Declaration

I declare that the work in this dissertation titled “Assessment of Credit Sales Management
Practices on Small Scale Businesses in Hargeisa Districts” has been carried out by me in the
Department of Accounting and Finance. The information derived from the literature has been
duly acknowledged in the text and a list of references provided. No part of this essay was
previously presented for another degree or diploma at this or any other institution.

Abdifatah Abdek Aden Hamze Mohamed Jama

ID Number 10462 ID Number 9954

Signature________________ Signature ________________

Date submitted: August, 2021

I|Page
 Approval
This is to certify that the thesis entitled the Assessment of Credit Sale Management Practices
on Small Scale Businesses in Hargeisa Districts by Mr. Hamze Mohamed Jama and Mr.
Abdifatah Abdek Aden as partial fulfillment of the requirements for the award of the
Bachelor of Arts Degree in Accounting and Finance has been conducted under my
supervision.

Advisor Mr. Yimmam Damtie Ali Signature --------------------------- Date --------------

II | P a g e
 List of Tables
Table 1 ..................................................................................................................................... 19
Table 2 ..................................................................................................................................... 21
Table 3 ..................................................................................................................................... 26
Table 4 ..................................................................................................................................... 32

List of Figures
Figure 1 .................................................................................................................................... 20
Figure 2 .................................................................................................................................... 20
Figure 3 .................................................................................................................................... 21
Figure 4 .................................................................................................................................... 22
Figure 5 .................................................................................................................................... 23
Figure 6 .................................................................................................................................... 23
Figure 7 .................................................................................................................................... 24
Figure 8 .................................................................................................................................... 24
Figure 9 .................................................................................................................................... 25
Figure 10 .................................................................................................................................. 26
Figure 11 .................................................................................................................................. 27
Figure 12 .................................................................................................................................. 28
Figure 13.................................................................................................................................. 28
Figure 14 .................................................................................................................................. 29
Figure 15 .................................................................................................................................. 29
Figure 16 .................................................................................................................................. 30
Figure 17 .................................................................................................................................. 31
Figure 18 .................................................................................................................................. 31
Figure 19 .................................................................................................................................. 32
Figure 20.................................................................................................................................. 33
Figure 21 .................................................................................................................................. 33
Figure 22 .................................................................................................................................. 34

III | P a g e
 DEDICATION

First and for most we thank to Allah for allowing and giving us the precious time to do all our
activities towards this work. After that we dedicate this piece of work to our beloved parents
who have been our source of inspiration and gave us strength when we thought of giving up,
who continually provide their moral, spiritual, emotional and financial support.

IV | P a g e
 ACKNOWLEDGEMENT
First of all, all Praise is due to ALLAH who has given the researchers a chance and capability
to complete this thesis. The preparation of this research paper would not have been possible
without the input from a large number of individuals that we cannot all list by name. We
would also like to thank all my instructors who share their knowledge and experience to the
researchers. Researchers would especially like to thank Admas University staff.

Finally; we would like to express my deepest gratitude to our teacher and academic advisor
Mr. Yimmam Damtie Ali for all his valuable advice, constructive guidance, and solid
support throughout our bachelor’s degree program. There are no thanking words that can
express our appreciation to him.

We further, extend our sincerest gratitude to our lovely siblings and parents who relentlessly
stood by researchers. Our special thanks also go to our lecturers, classmates, respondents and
any other person who provided input and positive criticism hence the accomplishment of this
research project

V|Page
Table of Contents
Declaration ..................................................................................................................................I
Approval .................................................................................................................................... II
DEDICATION ......................................................................................................................... IV
ACKNOWLEDGEMENT ........................................................................................................ V
Abstract ....................................................................................................................................IX
CHAPTER ONE ........................................................................................................................ 1
INTRODUCTION ...................................................................................................................... 1
1.1 Background of the Study ........................................................................... 1
1.2 Statement of the Problem .......................................................................... 3
1.3 Research Objectives ................................................................................... 3
1.3.1 General objectives ................................................................................................... 3
1.3.2 Specific of objectives ............................................................................................... 3
1.4 Research Questions .................................................................................... 4
1.5 Scope of the Study ...................................................................................... 4
1.5.1 Geographical scope ................................................................................................. 4
1.5.2 Content scope ........................................................................................................... 4
1.6 Significance of the Study ........................................................................ 4
1.7 Limitations .................................................................................................. 4
1.8 Definition of Terms .............................................................................. 5
CHAPTER TWO........................................................................................................................ 6
LITERATURE REVIEW ........................................................................................................... 6
2.0 Introduction ................................................................................................ 6
2.1 Credit Sale Management ........................................................................... 6
2.1.1 Reasons for Granting Credit .................................................................................. 7
2.1.2 Effective and Efficient Credit Policy ..................................................................... 8
2.1.3 Systems Required in Credit Management .......................................................... 10
2.1.4 Managing the Credit Policy .................................................................................. 10
2.1.5 Importance of Sales Credit Management Practices ........................................... 12
2.2 The Role of Credit Policies Practices ..................................................... 13
2.3 A Review of Related Empirical Literature ............................................ 14
CHAPTER THREE .................................................................................................................. 15

VI | P a g e
RESEARCH METHODOLOGY ............................................................................................. 15
3.0 Introduction .............................................................................................. 15
3.1 Research Design ....................................................................................... 15
3.2 Study Population ...................................................................................... 15
3.3 Sample Size ............................................................................................... 15
3.4 Sample procedure .................................................................................... 16
3.5 Research Instruments .............................................................................. 16
3.5.1 Questionnaire ......................................................................................................... 16
3.6 Reliability and Validity of the instruments ........................................... 17
3.6.1 Validity ................................................................................................................... 17
3.6.2 Reliability ............................................................................................................... 17
3.7 Procedure of data collection.................................................................... 17
3.8 Data Processing, Analysis and Presentation ......................................... 17
3.9 Ethical considerations.............................................................................. 18
CHAPTER FOUR .................................................................................................................... 19
DATA PRESENTATION, ANALYSIS AND INTERPRETATION ...................................... 19
4.0 Introduction .............................................................................................. 19
4.1 Background Characteristics of the Respondents .................................. 19
4.1.1 Job Title .................................................................................................................. 19
4.1.2 Gender .................................................................................................................... 19
4.1.3 Martial Status ........................................................................................................ 20
4.1.4: Age of the Respondents ....................................................................................... 20
4.1.5: Academic Qualifications ...................................................................................... 21
4.1.6: Business Type ....................................................................................................... 21
4.1.7 Existence of the Business ...................................................................................... 22
4.1.8 Practice of Credit Sales Management ................................................................. 23
4.1.9: Clients.................................................................................................................... 23
4.1.10: Employees .......................................................................................................... 24
4.2: Extent of Credit Sales Provided to Customers and collections ......... 25
4.2.1: Extent of Credit Sales .......................................................................................... 25
4.2.2 Economic Opportunities ....................................................................................... 25
4.2.3 Collection of Account Receivables ....................................................................... 26

VII | P a g e
 4.2.4 Contacting the Customers .................................................................................... 27
4.2.5 Credit Limit ........................................................................................................... 27
4.3 Credit Policies, Procedures and Control ............................................... 28
4.3.1 Credit Department ................................................................................................ 28
4.3.2 Authorization of Credit ........................................................................................ 28
4.3.3 Referring to the Customer Accounts ................................................................... 29
4.3.4 Accounting Computerized System ....................................................................... 29
4.3.5 Monitoring the Accounts ...................................................................................... 30
4.3.6 Opinion of Credit Management ........................................................................... 31
4.3.7 Lack of Credit Policy ............................................................................................ 32
4.3.8 Reviewing Customer Credit Limit....................................................................... 32
4.4 The Effect of Credit Policy on Default Control .................................... 33
4.4.1 Credit Default ........................................................................................................ 33
4.4.2: Solving Credit Default ......................................................................................... 33
4.4.3: Amount of Credit Become Default ..................................................................... 34
4.4.4 Effect of Credit Default......................................................................................... 34
CHAPTER FIVE ...................................................................................................................... 35
SUMMARY, CONCLUSION AND RECOMMENDATIONS .............................................. 35
5.1 Introduction .............................................................................................. 35
5.2 Summary and Findings ........................................................................... 35
5.3 Conclusion ................................................................................................ 36
5.4 Recommendation...................................................................................... 36
REFERENCES ......................................................................................................................... 37
Appendix I ................................................................................................................................ 38
QUESTIONNAIRE........................................................................................ 38

VIII | P a g e
 Abstract
Credit management is one of the most important activities in any business cannot be
overlooked by any economic enterprise engaged in credit irrespective of its business nature.
Sound credit management is a prerequisite for a company’s stability and continuing
profitability, while deteriorating credit quality is the most frequent cause of poor credit
management and condition. As with any company, the biggest risk in companies is lending
money and not getting it back. The study sought to determine the Assessment of credit sales
management practices on small business in Hargaysa, Somaliland.

