




































Indian Journal of Finance and Banking 

 Vol. 8, No. 1; 2021 

                                       ISSN 2574-6081   E-ISSN 2574-609X 

Published by CRIBFB, USA 

 

59 

CREDIT MANAGEMENT STRATEGIES AND FINANCIAL 

PERFORMANCE OF INDUSTRIAL GOODS SECTOR IN NIGERIA 
 

 

Ismail Alhassan 

Department of Accounting 

School of Business Education, Federal College of Education 

(Technical), Gombe, Gombe State, Nigeria 

E-mail: alhassan1412@gmail.com 

 

K. M. Anwarul Islam 

Associate Professor 

Department of Business Administration 

 The Millennium University, Dhaka, Bangladesh 

E-mail: anwarul@themillenniumuniversity.edu.bd 

 

 

Received: August 30, 2021     Accepted: November 15, 2021      Online Published: December 14, 2021  

 

DOI: 10.46281/ijfb.v8i1.1495            URL: https://doi.org/10.46281/ijfb.v8i1.1495 

 

 

ABSTRACT 

The influence of credit management methods on the liquidity and profitability of listed industrial goods 

firms in Nigeria was investigated in this study. It was decided to use a descriptive survey study design. 

The sample population for which copies of the questionnaire were distributed was 400 respondents, 

representing 65% of the population. The participants provided 355 valid responses, which were 

examined. For descriptive statistics, one-way ANOVA was utilized, and to test the hypotheses, a basic 

regression analysis method was applied. The results showed that the credit risk assessment, debt 

recovery strategy, and receivable collection policy sub-variables have a positive and statistically 

significant impact on the liquidity sub-variables - ability to pay, level of bad debt, and cash inflow. 

Liquidity had a positive and statistically significant effect on profitability. The study thus, suggest that 

companies in the industry should enhance their liquidity in order to achieve the targeted profit level by 

having effective credit terms and proper risk assessment strategy, designing and implementing debt 

recovery plans to aid collection of the overdue debt, adopting a stringent credit collection method, and 

employing and retained qualified accountants and credit administrators with excellent knowledge of 

credit control techniques. 

 

Keywords: Credit Management Strategies, Credit Sales, Industrial Goods, Liquidity. 

 

JEL Classification Codes: F65. 

 

INTRODUCTION 

For quite a long time marketing professionals have recognized that giving credit is one of the tactics 

used by businesses to increase sales volume. It serves as a critical marketing link for the transportation 

of goods from manufacturing to distribution to a large number of customers who cannot pay right away. 

In the firm's statement of financial position, trade credit establishes an account receivable, which the 

firm records under current assets and anticipates to receive in the future. Apart from increased sales 

https://doi.org/10.46281/ijfb.v8i1.1495


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volume, companies give credit to consumers for a variety of reasons, including gaining a large 

percentage of the industry market, achieving a certain level of profit, commanding client loyalty, and 

retaining customers in the company (Wireko & Forson, 2017). In credit transactions, the economic worth 

of the items flows to the buyer at the time of purchase, but the seller anticipates receiving an equivalent 

amount at a later period. The seller may face some liquidity risk as a result of a partial or complete 

payment delay at the moment of sale (Kaitibi1, Ganawah, Yokie, Jalloh, & Koroma, 2018). As a result, 

credit sales imply both current and future transactions, posing a receivable risk that must be carefully 

assessed and handled. Credit is unavoidable in any business circle, yet it remains a threat to any 

company's financial health and performance (Agu & Basil, 2013; Nwanna & Oguezue, 2017). 

Many quoted industrial businesses in Nigeria have failed because to a lack of liquidity to launch 

sustainable investments, resulting in lower profitability levels to continue operations, according to 

previous studies (Owolabi & Obida, 2012; Ifurueze, 2013). Bad debts from consumers who were unable 

to pay for products offered to them on credit when they were due accounted for a large portion of the 

liquidity problem. To increase sales, several manufacturing corporations give customers a lot of credit 

at the expense of liquidity, volume and control of a fair part of the industry market are prioritized. A 

corporation with sufficient liquidity can satisfy its short-term operating obligations to creditors and 

invest in promising ventures. Profitability would be boosted by proper investments, such as in projects 

with a positive net present value, as well as quick creditor payment and a cash discount advantage (Banu, 

Sayaduzzaman, & Sil 2021). Long-term credit without a credit policy to control debts will have a 

detrimental impact on liquidity and profitability (Raymond & Adigwe, 2015). To assess, manage, and 

avoid bad debts, a firm should use credit analytical tools and tactics created by credit professionals. 

