THE EFFECTS OF CREDIT MANAGEMENT ON LIQUIDITY POSITION OF A MANUFACTURING COMPANY (A CASE STUDY OF NIGERIAN BREWERIES PLC, ENUGU STATE)

CHAPTER ONE

INTRODUCTION:

1.1     HISTORICAL BACKGROUND OF NIGERIAN BREWERIES:

Nigerian Breweries Plc was founded in 1946 and since then has matured to become the absolute pinnacle of corporate Nigeria.

Today, Nigerian Breweries most recent extension, the new Ama Brewery, has taken the company into a new chapter in its history.  Nigerian Breweries: more than half a century of efforts to achieve world class status in Africa.

Over a period of slightly more than fifty (50) years, Nigerian Breweries has had success after success and has succeeded in anchoring itself firmly in the Nigerian beer market, the business community and indeed in the very hearts of Nigerian themselves.

The “Rising Star” or Nigerian Breweries has, for many decades now, been synonymous with success, quality and commitment.  The organization can boast a wide portfolio of brands that cover the three segments of the Nigerian beer market (Larger, Stout and Malt):  Star, Gulder, Heineken, Legan Extra Stout, Maltina, and Amstel malta.

In 1949, three years after its foundation, the first bottles of star were being filled on the bottling line of the brand new brewery in Lagos. 

Three more breweries have been founded since then:  Aba, Kaduna and Ibadan.  Enugu brewery was acquired in 1993.

For decades, Nigerian Breweries had tow large shareholders, one of which, Heineken had always focused on providing the breweries with technical support.  In year 2000, Heineken seized the opportunity of acquiring a 54.2% majority interest in Nigerian Breweries, a decision which underlined Heineken’s commitment to the African continent.

Thanks to the process of democratization that started to emerge towards the close of the 1990s, plus the brewery’s alert anticipation of what would happen in the new situation.  Nigerian Breweries successfully managed to accelerate a growth in sales from 2.5 million hectoliter in 1998 to 5.5 million hectoliter (hi) in 2003.  This was so successful in fact that a luxury problem arose:  the demand for Star, Gulder, and Maltina started to outstrip actual supply.  Nigerian Breweries and Heineken therefore started up the LAKIE output optimization project (Lagos, Aba, Kaduna, Ibadan, Enugu).

An investment of 280 million euros in new bottling lines and brewing plants substantially increased the capacity of these breweries.

The experts were more than aware that an expansion of the existing breweries alone would be insufficient to meet the constantly increasing demand for Star and Gulder.  And because of the rose-coloured prospects in the medium term, early in 2001 Nigerian Breweries and large shareholder Heineken decided to build an ultra-modern brewery fitted with the latest innovations and the most up-to-date plant equipment.  A world-class brewery befitting a world-class company.

The entire brewing community is envious of the new Ama brewery near Enugu.  The construction of a high-tech brewery, in corporating the absolute latest in technological developments and major innovations in a rural tropical environment is a feat which has never before been achieved in the brewery industry.

Nigerian Breweries assigned Heineken Technical Services to design and develop the new brewery and to supervise the construction of this 220 million euro (30 billion naira) project.

There were frowns of concern when the first plans for Ama were presented.  Would it be possible to operate such a high-tech, state-of-the-art brewery in Nigeria?  The start-up phase has proven that it certainly is.  There are two main reasons for Ama’s success.  First of all, Nigerian Breweries invested heavily in the recruitment of young technical professionals straight from technical school and then giving them additional training.  Many key operators and all the managers were sent to Holland and Germany for this additional training, months before the first beer was brewed in Ama.  The others were given the training on recently upgraded equipment in the breweries at Lagos, Aba, Kaduna and Ibadan.

The second success factor is the actual organizational structure.  A state-of-the-art brewery such as Ama calls for a small number of highly professional employees; employees who perform at their best when working in a hierarchically small operation consisting of only three layers.  Work here is based on Total Productive Management (TPM), which for Nigerian Breweries is a new concept introduced by Wiggert Deelen, the Technical Director.

The brewery has an initial capacity of more than 300 million litres of beer and can be extended even further.  The average production is in excess of 1.1 million creates per week.  The Ama brewery uses only natural ingredients for the brewing process, the brewing water being pumped up from five wells two hundred metres below the ground.  This is excellent quality water and needs very little correction to make it suitable for brewing.

The malted barley and hops used are imported from Europe, the malted surghum and maize grits are produced by local farmers, malters and millers.  Ama brewery uses 51,000 tonnes of grain per year, 2,550 truck-loads in all.

The brewery has one brew-house that produces twelve brews of 660 hectolitres high gravity wort per day.  The brew-house is in operation 24 hours a day, seven days a week.

After the boiled wort has been cooled down it is mixed with the yeast and then pumped to the fermentation “celler”.  While the celler is the traditional name for the location where fermentation takes place, in the brewery the 30 fermentation tanks of 5,000 hectolitres each are situated in a building above ground.

The beer is subsequently transported from these tanks to the brewery’s bottling lines. 

Here there are four bottling lines, two of which are reserved for the popular brand, Star, and one for Gulder.  Each bottling line has a filling capacity of 30,000 bottles per hour (60cl bottles).

The high level automation and the use of ultra-modern technical equipment make it possible for the brewery to also produce Heineken beer.  Preparations were started for the local production of Heineken beer only six months after the first brew had left the production line.