The study adopted a descriptive design. The population of study consisted of 100 small
businesses in Hargeisa Somaliland, Which are members of 26 June district, where the
sampling size of the study was 80 respondents which calculated by using Slovene’s formula.
This study used simple random sampling to carry out the research. Data were processed,
analyzed and presented quantitative approach. This include, use of figures and tables to insure
clear and easy presentation of research findings computers program SPSS was used in the
analysis of data collected

The study found that credit policy, extent of credit provided to the customer and credit default
had effect on credit sales management in the businesses in Hargeisa Somaliland. The study
assessed that there was strong relationship between credit management and businesses credit
policy, extent provided to customers and credit default. The study assessed that credit policy;
extent provided to customers and credit default significantly influence credit management in
the businesses in Hargeisa Somaliland. Credit policy was found to have a higher effect on
credit management and that a stringent policy is more effective in debt recovery than a lenient
policy. The study recommends that businesses should enhance their collection policy by
adopting a more stringent policy to a lenient policy for effective credit recovery.

IX | P a g e
 CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The practice of offering consumer credit began during the 18th century. Western Union started
the first official credit system of the modern age in 1914. Many other large companies followed
in Western Union’s path. World War II created the need for an established credit system.
Businesses began to grown after World War II so there was a great need for more credit in the
economy. The establishment of the credit system began to strengthen (Horne and Wachowicz,
1998).

Consumer credit use created the need for a universal system that allowed lenders to share credit
information about their customers in order to make good credit decisions. The first credit
agencies consisted of non-profit groups owned by participating merchants. By the 1970s, there
were over 2,000 credit reporting agencies around United States. During that same time, large
companies that offered credit created their own systems to maintain credit records, which limited
credit decision agencies around United States. The record keeping became very time consuming
so these large companies moved to consolidating these agencies on a national and regional basis.
By 1998, according to Myers and Brealey (2003) there were more than 500 credit bureaus in the
United States.

Credit is one of the many factors that can be used by a firm to influence demand for its products.
According to Horne and Wachowicz (1998), firms can only benefit from credit if the
profitability generated from increased sales exceeds the added costs of receivables. Myers and
Brealey (2003) define credit as a process whereby possession of goods or services is allowed
without spot payment upon a contractual agreement for later payment.

Timely identification of potential credit default is important as high default rates lead to
decreased cash flows lower liquidity levels and financial distress in contrast lowers credit
exposure means an optimal debtors‟ level with reduced chances of bad debts and therefore
financial health. According to Scheufler (2002), in today’s business environment risk
management and improvement of cash flows are very challenging with the rise in bankruptcy

1|Page
rates, the probability of incurring losses has risen Economic pressures and business practices are
forcing organizations to slow payments while on the other hand resources for credit management
are reduced despite the higher expectations.

Therefore, it is a necessity for credit professionals to search for opportunities to implement

proven best practices by upgrading your practices five common pitfalls can be avoided.
Scheufler (2002) summarizes these pitfalls as failure to recognize potential frauds,
underestimation of the contribution of current customers to bad debts, getting caught off guard
by bankruptcies, failure to take full advantage of technology, and spending too much time and
resources on credit evaluations that are not related to reduction of credit defaults. Credit
management is one of the most important activities in any company and cannot be overlooked by
any economic enterprise engaged in credit irrespective of its business nature. It is the process to
ensure that customers will pay for the products delivered or the services rendered Myers and
Brealey (2003) describe credit management as methods and strategies adopted by a firm to
ensure that they maintain an optimal level of credit and its effective management. It is an aspect
of financial management involving credit analysis, credit rating, credit classification and credit
reporting. Nelson (2002) views credit management as simply the means by which an entity
manages its credit sales. It is a prerequisite for any entity dealing with credit transactions since it
is impossible to have a zero credit or default risk.

The objectives of credit management can be stated as safe guarding the companies‟ investments
in debtors and optimizing operational cash flows. Policies and procedures must be applied for
granting credit to customers, collecting payment and limiting the risk of non-payments.

While the credit sales is crucial to boost sales, providing sales on credit emerged in Somaliland
businesses in the last twenty years. The financial institutions in Somaliland are the key players
that provide loan compared to businesses but this doesn’t mean that businesses only offer cash
sales.

2|Page
1.2 Statement of the Problem
Credit management is good for having transparent and effective way of utilizing financial
resources. As with any small business scale, the biggest risk in these businesses is to give sales
on credit and not receive payments on due date, which may result for those receivables to be
expressed as bad debt expanses.

Effective management of accounts receivables involves designing and documenting a credit

policy. Many entities face liquidity and inadequate working capital problems due to lax credit
standards and inappropriate credit policies. According to Pike and Neale (1999), a sound credit
policy is the blueprint for how the company communicates with and treats its most valuable
asset, the customers. Scheufler (2002) proposes that a credit policy creates a common set of
goals for the organization and recognizes the credit and collection department as an important
contributor to the organization’s strategies.

This study was conducted to assess the credit sales management practices in small scale
businesses in 26 June district and the effect of those practices on their business success.
Therefore the research underlines problems with regard to credit sales management on their
business success, likewise if there is no proper credit sales management on their business it may
result loss on credit sale.

1.3 Research Objectives

1.3.1 General objectives
The main purpose behind this research study is to find out how businesses are able to manage
their credit and to assess the credit management on financial performance practices in 26 June
District of Hargeisa, Somaliland.
1.3.2 Specific of objectives
 To examine the extent of credit provided to customers.
 To identify the credit policies used in small businesses.
 To assess how the credit policies enable businesses to control loss of credit sales.

3|Page
1.4 Research Questions
1. What are the extent of credit provided to customer?
2. What are the credit policies used in small businesses?
3. How the credit policies enable businesses to control loss of credit sales?

1.5 Scope of the Study

1.5.1 Geographical scope
The study focused on the assessment of credit sale management practices on small business
scales in Hargeisa districts, specially the district of 26 June because the district of 26 June is
where most of the small businesses in Hargeisa Somaliland are located.

1.5.2 Content scope

This study was confined on the assessment of credit sale management practices on small
business scales Hargeisa, Somaliland.

1.6 Significance of the Study

The study will immense benefit to the government, hence it provides guideline to help
businesses to control credit sales.
Students will get a benefit from the study, when they learn a business course, they use as a
resource for this study. Other beneficiaries also may be those who are writing their thesis or
dissertations and willing to investigate or examine the assessment of credit sales management
practices equally future researches on credit management will find this study interesting in their
research.

1.7 Limitations
The Limitations of the study are that the researchers didn’t able to get secondary data from the
businesses which related the policies that the businesses follow for credit and also the
researchers planned to develop an interview but for lack of expertise of the respondents they
didn’t get.