Management uses sound credit sales to maximize debt collection, reduce credit expenses, and provide 

credit solely to creditworthy consumers in order to eliminate the problem of bad debts and improve cash 

flow. To stay ahead of the competition, businesses should develop competitive financing conditions 

(Ofoegbu, Duru, & Onodugo, 2016). 

Management should control credit to guarantee adequate liquidity, according to Owolabi and 

Obida (2012), by designing an acceptable credit model that would offer a collection of receivables at 

appropriate time. Credit terms and client risk assessment, credit collection, and better debt recovery at 

low cost are all part of the plan. According to Ifurueze (2013), proper liquidity has a considerable 

moderating effect on an organization's profitability. This assumption has prompted the question of how 

credit management practices affect liquidity and, as a result, profit. In Nigeria's chemical and paint 

manufacturing subsector, the answer to this study question was omitted. As a result, further research is 

needed to determine the influence of credit management practices on the liquidity and profitability of 

businesses.  

The overall goal of this study is to look into the impact of credit management practices on the 

liquidity and profitability of Nigerian industrial goods sector. The subsidiary objectives to achieve the 

main goal are: to examine the impact of credit conditions and risk assessment on the customer's ability 

to pay; to examine the impact of debt collection method on the customer's ability to pay, to assess the 

impact of credit collection policy on the company's cash flow and to assess the extent of bad debt. Credit 

management procedures in industrial goods sector whose instruments are not traded on the Nigeria stock 

market floor, as well as companies in other sub-sectors, were excluded from this study. The study's 

justification is to contribute to the literature by providing analytical evidence on the link between the 

variables. Managers in the manufacturing industry, researchers pursuing more research in this area, 

bankers, and analysts would all benefit from the findings. The research could potentially be used as a 

reference material for credit management applications. 

 

LITERATURE REVIEW 

The Concept of Credit Management Strategies 

One of the most essential decisions sellers must make is whether or not to issue credit, and if so, how 

the credit will be managed. Credit control decisions differ from one business to the next, yet certain 

firms' decision templates may be similar, especially within the same industry (Okpala, Osanebi, & 



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Irinyemi 2019). Though credit sales transactions create trade debts in a business, they can also result in 

questionable and bad debts in some situations. Where existence is dependent on the volume of turnover, 

credit sales, regardless of the risk, is critical (Khan, Tragar, & Bhutto, 2012). According to the debtors' 

payment strength, debt can be classed as excellent, dubious, or terrible. The quality of accounts accepted 

by the firm, the state of the purchasers' country, and credit management practices are all factors that 

influence the extent of dubious or bad debt losses (Kamal 2021). The danger of questionable and bad 

debts can be reduced when debtors are properly managed. While improper trade debt management can 

result in a high sum of money being set aside for dubious and debt debts, bad debt losses occur when a 

company is unable to collect its receivables (Adegboye, 2021; Agu & Basil, 2013).  

Regardless of the virtues of credit sale in accomplishing firms' objectives, according to Uzoh 

(2012), it was proven to be accountable for financial failure in some manufacturing organizations, 

particularly when trade credits were not adequately managed. Most companies overlook the risk 

connected with sale credits and utilize it as a marketing technique in order to increase sales to beat the 

competition, increase customer loyalty, encourage additional cash flow, and aid in negotiating leverage. 

When the degree of competition in the industry is high, a firm will provide more credit and will have 

strong bargaining power if it has a strong product, monopoly power, brand name, huge size, and strong 

financial position. Credit sales are also used as a marketing tactic when a new product is brought to the 

market or when a corporation wants to push a product that isn't performing well (Ehiedu, 2014). 

 

Credit Management Strategies 

The terms policy and strategy have been used interchangeably in the past. A strategy is a special plan 

created to gain a market position and meet the company's objectives, whereas a policy is a set of 

guidelines created by the organization for rational decision making. As a result, policies take second 

place to strategy. Credit management policy is an operational document that lays out several operating 

rules for the credit sales process that the entire organization must follow when granting credit to 

customers (Taiwo & Abayomi, 2013). This research focused on credit management strategy, which is 

defined as a design that assists a firm in achieving organizational credit objectives, gaining customer 

trust, gaining a competitive edge through sales volume, and gaining a solid market position. A firm's 

intended position is achieved by a combination of well-thought-out intent and actions. This 

organizational approach aims to be effective (raise sales), manage events and problems (financial risk), 

capitalize on opportunities (increase cash inflow), fully utilize resources (make suitable expenditures), 

and deal with threats (reducing bad debt losses). Credit sales are managed, and bad debt losses are 

reduced using the credit management technique. Establishing credit conditions, credit information 

analysis and scoring to determine credit worthiness of organizations and individuals, and developing 

credit plans to aid receivable collections when due are all routine practices of credit management 

(Ifurueze, 2013). 