1.2. STATEMENT OF PROBLEM:

However, the research will be specifically concentrated on the problems which arise when the brewery sells beer to its customers for the purpose of receiving payment in future.

In view of these, the following critical questions demand answers:

1.       What effects does credit management have on liquidity position of Nigerian Breweries Plc, Enugu?

2.       Does credit sales reduces liquidity of this brewery?

3.       Does credit sales increase the profit level of the brewery?

4.       Is there any relationship between credit sales and liquidity position of this brewery?

5.       Has the brewery’s credit policy and credit terms any effect on its liquidity?

1.3. RESEARCH OBJECTIVE:

The primary objective of this study is to find out how effectively and efficiently the Nigerian Breweries Plc has managed its trade credit (selling been on credit to customers) to achieve optimum level of liquidity, which will in turn result in the promotion of the corporate image of the brewery and win the patronage of the public.

The project also aims at making suggestions on how the brewery, based on research findings, can improve its business through greater profitability and growth can be assured.

1.4. STATEMENT OF HYPOTHESIS:

In order to achieve the above objective, the research will make the following hypothesis:

1.       Liquidity of Nigerian Breweries Plc Enugu in a function of proper credit management.

2.       Credit sales do not reduce liquidity of Nigerian Breweries Plc Enugu.

3.       Credit sales increase the profitability of Nigerian Breweries Plc, Enugu.

1.5. SIGNIFICANCE OF THE STUDY:

In carrying out this study, it is intended that it will be of immense help to the accounting staff of Nigerian Breweries Plc Enugu, especially its credit management officers.

This study exposes the intricacies involved in extending credit to customers.

To the customers, this study will enumerate the several benefits that can be derived by making prompt settlements of their debts.  This serves as a means of increasing organizational efficiency.

This study also is particularly important for the financial manager of a small company because a small company has relatively limited access to the capital markets, it relies heavily on trade credits for its short-term financing.

This study will be helpful guide for him.  Thus any company or individual through this study can have a reasonable knowledge of what credit transactions are all about and how it can be effectively managed to attain the much needed profit maximization.

1.6. LIMITATION AND SCOPE OF THE STUDY:

In a study like this type, a lot of set-backs are bound to come up, this work is restricted by many variables.

The greatest identifiable ones are time, finance, respondents and general economic problem.

(1)     Time:

Since the research will be carried out at student’s level, the researcher will have to allot his time such that the demand for their courses will have to be met.

Moreover, since the interview will be conducted during the working days of the work the researcher will have to forfeit some of his lectures in order to successfully conduct the study.  The time that will be lost in terms of lecture missed will be a substantial loss in itself.

(2)     Finance:

Insufficient funds will be another factor inhibiting this research project.  The work will be single-handedly sponsored by the researcher.

And as a student, the project will be sponsored from his meager pocket money.  As a result, he may find it difficult to cover some inevitable expenses like transport, stationeries, typing and binding labour and so on.

This in turn is bound to affect the sample size and the geographical area of coverage of the study.

(3)     Respondent:

The inability of the officials concerned to produce adequate and relevant information required for the research project has been one of the most frequently encountered constraints by researchers.

Apart from the fact that some of the staff that will be required to give data are not technically skilful in the area of study, many of them may think that the researcher is one of government functionaries that come to question their activities or to assess them for tax payment.

This may be due to the fact that the school authority has been reluctant to introduce the researcher to the establishment formally by issuing identity papers or introduction papers to the students.

(4)     General Economic Problem: 

The last but not the least limiting factor is this work will be the general economic problem facing the entire country as at this point in time when the research will be carried out.

Considering the above constraints, the researcher will concentrate on few areas of trade credit management that lead to high profitability, optimum liquidity level and efficient utilization of all the brewery’s financial assets.  Such areas include – historical overviews and origin of credit, trade credit and credit management; credit policy; five Cs of credit; effects of credit on liquidity and profitability, and important areas of trade credit management.

1.7. DEFINITION OF TERMS:

Haven going this far, the researcher sees it reasonably enough to define some key terms or phrases intended to be used in this research project as they operationally apply to the problem:

The terms include:

1.       Trade Credit:

This is the quantity of goods (beer) the brewery sold to its customers with the purpose of collecting cash in the future.

2.       Credit Management:

This is the process by which the brewery properly maintains its credit sales so as to achieve optimum liquidity level.  Or, put in this way, credit management is a way of controlling the brewery’s credit granting attitude in order to maximize the brewery’s value of achieving a balance between risk and profitability.

3.       Liquidity:

This is the volume of cash the brewery has at hand and/or in the bank.  It is the actual total money (most liquid assets) the brewery has as a balance after all expenses (including cost of financial credit) have been made.

4.       Profitability:

This is the total net profit or gain made by the brewery from its selling activities (both cash and credit sales).

5.       Optimum Liquidity:

This is the level of cash (at hand and/or in the bank) at which all the brewery’s assets (resources) are efficiently employed and utilized.

6.       Company:

This is a legal person or entity created by the association of number of persons in accordance with the law for the purpose of a defined objective.

7.       Management:

This is the process of allocating an organisation’s inputs (human and economic resources) by planning, organizing, directing and controlling for the purpose of producing outputs (goods and services) directed by its customers so that organization objectives are accomplished.

8.       Credit Sales:

These are sales made by the brewery without immediate payment.

They are goods (beer) the brewery exchanged for money but with the intention to receive the cash in the future.