4|Page
1.8 Definition of Terms
 Credit: the ability of a customer to obtain goods or services before payment, based on
the trust that payment will be made in the future
 Credit Management: is the process of granting credit, the terms it's granted on and
recovering this credit when it's due. This is the function within a company to control
credit policies that will improve revenues and reduce financial risks.
 Credit Policy: is a set of guidelines that sets credit and payment terms for customers
and establishes a clear course of action for late payments.
 Credit Default: is the failure to meet the obligations of a loan, either required by a law
or agreed upon by the parties involved (typically the debtor and creditor).

5|Page
 CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter summarizes the information from the available literature in the same field of study.
It will review credit sale management practices and theories of credit sale management, as well
as empirical studies on credit sale management practices in Somaliland and in other countries.

2.1 Credit Sale Management

Credit management is one of the most intimate, sensitive and critical functions in any business.
Because it is repetitive and most effective when following clearly defined methodologies, it is
also probably one of the most suitable areas for computerization. Credit control disciplines have
been transformed in recent years by the advent of credit management software, online factoring
and full business process outsourcing, yet many finance managers are still reluctant to let credit
management out of their direct control sift, The Credit Management function incorporates all of
a company’s activities aimed at ensuring that customers pay their invoices within the defined
payment terms and conditions. Effective Credit Management serves to prevent late payment or
non-payment. Getting it right reinforces the company’s financial or liquidity position, making it
a critical component in any business. A key requirement for effective revenue and receivables
management is the ability to intelligently and efficiently manage customer credit lines or credit
limits. In order to minimize exposure to bad debt, over reserving, and bankruptcies, companies
must have greater insight into customer financial strength, credit score history and changing
payment patterns. Likewise, the ability to penetrate new markets and customers hinges on the
ability of a company to quickly make well informed credit decisions and set appropriate lines of
credit assignment point. Having stated earlier that firms grant credit to their credit worthy
customers, invariably we have accepted the existence of debtors. In other words, granting of
credit leads to creation of trade debts in business which can be further classified into good debts,
doubtful and bad debts.

Management of debtors is crucial in the management of working capital because poor

management of trade debt can lead to the provision of large sum of funds for bad and doubtful
debts. According to Pandey (2004) bad debt losses arise when the firm is unable to collect its
accounts receivable. The size of bad debt losses depends on the quality of accounts accepted by

6|Page
the firm. In the words of Uchegbu (2001), it is wise to discourage bad debts and efforts should be
made to encourage discount more importantly cash discount. This is contrary under competitive
business environment were survival depends on the volume of turnover (sales) which in turn
leads to trade debt accumulation. Here debtors cannot be completely avoided it is therefore the
work of the management to initiate policies concerning credit sales so that they will survive in
the business environment they find themselves. In the words of Donald and Penne (1987: 110),
debtors or accounts receivable in a firm are claims held against others in the operating circle.
Trade debtors are further classified into trade debtors and non-trade debtors. The amount which
is owed by customers for goods and services sold in the course of carrying on a business is
termed trade debtors while on the other hand any amount owed by customers arising from a
variety of transitions that are oral or written promises to pay other than goods at a later date is
called non-trade debtors. Studies have shown that in the period of boom (economic boom)
customers tend to make cash purchases, pay their debts on time and minimize the incidence of
bad debts. On the other hand, the period of economic recession is another situation. The
uncertainty, which befalls the repayment of such debts, has made the transactions to be based on
customer’s integrity, trust worthiness and his or her ability to satisfy other conditions placed by
the selling organization.

2.1.1 Reasons for Granting Credit

Companies feel the necessity of granting credit for several reasons. These may include
Competition, Generally the higher the degree of competition, the more the credit granted by a
firm Pandey (2004; company's bargaining power, If a company has a higher bargaining power
vies-a-vies its buyers, it may grant no or less credit; marketing tool, Credit is used as a marketing
tool, particularly when a new product is launched or which a company wants to push its weak
product; buyers requirements, In a number of business sectors buyers/dealers are "not able to
operate Without extending credit, this is particularly so in the case of industrial products.;
Buyer’s status, large buyers demand easy credit terms because of buck purchases and higher
Bargaining power. Some companies follow a policy of not giving much credit to small retailers
since it is quite difficult collect dues from them; Relationship with dealers, According to Pandey
(2004) companies sometimes extends credit to dealers to build long-term relationship with them

7|Page
or to reward them for their loyalty. Efficient credit sales management is necessary for achieving
liquidity and profitability of a company (Reddy and Kameswarri, 2004).

2.1.2 Effective and Efficient Credit Policy

According to Pandey (1993), he opined that a firm's investments in receivables are effected by
some external factors such as the general economic conditions: - Industry norms, competitive
activities, political regulations and Technological change. But for effective management of trade
debt, firms should lay down guidelines and procedures for granting credit to individual’s
customers and collecting the individual accounts. Management naturally wants to make efficient
use of the available capital in the business and is also interested in rapid turnover of accounts.
Given the circumstance, a firm should formulate a policy suitable for the firm and the
commercial environment upon which credit sales will be based. There are three major credit
policy variables (factors) credit standards, credit term, and collection period/policy (Rama
Moorthy, 1976).

According to Pandey (1993), credit standards are the criteria, which a business’s follows in
selecting customers for the purpose of credit extension. He further reiterated that a firm may
have light credit standards, that is, it may sell mostly on cash basis as may extend credit only to
the most reliable and financially strong customers. The implication of the above policy are
many, for instance, it will result to less bad debt losses and cost of credit administration. But
such a firm adopting the policy may not be able to expend sales. That is, the profit sacrificed on
lost sales may be more than the cost saved by the firm on the contrary, if credit standards are
loose, the firm may have large sales volume. But the firm will have to carry large receivables
(debtors). The cost of administering credit and bad debts losses will also increase, thus, the
choice of optimum credit standards involves a trade-off between incremental return and
incremental cost. Weston and Brigham (1986), they enumerated the different types of cost
associated with credit sales. Such as: (i) cost of capital tied up in receivables (debtors), (ii) bad
debts, (iii) higher investigation, (iv) collection cost. Pandey (2004). States that the evaluation of
a change in the firm's credit policy involves analysis of opportunity cost and lost contribution,
credit administration cost and bad debt losses. According to Solomon and Pringle (1977), they
states that, the firm's credit policy will be determined by the tradeoff between opportunity cost

8|Page
and credit administration cost including bad debts losses. This trade off occurs at point A where
the total of opportunity cost of lost contribution and credit administration cost and bad debts
losses is minimum. In the words of Brain (1981), the objective of credit control is to strike a
correct balance between incremental return and incremental cost.

Credit standards influence the quality of firm's customers. There are two aspects of the quality of
customers: (i) the time taken by customers to repay credit obligation and (ii) the default rate. The
average collection period (ACP): Determines the speed of payment by customers. It measures
the number of days for which credit sales remain outstanding. The longer the average collection
period, the higher the firm's investment in accounts receivable.

The credit managers should establish criteria for evaluating credit risk. The evaluation criteria
according to Brigham (1986) and Emekekwue (1990) they are called the Five (5) Cs thus:
Character: Refers to the customer’s willingness to pay their obligations.

Credit terms are stipulations under which the firm sells on credit to customers. They include:
credit period and cash discount. Credit period refers to the length of time for which credit is
extended to customers. Cash Discount is a reduction in payment offered to customers to induce
them to repay credit obligations within a specified period of time, which will be less than the
normal credit period. It is usually expressed as a percentage of sales.