 

Establishment of Terms of Credit 

The terms of credit refer a combination of three factors: the period of credit, cash discount, and the type 

of credit instrument employed. Credit periods refer to the time between sales and payment, which varies 

depending on the industry and the type of items supplied. When determining a credit period, a 

corporation must assess the likelihood that the client would not pay on the due date, the size of the 

account to allow for a shorter credit period for smaller accounts and vice versa (Akinleye, & Olarewaju 

2019). The degree of durability of the collateral used as security is also important. Secondly, a monetary 

discount is frequently permitted as part of the loan terms, and the purpose of the rebate is to expedite the 

collection of receivables. Finally, the invoice is commonly used as a credit sales tool. A seller sends a 

customer an invoice to sign as proof of receipt of goods, which also serves as a source document for the 

receivable accounting record (Akinsulire, 2017). 

 

 

 



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Analysis and Scoring of Credit Information  

Credit information analysis and scoring are two methods for determining a prospective customer's 

creditworthiness (firm or individual) and influencing the quality of the firm's customers who are 

provided credit (Ifurueze, 2013). Financial statements of the prospective credit customer are a common 

source of information used to assess a customer's creditworthiness. The seller would then be able to 

perform a ratio analysis. The customer's payment history, the quantity of the customer's important assets, 

at least three trade credit references, and full details of all directors, partners, or owners are also 

necessary for credit reports. Customers who are financially vulnerable should be required to submit a 

"credit bond" from a reputable financial institution (Akinsulire, 2017). It is based on these factors that 

the decision to award or deny credit is made. The defined criteria for evaluating credit risk, according to 

Ifurueze (2013), should be based on the "5Cs" of credit, which comprise character, capacity, capital, 

collateral, and condition. 

The willingness of a consumer to meet financial obligations is referred to as character. The term 

"capacity" refers to a customer's ability to pay his debt from his operating cash flows. Conservatism is 

examined using a broad financial ratio analysis, with a focus on risk ratios including debt-to-asset ratios, 

current-to-current ratios, and interest-earned-to-interest-paid ratios. This criterion demonstrates the 

customer's capital sufficiency. Furthermore, collateral refers to the assets that consumers pledge as a 

guarantee for the loan given. Finally, the requirement refers to the avoidance of economic and other 

national situations that could affect the customer's ability to pay. Adverse economic conditions may 

influence a customer's ability or inclination to pay a loan when it is due (Ofoegbu, Duru, & Onodugo, 

2012).  

 

Monitoring Receivables 

Debts should be monitored by the finance manager to ensure that all receivables are collected on time. 

He should use techniques like the average collection period, the aging schedule, and the collection 

experience matrix to help him. The average collection period is a credit policy that specifies a credit 

period that is compared to the calculated average collection period to determine how long it takes to 

collect an account receivable on average. Cash inflows are hampered by collection delays, which 

increases the risk of bad debt losses (Kroes & Manikas, 2014). This scenario would inevitably wreak 

havoc on the company's liquidity and profitability. This is how the formula is calculated: 

 

ACP = D / CS x 365 days. 

 

Where:  

ACP = Average collection period;  

D= Debtors, and  

CS = Credit sales 

 

This approach of reviewing and monitoring receivables aids in the tabulation of receivables by 

debt period. It shows how long the receivables have been outstanding, which is normally within 30 days, 

60 days, and 90 days or more (Uwalomwa, Uwuigbe, & Oyewo 2015). Traditional ways of evaluating 

receivables include the average collection period and the aging analysis schedule, both of which have 

drawbacks. Failure to link receivables to sales from the same period is one of the flaws, making control 

difficult (Owolabi & Obida, 2012). The collection experience matrix is a scientific method for analyzing 

collection experience that uses disaggregated data. This method connects receivables to sales from the 

same time period. The model displays transactions in a horizontal hierarchy and associated receivables 

in a vertical hierarchy for a particular period. 

