THE IMPACT OF

RECEIVABLE
MANAGEMENT ON
FINANCIAL
PERFORMANCE THE CASE
OF NIB INSURANCE (S.CO)
A research proposal submitted to a
partial fulfillment of the course
Research in Accounting & Finance

Prepared By: - Ermias Wondimagegn

ID:-BEE/1103/05
Faculty of Business and Economics
Department of Accounting & Finance

June 20/2015
Addis Ababa, Ethiopia

Table of Contents

INTRODUCTION............................................................................................................................................. 3
1.1 Background ......................................................................................................................................... 3
1.2 Statement of the problem .................................................................................................................. 4
1.3 Objective of the study......................................................................................................................... 5
1.3.1 General Objective ........................................................................................................................ 5
1.3.2 Specific Objective......................................................................................................................... 5
1.4 Scope of the Study .............................................................................................................................. 5
1.5 Significance of the study ..................................................................................................................... 5
REVIEW OF RELATED LITRATURE .................................................................................................................. 7
2.1 Definition and overview of Receivables.............................................................................................. 7
RESEARCH METHODOLOGY ........................................................................................................................13
3.1 Research Approach ...........................................................................................................................13
3.2 Types of Data and Their Source ........................................................................................................ 13
3.2.1 Types of data..............................................................................................................................13
3.2.2 Method and tools of data collection..........................................................................................13
3.3 Population and Sample Size.............................................................................................................. 13
3.3.1 Sample size................................................................................................................................. 13
3.3.2 Sampling technique....................................................................................................................13
3.4 Data Analysis Techniques..................................................................................................................14
SCHEDULE & BUDGET ................................................................................................................................. 15
4.1 Schedule............................................................................................................................................ 15
4.2 Estimated Budget..............................................................................................................................16

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Abstract

This study attempt to examine the Impact of Receivable Management on financial performance
of NIB Insurance Company. This company engage in providing different Kinds of insurance
services.
The study has attempt to address research questions having attention in the statement of the
problem and objective of the study the main objective of the study is to asses receivable
management and its effect on the profitability of NIB Insurance Company and the collection
policies and procedure of receivables.
The research design is descriptive type more over both secondary and primary data from the
company will be collected the secondary data includes recent years Audited financial report cash
procedure manual and credit policy manual for the primary data interview and questionnaire will
be conducted. The respondents will be selected with non-probability sampling using judgmental
sampling.
The data from the company will be collected, analyzed and interpreted using some statistical
techniques such as linear regression method which will be also supported with graphs.
Based on the analysis and interpretation conclusion will be made. Finally recommendation will
be drawn that assume to be useful the existing problem and receivable management practice in
NIB Insurance Company.

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Chapter one
INTRODUCTION
1.1 Background

Insurance is an economic institution that reduces risk by combining under one management a
group of objects so situated that the aggregate accidental losses to which the group is subject
became predictable within narrow limits. Insurance is usually effected by and can be said to
include, certain legal contracts under which the insurer, for consideration promises to reimburse
the insured or render services in case of certain described accidental losses suffered during the
term of the agreement. (Green & Reichmann Page no. 22)
Before the insurance companies are established in Ethiopia, peoples believe that cultural
cooperations in the form of Debo, Edir and Equb.At this time the economic condition and
the living standard of the people has changed. Most of them prefer insurance coverage for their
life and property.
When a company sales its insurance policies on credit basis it creates accounts receivable which
could be collected in the future. Thus it is important to see how the company manages its
receivables.
The term receivables include all money claims against people, Organization or other debtors. A
promissory note is a written promise to pay sum of money on demand or at a definite time.
Accounts and notes receivables originating from sales transaction are sometimes called trade
receivables.( warren, page no,332)
In the modern competitive market, sale of goods or services on credit basis is one of the means to
be competitive in the market; a credit sale is one of the marketing tools to aid the sale of goods or
services.
When merchandise or services are sold without the immediate receipt of cash, a part of the
claims against customers usually proves to be uncollectible. This situation is common regardless
of the care used in granting credit and the effectiveness of collection procedure used. The
operating expense incurred because of the failure to collect receivable is called an expense or a
loss from uncollectible accounts, doubtful accounts, or bad debts. (Ibid Page no. 324)
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There is no single general rule for determining an account or a note becomes uncollectible. The
fact that a debtor fails to pay an account according to a sales contract or dishonor a note on the
due date does not necessarily mean that the account will be uncollectible. Bankruptcy of the
debtor is one of the most significant indications of partial or complete worthlessness of
receivable. Other evidence includes closing of the debtor's business, disappearance of the debtor,
and failure of repeated attempts to collect and the barring of collection by the statute of
limitations. (Ibid Page no. 325)
As a marketing tool they are intended to promote sale and increase profits. However, the
extension of credit involves risk and cost. Management should weight the benefits as well as the
cost to determine the goal of receivable managment, when is also called credit managment.