Collection policy is necessary for effective and efficient management of credit sales because
customers usually default in paying their debt as at when due, that is with reference to the terms
of credit. The collection policy aims at accelerating collection from slow-payers and thus
reducing incidence of Bad debts losses. Credit limit is the maximum amount of credit which the
firm will extend at a point of firm. Once the firm has taken a decision to extend credit to the
applicant, the amount and duration of the credit have to be decided. A collection policy should
ensure prompt and regular collection. Prompt collection is needed for fast turnover of working
capital, keeping collection Costs and bad debts within limits and maintaining collection
efficiency. Regularity in collections keeps debtors alert, and they tend to pay their dues
promptly. Some firms usually adopt a clear-sequence to collect the debt after the expiration of

9|Page
the normal credit period granted to the customers; Firms may send a polite letter to the customers
(as reminder). A more severe letter will follow this afterwards. Other strategies may be the use of
telephones and personal visit by a company's representative. If all the above strategies fail, the
firm may resort to the use of collection agency and others such as legal action, etc. The result
will be a shift of loyalty and patronage to competitors and huge sales may be lost. However, a
situation where soft collection procedure is adopted, debtors may increase with profitability
being reduced. Hence, a fast and hard collection procedure is not desirable for a good firm to
survive.

2.1.3 Systems Required in Credit Management

Companies work with different applications and systems to limit the risks and to update the data.
These can help you in setting up and designing your credit management.
Acceptance system, Based on credit information, you determine whether a new customer is
accepted or not, this can be a manual or automated process (Graydon, 2018). Monitoring system,
this system checks the entire portfolio for continuous insight into existing customers and
suppliers. Certainly relating to chain parties, the latter is essential. Invoicing system, Invoices
may be sent manually or automated (sometimes as a digital invoice) and reminders must be
logically aligned.

Bookkeeping system, all receivables and payables are booked in this system, which is the basis
for insight into the cash flow and receivables risk. CRM system, the Customer Relationship
Management (CRM) system lists information relating to agreements, contact and contracts with
customers (Graydon, 2018). Complaints can also be processed in this system, for better insight
into the background of non-payment,

2.1.4 Managing the Credit Policy

The success or failure of a business depends primarily on the demand for its products. The major
determinants of demand are sales prices, product quality, advertising, and the company’s credit
policy. The financial manager is responsible for administering the company’s credit policy.
Receivables management begins with the credit policy. Credit policy consists of four major
components: credit standards, credit terms, and the credit limit and collection procedures. Credit

10 | P a g e
standards refer to the required financial strength of acceptable credit customers. Based on
financial analysis and non-financial data, the credit analyst determines whether each credit
applicant exceeds the credit standard and thus qualifies for credit. Lower credit standards boost
sales, but also increase bad debts. The minimum standards a customer must meet to be extended
credit are: character, capital, capacity, conditions and collateral. The credit period, stipulating
how long from the invoice the customer has to pay, and the cash discount together comprise the
seller’s credit terms. A company’s credit terms are usually very similar to that of other
companies in its industry (Maness, T. S., Zietlow, J. T, 2005).

Discounts given for early payment include the discount percentage and how rapidly payment
must be made to qualify for the discount. If credit is extended, the dollar amount that cumulative
credit purchases can reach for a given customer constitutes that customer’s credit limit. The
customer periodically pays for credit purchases, freeing up that amount of the credit limit for
further orders. The two primary determinants of the amount of a customer’s credit limit are
requirements for the supplier’s products and the ability of the customer to pay its debts. The
latter factor is based primarily on the customer’s recent payment record with the seller and others
and a review and analysis of the customer’s most recent financial statements (Ibidem, 2005).
Detailed statements regarding when and how the company will carry out collection of past-due
accounts make up the company’s collection procedures. These policies specify how long the
company will wait past the due date to initiate collection efforts, the methods of contact with
delinquent customers, and whether and at what point accounts will be referred to an outside
collection agency (ibid).

Collection policy is measured by its toughness or laxity in attempting to collect on slow-paying

accounts. A tough policy may speed up collections; by it might also anger customers, causing
them to take their business elsewhere (Brigham, and Daves, 2004).

A firm may liberalize its credit policy by extending full credit to presently limited credit
customers or to non-credit customers. Full credit should be given only if net profitability occurs.
A financial manager has to compare the earnings on sales obtained to the added cost of the
receivables. The additional earnings represent the contribution margin on the incremental sales

11 | P a g e
because fixed costs are constant. The additional costs on the additional receivables result from
the greater number of bad debts and the opportunity cost of tying up funds in receivables for a
longer time period. If a firm considers offering credit to customers with a higher-than-normal
risk rating, the profitability on additional sales generated must be compared with the amount of
additional bad debts expected, higher investing and collection costs, and the opportunity cost of
tying up funds in receivables for a longer period of time. When idle capacity exists, the
additional profitability represents the incremental contribution margin (sales less variable costs)
since fixed costs remain the same.

2.1.5 Importance of Sales Credit Management Practices

Some companies do their utmost to bring in new business, but may falter at the last hurdle of
ensuring that deals turn in to ‘paid deals’. Over half of all bankruptcies are attributed to poor
credit management – signifying its importance. Credit management involves much more than
reminding customers to pay. Rather, it involves gaining a thorough examination and process of
detecting possible reasons of non-payment, perhaps even whether a solution or product was not
delivered and even as far as the invoicing containing discrepancies. Effective credit
management is a comprehensive process consisting of determining the customer’s credit rating
in advance, frequently scanning and monitoring customers for credit risks, maintaining customer
relations, detecting late payments in advance ,detecting complaints in due time, Improving
the DSO( Days Sales Outstanding),and preventing any bad debt from arising.

According to Nodaway (2015), the credit management process needs to be understood and
followed with adequate checks made on “creditworthiness” of new and existing customers, and
‘credit limits’ (how much credit is allowed and for how long) must be set. Angelo et al. (2006)
add saying that a major responsibility of the Credit sale management function in companies is to
ensure credits are collected on time, that any signs a customer might default are acted upon
early, and that any overdue credits are “chased” to avoid losses. He concludes that getting the
credit management right reinforces company’s financial or liquidity position, making it a critical
component. In the current study, credit management involves credit policy, capital adequacy and
credit risk control.

12 | P a g e
2.2 The Role of Credit Policies Practices
According to Richardson, Melvin (2018) any company that sells products and services on credit
will have some type of credit policies and procedures in place. If the policies are too lenient or
too strict, they will have a negative impact on their ability to operate profitably and stay
competitive within the marketplace. Ability to pay a company extending credit to a consumer
will first look at the prospective client's ability to pay. The company will look at the amount of
total income in relation to debts owed. Willingness to pay organizations also takes a look at a
customer’s willingness to pay. They will review your credit report to see how you paid your
debts in the past. Anyone with an excessive amount of past-due debts may be denied credit.
Stability the next criteria looked at is the customer's stability. The longer you have been on your
job and at your residence, the better. Scoring system some companies use an automated credit
scoring system. If your application does not score a certain number of points, you may be
rejected automatically without a live person reviewing your application. Judgment/ liens if your
credit file has bankruptcies, judgments, liens, charge offs, bad debts, foreclosures and collection
accounts, there is practically no chance of your being approved for credit. Credit policy can refer
to credit extended to a consumer or business. Credit procedures companies commonly offer
terms of 2/10 or net 30. A buyer can pay the invoice in 10 days and receive a 2 percent discount
or the balance in 30 days and receive no discount. If an account becomes delinquent, a credit
hold can be placed on an account to prevent further purchases. Overdue accounts can also be sent
to a collection agency for further action.

The establishment of credit policy can include a detailed review of a potential customer’s
soundness should be made prior to extending credit. Procedures such as a careful review of the
customer’s financial statements and credit rating, as well as a review of financial service reports
are common, as customer financial health changes, credit limit should be revised, marketing
factors must be noted since an excessively restricted credit policy will lead to lost sales. The
policy is financially appropriate when the return on the additional sales plus the lowering in
inventory costs is greater than the incremental cost associated with the additional investment in
accounts receivable (Shim and Siegel, 2007).