 

Liquidity and Profitability Relationship 

Liquidity in the manufacturing environment refers to the amount of cash or near-cash instruments a firm 

has on hand to pay its obligations immediately or in the short term (Okpala, 2017). The term "sufficient 



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liquidity" refers to an entity's ability to satisfy its financial obligations when they become due. Liquidity 

has a quantity and a time dimension, according to Ezejiofor, Adigwe, and John-Akamelu (2015). Your 

liquidity is sound if you have cash or quickly realizable assets like government securities. Liquidity is 

determined by the ability and willingness of debtors to pay. If that is made up of goods, liquidity is 

determined by their salability, which can be low if they're not in demand. The above statement examines 

liquidity using current assets and their ability to be converted into cash (Olagunju, David, & Samuel, 

2012; Owolabi & Obida, 2012). Liquidity is believed to be at its optimum level in this study when credit 

clients can pay their bills on time, and proper policies are implemented to avoid or reduce bad debt 

(Muritala & Taiwo, 2013; Ofoegbu, Duru, & Onodugo, 2016).  

Any business venture's primary goal is to maximize profit, which defines its short-term viability. 

Profit is important, but management decisions should not be made solely for the sake of profit at the 

expense of wealth maximization. Profit is defined as the difference between revenues and expenses over 

a period of time, usually a year, and is considered the final outcome of a business's operations. Without 

sufficient earnings, a company's future is bleak. Profitability ratios assess a company's overall 

performance of by analyzing the company's overall performance and viability (Uwuigbe, Uwuigbe, & 

Oyewo 2015). The ratios used to quantify profitability are margin and markup, return on equity (ROE), 

and return on assets (ROA). The leftover profits are distributed to regular stockholders. This means that 

their return is the net profit after taxes. As a result, the Return on Equity (ROE) is used to determine the 

profitability of the owners' investment (ROE). The formula is as follows: 

 

ROE = Net profit after tax/Shareholders ‘equity 

 

Also known as Return on Assets, profitability can be assessed by a company's net income 

expressed as a percentage of total assets available for use (ROA). Companies with higher asset values 

should be able to make more profits, according to ROA. Management's capacity to effectively employ 

available assets and achieve good returns is measured by ROA. The formula is as follows: 

 

ROA = Profit after tax/Total Assets 

 

Factoring 

Different companies use different credit management approaches as long as the end result is positive. 

When a finance manager recognizes his company's unique situation, he or she may decide to employ 

debt risk reduction measures, one of which is factoring. Factoring, also known as debtor finance or 

receivables factoring, occurs when one company purchases another's debt or invoice (Onuora & Nwafili, 

2017). The debtors' accounts are discounted in this transaction to allow the buyer to profit from the debt 

settlement. Factoring is the process of transferring ownership of receivable accounts to a third party who 

will pursue the debt. Factoring buys debt at a discount, releasing the original debtor and providing them 

with working capital to continue trading, while the debt buyer chases down the loan for the full amount 

and profits when the receivable is collected (Olarewaju & Akinleye 2018). Clients can get the 

information and reports they need regarding market trends and patterns from this element. They also 

conduct a systematic study of the client's data in order to ensure proper debt monitoring and management 

(Uwalomwa, Uwuigbe, & Oyewo, 2015). 

 

Empirical Review 

Numerous studies have been conducted by researchers on credit management and its ability to improve 

profitability. Muritala and Taiwo (2013) in their studies used ten years of bank data from 2001 to 2010 

to examine the relationship between credit management, liquidity position and profitability of some 

selected banks in Nigeria. The alternative risk absorption hypothesis, according to the study, stipulates 

efficient credit management, which improves enterprises' ability to create liquidity. Furthermore, it was 

discovered that return on assets has a large positive impact on current ratio, corroborating the financial 

fragility crowding out concept. Oyadonghan and Bingilar (2014) examined the effects of effective credit 



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policy on the liquidity of manufacturing enterprises in Nigeria and found a link between credit 

management and liquidity. Liquidity is at a desirable level when a company's credit policy is favorable, 

according to the study. It also revealed that manufacturing organizations do not constantly check and 

review their credit policies, and as a result, cash discounts are not allowed as often as they should be. 