1.2 Statement of the problem

Since there are many private and a single governmental insurance companies competing in the
market, the existence and performance of any insurance company is usually determined by
designing effective and sound policy and management of recevables.
Currently there are about fourteen privately owned insurance companies and one publicly
owned Insurance Corporation in our country. In order to become competitive and profitable the
companies use various mechanisms to attract new customers and retain the existing one. Among
these mechanisms selling insurance policies in credit basis is one of the means to attract
customers. Consequently, collection of the accumulated receivables is one of major problems
faced by the companies.
There are debtors whose account balance shows huge amount of outstanding premiums and by
the time they are asked to pay their debt they will shift from one company to another insurance
company. These may arise due to poor receivables management of the company or customers
inability to settle their obligation.
This problem is also faced by Nib insurance S.Co and the company has large amount of
outstanding premium.
Therefore, my research will try to answer the following basic research questions.

What are the problems faced by the company during collection of receivables?

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What is the effect of uncollectible in the company performance and profitability?

What are the benefits of credit sales for the company and its customers?

How does the company evaluate the credit worthiness of the customer before giving
credit facility?

What kind of mechanisms does the company use to collect its receivables?

What is the appropriate receivable management system for insurance company?

1.3 Objective of the study

1.3.1 General Objective
The main objective of this study is to see the receivables management and its impact on financial
performance and profitability of Nib insurance company.
1.3.2 Specific Objective
To see the methods of credit analysis used in the company.

To see difficulties faced by the company during collection of receivables.

To see the impact of uncollectible receivable on the performance and profitability of

the company.

To see the strengths and weakness of the company's credit policy.

To suggest the way to improve the credit management of the company.

To see the overdue accounts receivable determined to be uncollectible.

1.4 Scope of the Study

The scope of the study had limited to analyzing the current practice of receivable management in
Nib insurance company and its impact on financial performance. Making detail studies in
receivable management had great importance to Nib insurance S.co for corporate objective,
customer satisfaction, effective and efficient operation and so on.

1.5 Significance of the study

The result of this study would help other researchers for further study on the topics. The study
also had the importance to Nib insurance S.Co for the impact of uncollectable receivable on the
companys performance and profitablity. This resarch have the forllowing benefits.

It helps me (the researcher) to broaden my knowledge on this area and to have good
experience for undertaking further studies.

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It will be used as a reference for other researcher who will undertake related studies.

It offers valuable information to Nib Insurance Company to evaluate its credit policy and
take corrective measures that will reduce its uncollectible receivables (outstanding
premium).

Based on findings it provides valuable suggestion and recommendations which are vital
to the practice of receivable management.