13 | P a g e
2.3 A Review of Related Empirical Literature
Receivables management has become one of the most important issues in the organizations
where many financial executives strive to identify the basic receivables drivers and the
appropriate level of accounts receivables (Lamberson, 1995). Jose et al. (1996) examined the
relationship between aggressive receivables management and 16 profitability of US firms using
Cash Conversion Cycle (CCC) as a measure of receivables management where a shorter CCC
represents the aggressiveness of receivables management. The results indicated a significant
negative relationship between the cash conversion cycle and profitability indicating that more
aggressive receivables management is associated with higher profitability. Firms in an industry
that has less competition would focus on minimizing the receivable to increase the cash flow.
For firms in industry where there are large numbers of suppliers of materials, the focus would be
on maximizing the payable. One of the earlier studies done by Jose, Lancaster and
Stevens(1996) for the twenty-year period from 1974 through 1993 of 2,718 firms offers strong
evidence that aggressive receivables management policies indicated by shorter cash conversion
cycle enhance profitability. Lazaridis and Tryfonidis (2006) also investigated relationship
between accounts receivables management and corporate profitability for the firms listed in
Athens Stock Exchange for a sample of 131 listed companies. The researcher used the company
financials from 2001-2004 for the study. The results of the study of regression analysis showed
that there was a statistically significant relationship between gross operating profit, a measure of
profitability and the cash conversion cycle. He suggested that by optimizing the cash conversion
cycle the managers could create value for the shareholders. Results of empirical analysis show
that there is statistical evidence for a strong relationship between the firm’s profitability and its
receivables management efficiency. Raheman and Nasr (2007) also investigated relationship
between cash conversion cycle and its components by taking a sample of 94 firms listed on
Karachi Stock Exchange for a period of six years from 1999-2004. He investigated that cash 17
conversion cycle is negatively related to net operating profit which is a measure of profitability.
Similar relationship was observed for average collection period, inventory turnover in days, and
average payment period. At company level it was observed that cash gap (cash conversion cycle)
is more important as measure of liquidity than the current ratio as measure of liquidity that
affects profitability. At industry level it was observed that size has significant effect on
profitability.

14 | P a g e
 CHAPTER THREE

RESEARCH METHODOLOGY
3.0 Introduction

This chapter focuses all important research points that guided the research especially the area of
data collection, type of data source, type of sampling, and method of data collection and method
of data analysis.

3.1 Research Design

This study used the descriptive survey research design specifically the descriptive strategies.
Descriptive studies are non-experimental researches that describe the characteristics of a
particular individual, or of a group of respondents.

3.2 Study Population

The research study focused at a target population involved in the assessment of credit sales
management in small businesses success in Hargeisa Somaliland. The researchers visited the
target area of the study, including Waheen market in 26june district in Hargeisa Somaliland.
According to the annual statistical book of the local government of Hargeisa (2016), more than
100 small business entities were registered in Waheen market. The study was conducted in
Hargeisa capital city of Somaliland this area was chosen, because of large sectors of business
organizations in Hargeisa Somaliland.

3.3 Sample Size

Sample size is the process of selecting members of a population to be included in a sample (Paul,
30, 1997). Sampling also is the process of choosing elements from a population in such way that
the sample elements selected represent the whole population. From the target population a
sample of 80 respondents were chosen for the study using Slovene’s formula which say;

Where N= number of population

n = number of sample size

15 | P a g e
e = marginal error and it is 5%

The target population of this study is 100 from different small business owners and managers in
Hargeisa Somaliland.

n= 100/ (1+100 (5%) ^2) =80

The sample size of the data has become 80 respondents.

3.4 Sample procedure

Simple random sampling was also used to get owners and managers in selected Waheen Small
business. Simple random sampling is a type of probability sampling which the elements selected
randomly.

3.5 Research Instruments

The instruments in which the research is conducted was using questionnaire.

3.5.1 Questionnaire

The questionnaire was intended to collect data from respondents as questionnaire distributed by
the respondents in a written way. Questionnaire was distributed by the all respondents to
contribute the study. Questionnaire on this study was contained four sections. Section I deals
with profile of respondents with questions like age of the respondent, marital status, educational
level, Section II, the extent of credit provided to customers, Section III deals with the credit
policies used in small businesses and section IV deals with how the credit policies enable
businesses to control loss of credit sales. Data was collected using self -administered
questionnaires. The choice of this method of data collection was selected because questionnaires
can reach a large group of respondents within a short time and with little cost, at the same time
use of questionnaires will enable the respondents to remain anonymous and be honest in their
responses. The questionnaire has adequate instructions and easy to understand.

16 | P a g e
3.6 Reliability and Validity of the instruments
3.6.1 Validity

The concept of validity ensures that the instruments will use to yield relevant and correct data.
To ensure validity data collection instruments were constructed in such a way that they had an
adequate number of items and that each items or question on the scale had a link with the
objectives of the study and were covered in a full range of issues that was measured. Where
necessary, questionnaires were revised accordingly to suit the objectives of the study.

3.6.2 Reliability

Reliability was used to measure the degree to which the instrument is the same if put under the
same conditions. To ensure reliability, the research instruments was pretested to select ------
respondents to ensure consistency and comprehensiveness. The respondents who participated in
the study was found informed and knowledgeable on the subject matter to provide reliable
answers. Reliability of the instrument establish through a test-retest technique. The researchers
was waited one week then was administer the same test to the same subjects a second time.

3.7 Procedure of data collection

A letter of authorization from Admas University was provided as a request for permission to
conduct the study. A covering letter accompanied the questionnaires explaining the purpose of
the study and the questionnaires were distributed directly to the respondents in their respective
areas for filling.

3.8 Data Processing, Analysis and Presentation

Data was analyzed for generalization purpose after ranking the responses to able draw
conclusion themes on assessment of credit sales management in 26 June District in Hargeisa
Somaliland using word, excel by research report was produced for Qualitative Data. Reponses
will code and analyzed for frequencies using ranking technique. Quantitative Data was entered in
Statistical Package for Social Scientists (SPSS) and analyzed for cross tabulation and graphics.

17 | P a g e
3.9 Ethical considerations

All respondents were assured confidentiality and the purpose of the research was academic was
declared and explain in advance to all respondents. An introduction letter was delivered to partial
Small business enterprises to ask for permission. For the purpose of this study was only and also
keeping for the business ethics and its code of conducts as well.

18 | P a g e
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.0 Introduction
This chapter is the analysis of the primary data that researchers collected from the respondents of
the study. It clearly explains and provides evidence directly related to its objectives. The chapter
explains the general background of the respondents attached by the presentation, analysis and
interpretation linked to research questions.
4.1 Background Characteristics of the Respondents

4.1.1 Job Title

The table below (Table 4.1) represents the job title of the respondents, in which the majority
(67%) of the respondents were employees while 25% of the respondents were managers and
about8% of the respondents were owners. This indicates that the most of the participants of the
study were employees.

Table 4.1: Job Title

Table 1

Title Percentage

Owners 8%

Managers 25%

Employees 67%

4.1.2 Gender
As the figure below (Figure 4.2) indicates the gender of the respondents, majority (83%) of the
respondents were males while the remaining 17% of the respondents were females. This
indicates that the most of the participants of the study were males.

19 | P a g e
Figure 4.2: Gender

100%
80% 83%

60%
40% 17%
20%
0%
MALE FEMALE

Figure 1

4.1.3 Martial Status

The Figure below (Figure 4.3) shows the classification of the respondents by marital status, and
the information indicates that majority (75%) of the respondents were single while the remaining
25% of the respondents were married .This tells that the most participants in this sector were
single.

Figure 4.3: Martial Status

80% 75%

60%

40%
25%
20%

0%
Single Married

Figure 2

4.1.4: Age of the Respondents

The table below (Table 4.4) below presents the categorization of the respondents by age and the
information indicates that the first section (22%) of the respondent were the age 20-24 and the
second section (22%) of the respondents were the age 30-34 and the third section (44%) of the

20 | P a g e
respondents were the age 25-29 and the fourth section (12%) of the respondents were the age
above 35. This implies that most of the respondents in the study were at the age 25-29.