According to Kaitibi, Ganawah, Yokie, Jalloh, and Koroma (2018), who evaluated the influence of 

efficient credit management on commercial bank profitability in Sierra Leone between 2010 and 2014, 

credit management shows a positive and significant link with profitability. The findings revealed that 

the effectiveness of loan management has a substantial impact on the profitability of commercial banks 

in Sierra Leone. Sabenhang (2015) looked into the impact of credit management on commercial bank 

performance in Rwanda. The study discovered that there was a substantial link between Equity Bank's 

financial performance and client appraisal, credit risk management, and collection policy. Between 2006 

and 2015, Okpala (2017) conducted research on the relationship between credit management and deposit 

money bank profitability in Nigeria. The study found that good credit management helps DMBs 

maintain their financial strength (liquidity), which boosts their profitability. As a result, Kungu, Wanjau, 

Waititu, and Gekara (2014) investigated the impact of loan policy on manufacturing firm profitability 

in Kenya. Profitability and credit policy have a significant link, according to the findings. These findings 

are consistent with those reported by Martnez-Sola et al. (2010) and Khan et al (2012). The finding of 

Alarcon, on the other hand, contradicted the positive effect of credit management on profitability (2008). 

The purpose of this study is to determine the importance of trade credit as a means of business financing 

in the Spanish agro-food industry. Credit policy and liquidity management, according to Onuora and 

Nwafili (2017), have a significant negative association with Return on Assets.  

Liquidity management is critical, especially during times of financial crisis and high costs of 

getting loans in the financial market, as well as investors' reluctance to engage in company shares due 

to capital market problems (Owolabi & Obida, 2012). Owolabi and Obida (2012) investigated the 

association between liquidity management and corporate profitability in Nigerian manufacturing 

enterprises. Liquidity management, as assessed by the company's credit policies, cash flow management, 

and cash conversion cycle, has a considerable impact on profitability, according to the findings. In 

addition, Ezejiofor, Adigwe, and John-Akamelu (2015) investigated the impact of credit management 

on the liquidity and profitability of a Nigerian manufacturing firm. According to the findings, there is a 

link between liquidity situation and debtor turnover, as well as liquidity management and profitability. 

Trade credit promotes items and increases sales, whereas credit management tactics have a direct 

relationship with a firm's liquidity situation and an indirect association with profitability, according to 

the research. Kumaraswamy and George (2019) replicated the association between liquidity 

management and profit performance in the Nigerian listed pharmaceutical manufacturing subsector 

(2016). The liquidity ratio and the profitability of the companies were shown to be strongly and 

favorably connected. The findings of Uzoh (2012) and Ifurueze (2012) support the conclusions of these 

studies (2013). Omenguele and Mazra (2013) warned that if trade credit isn't properly managed, the 

system's profitability and performance will suffer. 

 

Gaps and Hypotheses Development 

Most researchers had established the relationship between credit management and liquidity and 

profitability in the banking sector, according to the literature reviewed in the previous subsection 

(Muritala & Taiwo, 2013; Kagoyire & Shukla, 2016; Kaitibi et al., 2018). However, just a few studies 

in Nigeria have linked credit management to liquidity and profitability in the industrial sector (Owolabi 

& Obida, 2012; Oyadonghan & Bingilar, 2014; Ezejiofor, Adigwe, & John-Akamelu, 2015). In the 

quoted chemical and paints manufacturing sub-sector in Nigeria, it is clear that the relationship between 

credit management strategy, liquidity, and profitability sub-variables and in aggregate has been deleted 

from the body of knowledge. This omission left holes in the research, which the current study aimed to 

fill. To fill in the gaps in the literature, the following null hypotheses (H0) were developed to investigate 

the relationship between the variables. 

 Credit risk assessment has no significant impact on the customer’s ability to pay. 



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 Debt recovery strategy has no significant influence on the level of the firm’s bad debt. 

 Receivable collection policy has no significant effect on cash inflow and 

 Firm liquidity has no significant influence on profitability. 

 

Theoretical Review 

According to the literature, the supply of trade credit in an unequal situation between the vendor and the 

customers offers a variety of ideas to explain trade credit's existence and use. Tax theory, liquidity 

theory, product quality theory, financing advantage theory, pricing discrimination theory, and 

transaction cost theory are examples of these theories. Although not exhaustive, the preceding list 

reflects the writers' understanding of trade credit in a Nigerian context (Ali & Dhiman 2019). To explain 

the merit supplied to both sellers and purchasers, the financing advantage theory of trade credit and 

transaction costs theory were employed as the foundation of this study. 

 

Theory of Financing Advantage  
According to the financial advantage idea of trade credit, suppliers may have an advantage over 

traditional lenders in determining the creditworthiness of their customers, as well as a superior ability to 

monitor and enforce credit repayment. 