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CHAPTER TWO

REVIEW OF RELATED LITRATURE

2.1 Definition and overview of Receivables

The term receivable includes all money claims against people, organization or other debtors. A
promissory note is a written promise to pay sum of money on demand or at a definite time.
Accounts and notes receivable originating from sales transaction are sometimes called trade
receivables. (Warren, ----, page no.332)
Receivable are asset accounts representing amounts owed to the firm as a result of sales of goods
or services in the ordinary course of business. The value of these claims is carried on the balance
sheet under titles such as account receivable, trade receivable or customer receivables.
(Hampton, -----, page no.208)
Account receivables are generated when a corporation sells its products and services on credit.
Receivables are components of corporation working capital and represent investment a firm
makes in seeking to increase shareholders wealth. (Neveu, ---, page no. 184)
Trade credit arises when a firm sells its product or services on credit and does not receive cash
immediately. It is an essential marketing tool, acting as a bridge for the movement of goods
through production and distribution stages to customers. A firm grants trade credit to protect its
sales from the competitors and to attract the potential customers who buy its products at
favorable terms. Trade credit receivable or book debts which the firm is expected to collect in the
near future. The book debts or receivable arising out of credit has three characteristics: First; it
involves an element of risk which should be carefully analyzed. Cash sales are totally risk less,
but not the credit sales as the cash payment is yet to be received. Second, it is based on economic
value. To the buyer, the economic value in goods or services passes immediately at the time of
sale, while the seller expects an equivalent value to be received later on. Third, it implies
futurity. The cash payment for goods or services received by the buyer will be made by him in a
future period. The customers from whom receivable or book debts have to be collected in the
future are called trade debtors or simply as debtors and represent the firms claim or asset.
(Pandy, ------, page no.843)
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Every commitment of financial resources in a firm is expected to contribute to the goal of

maximizing the present value of the firm in the market place. The commitment of fund to
account receivable is no exceptions. In support of these objectives we can identify the three goals
of maintaining receivables.
1. To achieve growth in sales: if a firm permits sales on credit, it usually can sell more
goods than if it instead on immediate cash when they purchase. They prefer to write a
cheque at a later time rather than carry a cheque book with them. They may want the
bill to be sent to their accounting department, where it will be processed. In other case
the purchase order may be transmitted over the telephone with instructions to send the
goods and to bill for payment. Finally, many firms do not have the available cash to
make immediate payment up on receipt of goods. They must wait until they resell the
goods before they have money to pay for them. Because of these and other factors,
fewer sales could be expected if a firm eliminated its credit policies.
2. To increase profit: if the direct result of maintaining receivables is to increase sales
an indirect result is that the additional sales normally result in higher profit for the
firm. This is the case when the marginal contribution or gross margin is greater than
the additional costs associated with administering the credit policy. If the firm does not
realize higher profit from its credit and receivables, it should consider an all cash sales
program.
3. To meet competition: as a defensive measure, most firms establish credit polices
similar to the policies of competitors. It is a common practice in American business for
the term of trade to be identical throughout an industry, with wide variances in
practices from one industry to another. In the same area, textiles may be purchased in
terms of 2/10 EOM (a 2% discount if payment is made by the 10th day of the next
month) where as stationary, suppliers carry terms of net 30. By adapting its terms of
trade to the industry norms, a firm avoids the loss of sales from customers who would
buy elsewhere if they did not receive the expected credit
All three goals have a single purpose to generate a larger flow of operating revenue, and hence
profit, than possible without a commitment of funds to accounts receivables. (Hampton, Page no.
210)
8|Page

Credit Standard

Credit standards are the criteria which a firm follows in selecting customers for the
purpose of credit extension. The firm may have tight credit standards, that is, it may sell
mostly on cash bases, and may extend credit only to the most reliable and financialy
strong customer. Such standards will result in no bad-debt losses, and less cost of credit
administration. But the firm will have to carry large receivable. The cost of
administrating credit and bad-debit losses will also increase. Thus the choice of optimum
credit standard involves a trade-off between incremental return and incremental costs.
(Hampton, ----, page no. 851)

It refers to the strength and credit worthiness a customer must exhibit in order to
qualify for credit. If a customer does not qualify for the regular credit terms, it can still
purchase from the firm but, under more restrictive terms. (Ibid, Page no. 730)

The length of time for which credit is extended to customers is called the credit
period. It is generally stated in terms of a net date. A firms credit period may be
governed by the industry norms. But depending on its objective, the firm lengthens the
credit period. On the other hand, the firm may lengthens its credit period if customers
are defaulting too frequently and bad-debt losses are building up. (Pandy,----, page no.
858)