Table 4.4 Age

Table 2

Age Category Percentage

20-24 22%
25-29 44%
30-34 22%
35 Above 12%

4.1.5: Academic Qualifications

The figure below (Figure 4.5) shows the academic qualifications of the respondents were the
most (45%) of the respondents were high school level, while about 35% of the respondents were
degree level, 15% of them were diploma level, and 5% of the respondents were master level
.This implies that the most participants of the study were high school level.

Figure 4.5: Academic Qualifications

5%
15%
35% Diploma
High school
45%
Degree
Master

Figure 3

4.1.6: Business Type

The Figure below (Figure 4.6) classifies the different types of businesses of the respondents,
which is either sole proprietorship, partnership or corporation and the information indicates that

21 | P a g e
majority (75%) of the respondents said that there businesses were sole proprietorship while
(25%) respondent’s said that there businesses were partnership. This tells that majority of
respondent’s businesses were sole proprietorship.

Figure 4.6: Business Type

CORPORATION 0%

PARTNERSHIP 25%

SOLE PROPRIETORSHIP 75%

0% 20% 40% 60% 80%

Figure 4

4.1.7 Existence of the Business

The figure below (Figure 4.7) represents the existence of the business and about 49% of the
respondents businesses existed between 5 to 10years, while 27% of the respondents businesses
existed between 10 to 15years, 15% of the respondents existed less than 5 years, while the
remaining 9% existed more than 15 years .This indicates that most of the participants of the
study were businesses that have been operating at least 5 years.

Figure 4.7: Existence of the Business

22 | P a g e
 Above 15 years 9%
Between 10 to 15 years 27%
Between 5 to 10 years 49%
Less than 5 years 15%

0% 10% 20% 30% 40% 50%

Figure 5

4.1.8 Practice of Credit Sales Management

Figure below (Figure 4.8) shows classification of the respondents business who practice credit
sales management and who does not. And the information indicates that majority (83%) of the
respondents were businesses that have been adopted credit sales practices while the remaining
17% of the respondents were businesses that have not been adopted credit sales. This tells that
the most participants in this sector were businesses that practices credit sales. It’s very important
for business to adopt credit management practices. According to Reddy and Kameswarri (2004),
efficient credit sales management is necessary for achieving liquidity and profitability of a
companies or businesses.

Figure 4.8: Practice of credit sales Management

No 17%

Yes 83%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure 6

4.1.9: Clients
The Figure below (Figure 4.9) presents the classification of the respondents by number Clients
they have, and the information indicates that majority (51%) of the respondents have clients
between 200 to 300 while 24% of the respondents have clients between100 to 200 and 18% have

23 | P a g e
more than 300 clients, also 7% of the respondents have less than 100 clients. This tells that the
majority businesses have clients between 200 and 300. In general companies vary in relation to
number of client depending on the credit policies they use whether its strict policy or liberal
policy. Companies who use liberal policy have much more clients compared to those who use
strict policy.

Figure 4.9 Clients

60%
51%
50%
40%
30% 24%
18%
20% 7%
10%
0%
LESS THAN 100 BETWEEN 100 TO BETWEEN 200 TO ABOVE 300 CLIENT
CLIENTS 200 CLIENT 300 CLIENT
Figure 7

4.1.10: Employees
The figure below (figure 4.10) represents number employees of the respondents companies have ,
the majority (80%) of respondents stated that the businesses have 1 to 25 employees, while 13%
of the respondents mentioned that they have 25 to 50 employees, and 7%) of the respondents
were having 50 to 75 employees. And none of the companies have employees above 75. This
indicates that the most of the participants of the study are businesses with 1 to 25 numbers of
employees.

Figure 4.10 Employees

80% 80%

60%

40%
13%
20% 7%
0%
0%
1 TO 25 25 TO 50 50 TO 75 75 ABOVE
Figure 8

24 | P a g e
4.2: Extent of Credit Sales Provided to Customers and collections
4.2.1: Extent of Credit Sales
As figure 4.11 above shows that about 83% of the respondents mentioned that they did practice
credit sales management and 17% of the respondents answered that they didn’t practice credit
sales management, so the remaining section of the analysis and interpretations of the 83%
respondents who practice credit sales management. And the figure below (figure 4.11) indicates
that the majority (60%) of the respondents answered they provide great extent about 18% of the
respondents answered very great extent, 16% of the respondents answered moderate extent while
6% of the respondents answered low extent. This implies that the majority of the respondents
provide great extent of credit to their customers. Providing more credit sales to customers has
great advantage for businesses for example, if a company is within completion with other
companies or want to increase their bargaining power in the market they provide a great extent
of credit to their customers in order to increase their sales. According to Pandey (2004), the
higher the degree of competition, the more the credit granted by a firm.
Figure 4.11 Extent of Credit Sales

Low Extent 6%

Moderate Extent 16%

Great Extent 60%

Very Great Extent 18%

0% 10% 20% 30% 40% 50% 60% 70%

Figure 9

4.2.2 Economic Opportunities

As the figure below (Figure 4.12) indicates that the majority (59%) respondents answered agree
about 23% of the respondents answered strongly agree, about 10% of the respondent answered
disagree and the remaining 8% the respondents answered strongly disagree. The majority of the
respondents of this study are the respondents that believe that there is economic opportunities
gain by the creditors; this suggests that credit plays great role in the economy of the creditors.

25 | P a g e
Figure 4.12 Economic Opportunities

60%

40%
59%
20% 23%

0%
10%
STRONGLY 8%
AGREE AGREE
DISAGREE
STRONGLY
DISAGREE

Figure 10

4.2.3 Collection of Account Receivables

Table 4.13 depicts that the majority (56%) of respondents stated that they collect their account
receivables within time frame 1-15 days while 33% of the respondents stated that they collect
their account receivables within time frame of 16-30 days and the remaining 11% of the
respondent stated that they collect their account receivables within time frame of 30-45 days and
none of the respondents answered for 45-60 days. which implies that the most of the companies
collect their account receivables within time frame of 1-15 days. According to Brigham, E. F.,
Daves, P. R (2004), Collection policy is measured by its toughness or laxity in attempting to
collect on slow-paying accounts. A tough policy may speed up collections; by it might also anger
customers, causing them to take their business elsewhere.
Table 4.13 Collection of Account Receivables

Table 3

Time Percentage
1-15 days 56%
16-30 days 33%
30-45 days 11%
45-60 days 0%

26 | P a g e
4.2.4 Contacting the Customers
As the figure below (Figure 4.14) indicates that the majority (60%) respondents stated that they
contact their customers via telephone about 35% of the respondents stated that they contact their
customers by sending them due date notifying letter while the remaining 5% of the respondent
stated that they contact the customers by personal visit. This implies that the most businesses
contact their customers by telephone.
Figure 4.14: Contacting the Customers

70%
60%
60%

50%

40% 35%

30%

20%

10% 5%

0%
By Telephone By Letter By Personal Visit
Figure 11

4.2.5 Credit Limit

As the Figure 4.15 below indicates, the analysis of the question which is the amount of credit the
companies provide to their customers and the information shows that about 46% of the
companies provide their customers credit amount of $100-$1000, while 20% of the companies
provide $1000-$2000 amount of credit, and 17% of the companies also provide $2000-$3000
amount of credit and the rest (17%) provide more than $3000. This indicates that most of the
companies in the study provide to their customer’s a credit amount of $100-$1000. Every
company have their own policies in relation to the limit of credit provided to their customers.
They set those limits in accordance to their economy condition and customer profile.
Figure 4.15: Credit Limit

27 | P a g e
 46%
60%
40% 20% 17% 17%
20%
0%
$100-$1000 $1000- $2000 $2000- $3000 $3000 and
above

Figure 12

4.3 Credit Policies, Procedures and Control

4.3.1 Credit Department
The figure below (Figure 4.16) shows that the researchers asked the respondents a question does
the company have credit department and based on their answer about 91% told the researchers
that they have no credit department, While the remaining 9% of respondents told to the
researchers yes that they have. This implies that most of the companies don’t have credit
department. Since this research was based on small business, they always tend not to have credit
department.