In extending credit to a buyer, the seller may have a cost advantage over financial institutions 

because of the financing advantage (Schwartz, 1974). Gaining knowledge, influencing the buyer, and 

salvaging the value of existing assets are all cost advantages offered to the credit supplier. When a 

supplier visits the buyer's location more frequently than financial institutions, it gains an edge in 

information acquisition. By analyzing the amount and timing of the buyer's orders, as well as his 

response to taking advantage of early payment to gain discounts, the information may be derived from 

the buyer's business state. The incapacity of a buyer to take advantage of early payment reductions may 

disclose the extent of his creditworthiness and serve as a red flag (Chaudhury, 2020). 

The nature of the items sold and the seller's position should be examined whether the vendor 

must control the buyer. If the supplier observes that the buyer has few cost-effective substitute sources, 

the supplier can threaten to shut off future deliveries if the buyer account represents a small percentage 

of the provider's total sales volume. In the case that the buyer defaults, the supplier can seize the items 

given to preserve the value of the current assets. If the items provided are long-lasting, the lien situation 

may be feasible. As a result, the larger the risk, the more durable the buyer's collateral is (Singh & 

Sharma, 2018). If the supplier observes that the buyer has few cost-effective substitute sources, the 

supplier can threaten to shut off future deliveries if the buyer account represents a small percentage of 

the provider's total sales volume. In the case that the buyer defaults, the supplier can seize the items 

given to preserve the value of the current assets. If the items provided are long-lasting, the lien situation 

may be feasible. As a result, the more durable the buyer's collateral is, the more credit the supplier can 

extend (Tuladhar, 2017). A financial institution, on the other hand, may have limited capabilities to 

withdraw future financing, which may have no immediate impact on the borrower's activities. In 

addition, bankruptcy regulations may limit the financial institution's ability to withdraw previous loans. 

Financial institutions might potentially seize the company's assets to repay the loan. However, if the 

supplier already has a network for selling its goods, it can achieve reclamation and resale at a lower cost 

than the banking institution. Alalade, Binuyo, and Oguntodu (2014), and Taiwo et al. (2017) all 

employed the financing advantage hypothesis of trade credit. 

 

Transactions Costs Theory 

The buyer's benefit in using trade credit as a form of financing, as well as the seller's cost-cutting 

strategy, is supported by transaction costs theory. It claims that using trade credit can help you save 

money on your bill-paying transactions (Uzoh, 2012). Rather than paying bills as soon as items are 

delivered, a customer with credit sales accumulates responsibilities and pays them only at agreed-upon 

intervals — weekly, monthly, or quarterly. The vendor would also be able to decouple the payment cycle 

from the delivery timetable in this way. Other versions of the transaction cost theory are applicable to 



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goods with a high degree of seasonality in their consumption patterns. To maintain smooth production 

cycles, the company may need to build up large inventories, which will result in stock warehousing costs 

and a reduction in working capital. These costs could be cut by (a) lowering the price of the goods to 

encourage early sales and demand. Though this may reduce earnings, (b) selectively giving trade credit 

to consumers and over time to enhance sales and inventory management (Mian & Smith, 1992). 

Ezejiofor, Adigwe, & John-Akamelu, 2015; Kagoyire & Shukla, 2016; Nwanna & Oguezue, 2017; 

Ezejiofor, Adigwe, & John-Akamelu, 2017; Ezejiofor, Adigwe, & John-Akamelu, 2017; Ezejiofor, 

Adigwe, & John (2017). The trade credit theories of financing advantage and transaction costs are crucial 

to this study because they explain why both sellers and buyers under trade credit in a perfect market 

offer and accept trade credit. 

 

METHODOLOGY 

In order to empirically analyze the influence of credit management techniques on liquidity and 

profitability of quoted industrial goods companies in Nigeria, a descriptive survey study approach was 

used. This design was chosen because it captures the study's research goals and deals with non-

manipulated complex interactions between variables (Zamira, 2016) As of May 2019, the study's 

population consisted of 834 management workers (top, medium, and lower level managers) from seven 

(7) selected listed industrial goods firms in Nigeria. The participants had to meet the following criteria: 

I have at least 5 years of calculative experience in the industry, (ii) have at least a B.Sc. educational 

level, and (iii) be involved in trade credit and receivable decision making in the organization. There are 

ten firms included in the study, these are: DN Meyer Plc, Beta glass Nigeria Plc, CAP Plc, Berger Paints 

Plc, Dangote Cement Plc, Portland Nigerian Plc, Cutix Plc, Lafarge Plc, Greif Nigeria Plc and Premier 

Paints Plc. The sample consists of 400 respondents, or 65% of the overall population, who were chosen 

at random. The Executive Directors, General Managers, Sales & Marketing Managers, Finance 

Managers, Accountants and others were chosen as participants.  