A firm lengthens credit period to increase its operating profit through expanded sales.
However, there will be net increase in operating profit only when the cost of extended
credit period in less than the incremental operating profit. With increased sales and
extended credit period, investment in receivable would increase: a) Incremental sales
result in incremental receivable and b) Existing customers will take more time to repay
credit obligation (i.e. the average collection period will increase), thus increasing the
level of receivable. (Ibid,----, page no. 858)

Credit policy
The successes or failure of a business depends primarily on the demand for its products as a rule,
the higher its sales, the higher its profits and the value of its stock. Sales, intern, depends on a
number of factors, some exogenous but others under the control of the firm. The major
9|Page

controllable variables which affect demand are sales prices, product quality, advertising and the
firms credit policy. Credit policy intern consists of these four variables:

1.

The credit period, this refers to the length of time buyers are given to pay for their

purchase.

2.

The credit standards, which refer to the minimum financial strength of acceptable

credit customers and the amount of credit available to different customers.

3.

The firms collection policy, which is measured by its toughness or laxity on

following up on slow-paying accounts.

4.

Any discounts given for early payment, including the discount amount and period.

The credit manager has responsibility for administering the firms credit policy.
However, because of the pervasive importance of credit, the credit policy of self is
normally established by the executive committee.
Setting credit standard implicitly requires measurements of credit quality, which is
defined in terms of the probability of a customers default. The probability estimate for
a given customer is, for the most part, a subjective judgment. Nevertheless, credit
evaluation is a self-established practice and a good management can make reasonably
accurate judgments of the probability of default by different class of customers.
Methods that measure credit quality should include the evaluation of five areas
generally considered important to determining customer credit worthiness are:1. Character refers to the probability that customers will try to honor their obligations.
2. Capacity:-is a subjective judgment of customers ability to pay. It is judged in part by
the customers past records and business methods and it may be supplemented by physical
observation of their plants or stores.
3. Capital: - measured by the general financial condition of a firm as indicated by an
analysis of its financial statements.
4. Collateral:-is represented by assets that customers may offer as securing in order to get
credit.
5. Condition:-refers to both general economic trends and special development on certain
geographic regions or section of the economy that might affect customers ability to meet
their obligations.
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Information on those five factors comes from the firms previous experience with its customers
and it is supplemented by a well-developed system of external information gathered of course,
once the information on the five conditions is developed the credit manager must still make a
final decision on the potential customers overall credit quality.
Credit period
The length of time for which credit is extended to customers is called the credit period. It is
generally stated in terms of a net date. A firm's credit period may be governed by the industry
norms. But depending on its objective, the firm lengthens the credit period. On the other hand,
the firm may lengthen its credit period if customers are defaulting too frequently and bad-debt
losses are building up. (Pandy, page no. 858)
A firm lengthens credit period to increase its operating profit through expanded sales. However,
there will be net increase in operating profit only when the cost of extended credit period in less
than the incremental operating profit. With increased sales and extended credit period,
investment in receivable would increase:
a) Incremental sales result in incremental receivable and
b) Existing customers will take more time to repay credit obligation (i.e. the average collection
period will increase), thus increasing the level of receivable. (Ibid, page no. 858)

Cash Discounts
A 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. Cash discount terms indicate the rate of discount
and the period for which it is available. If the customer does not avail the offer, he must make
payment within the normal credit period. (Ibid, page no. 861-862)
In practices, credit terms would include:
a) The rate of cash discount,
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b) The cash discount period and

c) The net credit period. (Ibid, Page No. 862)
A firm uses cash discount as a tool to increase sales and accelerate collection from customers.
Thus the level of receivable and associated costs may be reduced. The cost involved in the
discounts taken by customer. (Ibid, Page no. 862)
Collection Policy & Procedures
A collection policy is needed because all customers do not pay the firm's bills in time. Some
customers are slow payers while some are non-payers. The collection efforts should, therefore,
aim at accelerating collections from slow-payers and reducing bad-debt losses. 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 collection keeps debtors alert, and they tend to pay their dues
promptly. (Ibid, page no. 864)
The collection policy should lay down clear-cut collection procedures.