Figure 4.16 Credit Departments

9%
Yes 91%

No

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Figure 13

4.3.2 Authorization of Credit

As the figure below (Figure. 4.17) shows that the researchers asked those respondents a
question, does anyone outside the credit department have the authority to give credit and based
on their answers majority (87%) of respondents responded while the remaining (13%) responded
‘Yes’, other than credit department members some of other personnel have the power to
authorize credit. This implies that most of respondents of this study responded ‘No’ for other
than credit department members have authority to give credit.

28 | P a g e
Figure 4.17 Authorization of Credit

Yes 13%

No 87%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure 14

4.3.3 Referring to the Customer Accounts

The figure below (figure 4.18) shows that the researchers asked to the respondents a question do
you refer to the customer account prior to acceptance of every order?, And based on their
responses majority (94%) respondents told to the researchers yes, they refer to the customer
account prior to acceptance of every order ,while the remaining 6% responded no. This implies
that most of respondents of this study refer to the customer account prior to acceptance of every
order. Referring to the customer’s account prior to acceptance order helps companies to manage
their credit, by checking whether this customer was previously liable to them or not.

Figure 4.18: Referring To the Customer Accounts

6%, 6%
Yes No

94%, 94%

Figure 15

4.3.4 Accounting Computerized System

The figure below (figure 4.19) shows that the researchers asked the respondents a question
whether they use computerized accounting system or not, and based on their answers majority

29 | P a g e
(90%) of respondents respond yes their accounting system is computerized, while the remaining
10% told the researchers that their accounting system is manual. This implies that most of
respondents of this study use computerized accounting system. Computerized accounting system
helps companies to save time and money.

Figure 4.19: Accounting computerized System

No 10%

Yes 90%

0% 20% 40% 60% 80% 100%

Figure 16

4.3.5 Monitoring the Accounts

As the figure above (Figure 4.19) stated majority (90%) of businesses responded yes for using
computerized accounting system and the remaining (10%) responded no, this question was asked
to those (90%) who responded yes. The below figure (fig.4.20) shows that the researchers asked
the respondents a question does your accounting system monitor which accounts are approaching
due date for payment? And based on their respond the majority (98%) of respondents told to the
researchers yes their accounting system monitor which accounts are approaching due date for the
payment, while the remaining (2%) told the researchers that their system don’t monitor. This
implies that most of respondents of this study have accounting system which helped them to
monitor which accounts are approaching due date payment.

Figure 4.20: Monitoring the Accounts

30 | P a g e
 120%
98%
100%

80%

60%

40%

20%
2%
0%
Yes No

Figure 17

4.3.6 Opinion of Credit Management

As the figure below (Figure 4.21) indicates that the majority (66%) of respondents answered that
their opinion of credit management is good while 28% of the respondents told the researchers
their opinion of credit management is neutral while the remaining 6% of the respondent opinion
of credit management is bad. This implies that the most of the respondents’ opinion about credit
management was very good. According to Kakuru (2003) the credit sale management function
incorporates all activities aimed at ensuring that customers pay their credits within the defined
payment terms and conditions.

Figure 4.21: Opinion of Credit Management

Bad

Neutral

Good

0% 10% 20% 30% 40% 50% 60% 70%

Figure 18

31 | P a g e
4.3.7 Lack of Credit Policy
As table below (Table 4.22) shows that majority (50%) of the respondents answered strongly
agree, in relation to the above question while (22%) of the respondents answered agree. While
(22%) of the respondents answered neither agree nor disagree while the remaining (6%)
answered disagree. This implies that the most of the participant of this study strongly agreed that
the lack of credit policy is financial burden to the business. According to Emekekwue (1998)
credit management is one of the most intimate, sensitive and critical functions in any business.
Table 4.22 Lack of Credit Policy
Table 4

Lack of Credit Policy Is Financial Burden to the Businesses Percentage

Strongly Agree 50%
Agree 22%
Neither agree nor disagree 22%
Disagree 6%
Strongly disagree 0%

4.3.8 Reviewing Customer Credit Limit

As the figure below (Figure 4.23) below shows that majority (45%) of the respondents answered
that they review their customer credit limit monthly, while 23% of the respondents answered
they do it in a yearly. While another (16%) of the respondents answered they review it in a
weekly and the remaining (16%) answered semi-monthly. This implies that the most of the
participant of this study review the credit limit of their customers monthly. Companies often
review the credit limit of their customers and decide whether to increase the credit limit of the
customers who pay on time, According to Pandey (2004) companies sometimes extends credit to
dealers to build long-term relationship with them or to reward them for their loyalty.
Figure 4.23: Reviewing Customer Credit Limit

50%
40%
30%
20% 45%

10% 16% 23%

16%
0%
WEEKLY SEMI-MONTHLY MONTHLY YEARLY

Figure 19

32 | P a g e
4.4 The Effect of Credit Policy on Default Control
4.4.1 Credit Default
The below figure (figure 4.24) shows us the question does your company face credit default and
the information indicates that vast majority (72%) of the respondents responded ‘yes’ while the
rest (28%) responded ‘no’. this implies that majority (72%)of respondents mentioned that their
companies face credit defaults.
Figure 4.24: Credit Default

78%
80%
60%
22%
40%
20%
0%
No Yes

Figure 20

4.4.2: Solving Credit Default

As the figure below (Figure 4.25) below shows that most (42%) of the respondents answered
they solve by expanding the period while (28%) of the respondents said they consider it as bad
debt expense. While another (23%) of the respondents answered they arrest the customers and
the rest (7%) responded they do other solution which they didn’t specify this implies that the
most of the participant of this study solve if credit default happen by expanding the period.
Companies often expand credit period after due date in order to avoid for those credits to
become uncollectible.
Figure 4.25: Solving Credit Default

50% 42%
40% 28%
30% 23%
20%
7%
10%
0%
To consider the credit as To arrest the customer To expend the period Other solutions
bad debt expense

Figure 21

33 | P a g e
4.4.3: Amount of Credit Become Default
As the figure below (Figure 4.26) below shows that majority (73%) of the respondents answered
the percentage that becomes default yearly is 1%-25% while 18% of the respondents said only
25%-50% become default, about 9% of the respondents answered only 50%-75% become
default. This implies that the most of the participant of this study is businesses that face 1%-25%
default yearly. Companies in relation with their policies about credit sales set percentage of
default risk they can tolerate.
Figure 4.26: Amount of Credit become Default

75%-100% 0%
50%-75% 9%
25%-50% 18%

1%-25% 73%

0% 10% 20% 30% 40% 50% 60% 70% 80%

4.4.4 Effect of Credit Default

The figure below (figure 4.27) shows credit default effect the business and the information
indicates that majority (56%) of the respondents strongly agree while 25% response were agree
and 19% of the responses were neutral as well as, none of respondents answered both for
disagree and strongly disagree. This implies that most of the participants strongly agree that
credit defaults have an effect in the business. According to Jaros, Melichar, Svadlenka (2014)
states that the existence of risk of nonpayment is major disadvantage of credit sale.

Figure 4.4.4: Effect of Credit Default

0% 0%
19%

25% 56%

Strong agree Agree Neither agree nor disagree Disagree Strongly disagree

Figure 22

34 | P a g e
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction
This chapter presents the discussion of key data findings, conclusion drawn from the findings
highlighted and recommendations made there-to. The conclusions and recommendations drawn
were focused on addressing the objective of the study. The researchers had intended to assess
credit sale management practices in small businesses in Hargeisa, Somaliland.

This chapter consists of the following sub-sections summary of major findings, conclusions and
recommendations that these sub-sections provide information above mentioned topic.

