice for firms in again industry is to give credit, new
entrains in the industry will find it inevitable to extend credit to their customers too.
This was compared with Pandey (2004) who contends that firms in practice feel the necessity of
granting credit for several reasons like high competition where by the higher the degree of
competition the more the credit granted by a firm. He also that notes selling on credit can be
industrial practice where it’s taken as a norm within the industry to maintain the sales. This is so
common with the hardware firms in Uganda. Products like iron sheets, steel bars, cement nails
among others are sold on credit to small outlets and money collected at later dates. Pandey
(2004) agrees with Julius Kakuru (1998) and notes that selling on credit is a marketing tool that
helps firms expand on their sales. He further argues that in declining market selling on credit
may be used to maintain the market share and also build customer good will.

Regarding to the costs involved in debtors’ management, the study concludes that, Opportunity
costs, Administration costs, Bad debt losses, Production and selling costs charges, Costs of
litigation are the most costs involves in debt management of most business firms. Julius Kakuru
(1998) that Collection costs are incurred at the time of collection of receivables and they are
inform of sending reminding letters, telephone charges among others. Still that production and
selling costs increase with expansion in sales, which arises from the investment in receivables.
When a firm’s credit policy is loosened so as to expand sales then incremental sales revenue and
production and selling costs are increased. The difference between the incremental sales revenue
and production and selling costs is the incremental contribution of the change in the credit policy
(Julius Kakuru, 1998).

Lastly, the study concludes that, there is a relationship between debtors’ management and
business financial performance and that the relationship depends on the management of debtors,
as can either be negative or positive relationship. This was related with Pandey (2004), the debt
policy of a firm affects its working capital by influencing the level of debtors. He argued that a
liberal credit policy, without rating the credit worthiness of customers would be detrimental to
the firm’s liquidity.

5.3 Recommendations of the study

The study recommends that business Enterprises especially in developing Countries like Uganda
should practice book keeping and auditing of debtors and this would minimize on the costs
involved in the cash management. This can be done by developing the skills of double entries in
their business as well as employing of internal auditors in their day-to-day businesses operations.

The study further recommends training of employees in business as important motivational tool
of motivating employees towards better performance in debtors’ management of such businesses.
In fact through training, employees will get motivated and a full grasp of all aspects of the
business organization, the nature of their work and the balance between their needs and business
needs hence better performance in the process of managing debtors.

Furthermore, removing the potential of a “Possibility Gap” among some employees’ by making
sure that the employee team members know exactly what is expected of them and is held
accountable to employee’s performance scorecard. The Possibility Gap in this case is the gap
between “what is” and “what should be” in terms of tasks and activities and the results that
should be coming as a result of the right employee team member doing the right things was also
suggested by the study respondents in the process of debtors’ management.

In addition, the study recommends business enterprise owners to extend credits to their
customers after they have been evaluated to actually know whether they are willing to pay the
amounts for the goods and services extended to them.

5.4 Suggestions for further studies

 The impact of audit function on the performance of Small and Medium Enterprises
 The relationship between book keeping and business performance Business in Uganda
 The impact of motivation on the performance of employees in business in debtors’
management
 References
1. Bagonzonzya H.K. (2003) Financing of Micro and Small Enterprises in Uganda. Paper
presented at ACCA Seminar in Uganda
2. Barry Elliot and Jimie Elliot (2001) Financial Accounting and Reporting, Sixth Edition,
Pearson Education Limited 1993
3. Biryabarema, E. (1998) Small Scale Business and Commercial Banks in Uganda, Kampala,
Makerere University press.
4. Julius Kakuru, (1998) Basic Financial management. MUBS
5. Richard G. Lipsey et al (2001) Macro Economics (10th edition), Addison Wesley Longman
publishers
6. Daniel Goleman, (2003) Dictionary of Business and management. Bloomsbury publishing
Plc.
7. Komakech et al (2002) Entrepreneurship Education for schools. NCDC
8. Kazooba (2006) Causes of small Business failure in Uganda [on line] URL.
http://web.africa.ufl.edu/asq/v8/v8i4a3.htm
9. Lewis et al (1995) Advanced Business (2nd ed) GNVQ ltd
10. Longnecker (2006) Small Business Management, International Edition, Mellisa Accuna,
11. O’du’boa et al (2002) Entrepreneurship for schools. NCDC
12. Omonuk (1999) Fundamentals of Accounting for Business. Entebbe publishing Corporation
13. Pandey, (1999), Financial Management, Eighth Edition, VIKAS Publishing House pvt
Limited
14. Pandey (2004) Financial Management (9th ed). New Delhi. Vikas Publishing house.
15. PVT ltd
16. Saleemi NA (2003) Business Finance Simplified. NA saleemi publishers
Nairobi Kenya administration.

APPENDICES
 APPENDIX I: RESPONDENTS’ QUESTIONNAIRE

Dear Respondent,
I am Ninsiima Shallon student of Bishop Stuart University offering Bachelor’s Degree in
Business Administration and as part of the requirements for the completion of the Degree
Program. The information provided will only be used for academic purposes. Hence you are
requested to answer the questions as freely as possible.
SECTION A: BACKGROUND INFORMATION
1. Gender:
Male Female

2. Age Bracket of the respondents

(a) below 20 years (b)20-30 years (c) 30-40 years
(d)40-50 year (e) above 50 years

3. What is your highest academic qualification

(a) Never been to school (b) Primary level (c) Secondary level
(d) Tertiary level
4. Marital status of the respondents
(a) Single (b) Married (c) Widowed
(d) Divorced /separated
5. Religion of the respondents
(a) Protestant (b) Catholic (c) Moslems

SECTION A: METHODS OF DEBTOR MANAGEMENT EMPLOYED BY HARD

WARE BUSINESS ENTERPRISES

6. Does business enterprises acquire cash for running daily activities

(a) Yes (b) No (c) Not Sure

7. What the sources of fund/cash in business enterprises

(a) Loan (b) Equity financing. (c) Use of trade credits
 (d) Retained earnings
8. Does your business enterprises Endeavour to manage debtors
a) Yes (b) No

9. If yes give reason for …………………………………………………………………………….

10. Does your company use Debtors management policy through?
(a) Lenient (b) Stringent

Does your business organization sell on credits?

a) Yes (b) No
If yes give reason for your answer
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Debtors’ management involved a lot of costs in your company
a) Yes (b) No
If yes give reason for your answer
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Methods of debtor management employed by Hard Ware business enterprises in Uganda
Statement SD D N A SA
1) There’s debtor management policy in place
2) Debtors are always reminded of debts
3) Character of debtor is always evaluated before extending
credit
4) Capacity of debtor is always evaluated before extending credit
5) All credit terms are evaluated before extending credit
6) There are credit Limits that considered before extending
credit
SECTION C; Factors affecting business performance of Hard Ware business enterprises in
Uganda
Statement SD D N A SA
7). Lack of capital affect your businesses
8) Poor record has an affect on your business
9) Effective management attribute to business failure
 10) High rental charges have impeded success of your businesses
11) Planning has effect on businesses
12 High costs have become one of the problems faced by your
businesses.

SECTION D; Relationship between debtor management and Business Financial

performance
Statement SD D N A SA
13) Organizational performance will be improved if all credit
terms are evaluated
14)There is relationship between debtor management and
organizational performance
15) Effective management improves organizational performance
16)Evaluation of credit Limits leads to better organizational
performance
17) Evaluation of debtor capacity leads to better organizational
performance

18) List other ways in debtor management that affect Business financial performance.

………………………………………………………………………………………………………
…………………………………………………………………………………
Thank you for your participation