5 points for 20 items The Likert-scale response instrument was created by the researcher and 

divided into sections A and B for demographic data and sections B to E for inferential data. The answers 

to the questions in each section about the quantity of relationships between variables were coded as 

follows: 1= Weak. 2 indicates a slight weakness, 3 indicates an average performance, 4 indicates a strong 

performance, and 5 indicates a very high performance. To reach relevant analysis and conclusion, the 

respondents' impressions and opinions were recorded and assessed. Exploratory factor analysis was used 

in the research instrument to see if the proposed variable indicators had significant factor loadings and 

to choose the best model for the study.  

At a 5% level of significance, descriptive statistics and regression analysis were used to assess 

the primary data gathered. The descriptive statistics were determined using a one-way ANOVA to 

determine the average respondents' perception and the mean score on each of the three constructs. In 

addition, a basic regression analysis method was used to examine the impact of credit management 

strategy on liquidity and profitability in Nigeria's publicly traded industrial goods firms. The rule was 

that the independent variable's probability value was compared to a critical value of 5%. 

Credit management strategies, which are separated into three proxies: credit risk assessment 

approach, debt recovery strategy, and credit collection strategy, are the independent variables. Liquidity 

is the dependent variable, which is divided into three sub-variables: ability to pay, bad debt level, and 

cash inflow, which is thought to have the potential to modify profitability. The variables employed in 

the investigation were described in Table 1. 

 

Table 1. Depiction of Variables Used in the Study 

 

Variables Abbre Status Definition  

Credit risk 

assessment 

strategy 

CRA Independent This is an examination of a prospective credit customer's 

information to determine whether the customer will be able 

to meet his commitments under the terms of the contract. 



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Credit 

Management 

Strategies 

CMS Independent Are plans by a firm to guarantee that credit sales are kept 

under control, receivables are collected on time, and bad debt 

losses are kept to a minimum in order to meet the firm's goals. 

Credit 

collection 

strategy 

RCP Independent This is a set of receivables collection policies that control how 

a company extends credit and collects receivables. 

Debt 

recovery 

strategy 

DRS Independent This is a method that aids a company in debt collection by 

lowering costs, shortening collection time, and increasing 

liquidity. 

Profitability PRO Dependent This is the amount of profit or financial gain generated by an 

organization's activities. It's calculated by subtracting total 

expenses from total revenue over the same time period. 

Liquidity LID Dependent Liquidity refers to how much cash or close cash a company 

has on hand to pay short-term obligations. 

Bad debt. LBD Dependent A bad debt is a sum of money owing to a creditor that is 

unlikely to be repaid. 

Cash inflow CFL Dependent The net amount of cash and cash equivalents transferred into 

a business is referred to as cash inflow. 

Ability to 

pay 

ATP Dependent This is a financial theory that demonstrates a credit 

customer's ability to pay his obligation when it is due. 

Source: Researchers’ Compilation (2021) 

 

Other dummy variables in this study include the credit manager's expertise, industry restrictions, 

the type of credit items sold, and the usage of collateral as security. These variables, however, were not 

employed in the regression analysis because they expected a value of "0." 

 

Econometric Specification 

At a 5% level of significance, the data were examined using a descriptive and basic regression approach. 

LID + PRO = f is the functional form of the model specification (CMA). Where LID stands for liquidity, 

with ATP, LBD, and CFL as sub-variables as a function of credit management approach (CMS). CRA, 

DRS, and RCP are all proxies for the CMS. The following are the linear regression equations that were 

used adopted from Ehiedu (2014) with modification: 

 

Impact of credit risk assessment on customer’s ability to pay the debt 

ATP=β0 +β1 (CRA) + ε1………………………………………….. Model 1 

 

Impact of debt recovery strategy on the company’s level of bad debt. 