5.2 Summary and Findings

The study revealed that majority (83%) selected businesses practice credit sales management and
credit policy in credit management to a great extent. Further it assessed that credit policy is a
viable strategy for credit, aspects of owner authorization are considered while appraising clients,
credit policy considers the character of the customers seeking credit facilities and that businesses
have competent personnel for carrying out credit policy.

The study found the extent of credit sale management used by selected businesses related to the
specific objective in concisely high extent, for example, the respondents were as asked the
question for extent their business use credit sale management, the majority (60%) of respondents
answered high extent. This implies that the majority of the respondents are great extent of using
the credit policy in credit management.

The study also found that selected businesses demonstrated that the effect of credit default by the
businesses in credit management is a very great extent as the majority of the respondents (56%)
strongly agreed. This implies that most of the participants strongly agree that credit defaults can
affect the business. Controlling credit default have been a challenge in credit management,
enforcement of guarantee policies provides chances for credit recovery in case of credit defaults,
regular reviews should be make on credit policies to improve state of credit management, and
finally that available credit policies have assisted towards effective credit management.

35 | P a g e
5.3 Conclusion
Based on findings of the study the following conclusion were drawn.

Businesses practice credit sales management to a high level in order to become the market
leaders and for economic opportunities.

Related to the credit policy, small businesses use liberal strategy and that strategy significantly
influences credit management.

Finally the liberal strategy used by the small businesses for credit sales management affects
business success and lead to a credit defaults.

5.4 Recommendation
Based on the findings and the conclusions drawn, thus the following recommendations are made.

 The businesses need to acquire effective credit management that suits to their
organizational needs and to prevent credit default and increase credit policy based on
effective credit management, in order to reach effective credit management business
needs to establish basic strong base for customers; using credit application form, fully
documented terms and ensuring that sales staff are familiar with businesses credit policy.
 There should be a system practice and involved credit management that get rid of credit
default and come up with a system that based on credit policies, E.g. Cforia.autonomy
Software which provides credit, collections, chargeback and cash application
management.
 Businesses also need to impose strict conditions to the customers when they are giving
credit sales, for example collateral.
 Small businesses should also be advised to be very careful when collecting receivables
like setting policy for further chasing, for example, standard letters, calls, faxes, and
visits referring to Solicitors.

36 | P a g e
REFERENCES

Abedi, S. (2000): Highway to Success, Credit Management Journal, and http://

leatherspinters.com

Binks, M.R. and Ennew, C.T. (1992) "Information asymmetries and the provision of finance
to small firms" International Small Business Journal 11, No.1 pp. 35-46.

Binks, M., and Ennew, T. (1997) Small business and relationship banking: the impact of
participative behavior, entrepreneurship; Theory and practice vol. 21, No.4 pp. 8392.Ed

Program and Operations Assessment Report No. 10, USAID, Washington, D.C. Deakins,
D., Hussain, G. (1999) "Risk assessment with asymmetric Information" International
Journal of Bank Marketing .VoI12, pp 24-31.

Edward. B (1993) Credit Management (6th Ed.) http://www.gowerpublishing.com.

Eppy, I. (2005) Perceived Information Asymmetry, Bank lending Approaches and Bank
Credit Accessibility by Smes in Uganda (Unpublished thesis) Makerere University

Grover,P.(2002). Managing Credit: Is your Credit Policy Profitable? [On-line]. Available

http://www.creditguru.com (22/10/07)

Gray don (2018). How to create a robust credit management platform?

https://www.graydon.co.uk/wiki/credit-management

Nelson, L. (2002). Solving Credit Problem. [On-line]. Available http://www.cfo.com

(23/04/12)

Williamson, O. E. (1981). The Economics of Organization: The Transaction Cost Approach.

Richardson, Melvin (2018) Credit Policies & Procedures available

https://pocketsense.com/credit-policies-procedures.

Kothari C K (2006) Research Methodology, Methods and Techniques, Willey Eastern Ltd, New
York

37 | P a g e
Appendix I
ADMAS UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE

QUESTIONNAIRE
Our names are Hamze Mohamed Jama and Abdifatah Abdek Aden we are senior accounting
students at Admas University, Hargeisa Somaliland. We have prepared this questionnaire for
the purpose of collecting data on a research work entitled: The assessment of credit sales
management practices in small scale businesses, in Hargeisa, Somaliland specially 26 June
district.

Thank you very much for agreeing to participate in this survey, the information provided by
you in this questionnaire will be used for research purposes of our thesis and it will not be
used in a manner which would allow identification of your individual responses.

Please tick the blanks that provided. SECTION

A: DEMOGRAPHIC CHARACTERISTICS

Q1: What is your job title?

A. Owner

B. Manager

C. Employer

Q2: Gender.

A. Male

B. Female

Q3: Marital status

A. Single

B. Married

38 | P a g e
Q4: Age of respondent

A. 20_24years

B. 25_29years

C. 30_34years

D. Above35years

Q5: The highest level of your education?

A. Diploma

B. High school

C. Degree

D. Master

Q6: What is the type of your small business?

A. Sole proprietorship

B. Partnership

C. Corporation

Q7: For how long has your business been in existence?

A. Less than 5 years

B. Between 5 to 10 years

C. Between 10 to 15 years

D. Above 15 years

39 | P a g e
Q8: Does your organization adopt Credit Management Practices?

A. Yes
B. No

Q9: How many clients does your organization

have?

A. less than 100 clients

B. between 100 to 200 client

C. between 200 to 300 client

D. above 300 client

Q10: How many employees are there in your business?

A. 1-25
B. 25-50
C. 50- 75
D. 75 Above

SECTION B

OBJECTIVE ONE: THE EXTANT OF CREDIT PROVIDED TO CUSTOMERS AND COLLECTIONS.

Q11: To what extent does the Company use credit policy in Credit Management?

A. Avery great extent

B. Great extent

C. Modern extent

D. Low extent

40 | P a g e
Q12: There are economic opportunities gained by the creditors, as a result of giving a lot

of credit to the customers.

A. Strongly agree

B. Agree

C. Disagree

D. Strongly disagree

Q13: How long does it take to you collect the receivable?

A. 1-15 days

B. 15-30 days

C. 30-45 days

Q14: How do you contact your customers?

A. By telephone
B. By letter
C. By personal visit

Q15: How much of credit limit do you provide to you customers?

A. $100-$1000

B. $1000- $2000

C. $2000- $3000

D. $3000 and above

41 | P a g e
OBJECTIVE TWO: CREDIT POLICIES, PROCEDURES AND CONTROL.

Q16: Does your company have credit department?

A. Yes

B. No

Q17: Does anyone outside the credit department

have the authority to approve credit?

A. Yes

B. No

Q18: Do you refer to the customer account prior

to acceptance of every order?

A. Yes

B. No

Q19: Is your accounting system computerized?

A. Yes
B. No

Q20: If yes does your accounting system monitor

which accounts are approaching due date for
payment?

A. Yes
B. No

42 | P a g e
Q21: What is your opinion on credit management?

A. Very good

B. Neutral

C. Very bad

Q22: Lack of credit policy is a financial burden to the business

A. Strongly agree

B. Agree

C. Neither agree nor disagree

D. Disagree

E. Strongly disagree

Q23: How often do you review your customer credit limit?

A. Weekly
B. Semi-Monthly
C. Monthly
D. Yearly

OBJECTIVE THREE: CREDIT DEFAULT

Q24: Does your company face credit default?

A. Yes

B. No

43 | P a g e
Q25: How do you solve if credit default has happen?

A. To consider the credit as bad

debt expense

B. To arrest the customer

C. To expend the period

D. Other solutions

Q26: The Company’s credit providence to customers yearly, in that how much percentage
become default?

A. 1%-25%
B. 25%-50%
C. 50%-75%
D. 75%-100%

Q27: Credit default affects the businesses?

A. Strong agree

B. Agree

C. Neither agree nor disagree

D. Disagree

E. Strongly disagree

44 | P a g e