The collection

procedures for past dues or delinquent accounts should also be established in unambiguous
terms. The slow-paying customers are needed to be handled very tactfully. Some of them may be
permanent customers. The collection process initiated quickly, without giving any chance to
them, may antagonize them, and the firm may lose them to competitors. (Ibid, Page no. 864)
The responsibility for collection and follow-up should be explicitly fixed. It may be interested to
the accounts or sales department, or to a separate credit department. The co-ordination between
accounts and sales departments is necessary. The accounting department maintains the credit
records and information. If it is responsible for collection, it should consult the sales department
before initiating an action against non-paying customers. Similarly the sales department must
obtain past information about a customer from the accounting department before granting credit
to him. (Ibid, Page No. 864)

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Chapter Three

RESEARCH METHODOLOGY
3.1 Research Approach

The Research will be conducted using Quantitative method because receivables are express in
quantity, in addition to this the generation of the data involves in quantitative analysis therefore it
describes the phenomena in number instead of words. In order to assess the receivable
management of the Nib Insurance company quantitative research is more preferable than
qualitative one.

3.2 Types of Data and Their Source

3.2.1 Types of data
I will use primary and secondary data for the research and sources of primary data includes,
interview with finance department employees and questioners will used to gather the necessary
information from branch supervisor and managers those who are found in Addis Ababa. And I
will use as a source for secondary data necessary written documents which are found in the
company.
3.2.2 Method and tools of data collection
For primary data the data collection method that will be applied in the research mainly involve: Questioners, (semi structured) Interview and Observation. The secondary data will be collected
from various written documents. In order to get reliable & accurate data primary data are
preferable on the other hand, to understand the previous trend of the company using secondary
data is also vital.

3.3 Population and Sample Size

3.3.1 Sample size
There are 308 employees who work in the head office of Nib insurance company among this 60
respondent will be selected.
3.3.2 Sampling technique
In order to collect first hand data I will prepare questioner and interview for the selected target
population of the research which is found in the finance department of the company and various
branches in Addis Ababa. I am planning to use Non-probabilistic sampling particularly
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judgmental sampling. This sampling technique is selected to get relevant & responsible data
from the concerned bodies and departments.

3.4 Data Analysis Techniques

The process of data analysis will involve several stages namely; data clean up, frequency tables,
percentages and means will be used to present the findings. Quantitative methods of data
analysis will be adopted in this study. Quantitative analysis will involve use of ratios, percentage,
mean, standard deviation and variance. Relationships between the independent variable (i.e.
Receivables) and the dependent variable (i.e. Profit) will be tested using the simple linear
regression model Y=MX+B; where Y is the Dependent variable which is Profit; while X is the
Independent variable which is receivable management practices and M is the rate of change of Y
with respect to the rate of change of X and while B is a constant. Profit will be measured by the
performance of receivable collection management. Accounts receivable management practices
will be indicated through sound credit policy, factoring, provision of collateral security,
evaluation of credit worthiness and proper record keeping.

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Chapter four

SCHEDULE & BUDGET

4.1 Schedule
No

Activity to be performed

Weeks
1st

1.

Identification & formulating

research problem

2.

Literature survey

3.

Development of working
hypothesis

4.

Preparation of research &

sample design

5.

Develop Questioners and

Retest the Questioners

6.

Conducting Interviews and

Collecting

Data

from

Data

from

Questioners
7.

Collecting

Secondary Sources
8.

Data

Analysis

Interpretation
9.

Hypothesis Testing

10.

Report Draft writing

11.

Final report writing

12.

Final paper presentation

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and

2nd

3rd

4th

5th

6th

7th

8th

4.2 Estimated Budget

No

Items

Estimated cost in Birr

Stationery and other material

300.00

Printing and Photo Copy

250.00

Transportation

250.00

Miscellaneous expense

200.00

Total Cost

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1000.00