LBD= β0 +β2 (DRS) + ε2 ……………………………………..…. Model 2 

 

Impact of credit collection policy on cash inflow 

CFL=β0 +β3 (RCP) + ε3 …………………………………….….Model 3 

 

Impact of liquidity on profitability 

PRO=β0 +β4(LID) + ε4 ………………………………………..Model 4 

 

The overall model for the study is indicated as follow: 

 

Influence of firm liquidity on profitability 

LID+PRO =β0 + β1 (CMS) + ε 

Where: CMS = (CRA) + (DRS) + (RCP) 



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LID+PRO =β0 + β1 (CRA) + β2 (DRS) + β3 (RCP) + ε…….Model 5 

A prior expectation CRA> 0, DRS> 0, RCP> 0 

 

DATA ANALYSIS AND INTERPRETATION OF STATEMENTS 

A total of 400 copies of the questionnaire were distributed to the sample population, and 355 copies 

were returned, reflecting a response rate of 89 percent. The data were collected and analyzed using 

descriptive and regression analysis to test the null hypotheses about the effect of credit management 

strategy on liquidity and profitability. 

 

Descriptive Statistics 

To summarize the average respondents' perceptions of each of the credit management strategy sub-

variables - credit management, credit risk assessment, and debt recovery plan - descriptive statistics were 

conducted using one-way ANOVA. 

 

One-Way Analysis of Variance (ANOVA) 

Table 2. Summary of Results (One - way ANOVA) 

 

Firms CRS (Model 1) DRS (Model 2) RCP (Model 3) 

 N Mean SD N Mean SD N Mean SD 

Meyer Plc 37 3.442 0.344 37 4.452 0.346 37 3.843 0.238 

Beta Glass 40 3.028 0.354 40 4.465 1.456 40 3.665 0.357 

Greif Plc 41 3.502 0.564 41 4.028 0.453 41 3.583 0.448 

CAP Plc 36 3.243 1.345 36 4.922 0.982 36 3.879 0.639 

Lafarge Plc 40 3.345 0.657 40 4.502 0.485 40 3.658 1.338 

Cutix Plc 38 3.452 1.024 38 4.563 0.398 38 3.904 0.511 

Premier Paint 30 3.112 0.376 30 4.237 1.398 30 3.831 0.378 

Berger Paint 39 3.426 1.101 39 4.598 0.765 39 3.773 0.444 

Portland 25 3.246 0.345 25 4.722 0.439 25 3.905 0.346 

Dangote 29 3.222 0.392 29 4.832 0.267 29 3.643 0.398 

Total 355 3.302 0.650 355 4.539 0.699 355 3.768 0.510 

F- statistics 22.34   24.

11 

  20.86   

P-value 0.012   0.0

35 

  0.009   

Source: Researcher's Computation 

Note: CRA = Credit risk assessment; DRS = Debt recovery strategy; RCP = Receivables collection 

policy 

 

Hypothesis 1: Credit Risk Assessment has No Significant Impact on the Customer’s Ability to Pay 

As demonstrated in Table 2, Model 1, the average opinion of each population strata suggested a strong 

but mixed perception of the impact of credit risk assessment on customer ability to pay in each category. 

When all the items were collapsed, the overall average impression of all categories yielded a total mean 

score of 3.302, with an F- value of 22.34. With a P-value of 0.012 < 0.05, the differences in mean 

impression of the ten firms were statistically significant. As a result, the aggregate mean score of 

respondents' opinions between the CRA and the ATP suggests that credit risk assessment is strongly 

linked to the customer's ability to pay. This falls above “slightly strong” option on the scale of 1 to 5 on 

the research instrument. 

 

 

 



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Hypothesis 2: Debt Recovery Strategy has No Significant Influence on the Company’s Level of 

Bad Debt 

As demonstrated in Table 2, Model 2, the average view of each population strata suggested a high but 

mixed perception of the impact of debt recovery strategy on the company's level of bad debt in each 

category. When all the items were collapsed, the overall average perception of all classes yielded a total 

mean score of 4.539, with an F- value of 24.11. With a P-value of 0.035 < 0.05, the differences in mean 

assessment of the ten firms were statistically significant. As a result, based on the total mean score of 

respondents' opinions between the DRS and BDE, debt recovery method appears to be firmly tied to the 

company's amount of bad debt. This falls within the “strong” option on the scale of 1 to 5 on the research 

instrument. 

 

Hypothesis 3: Receivable Collection Policy has No Significant Effect on Cash Inflow 

In Table 2, model 3, the common view of each population section revealed a strong but mixed opinion 

in each group on the impact of receivable collection policy on cash inflow. When all the items were 

compressed, the overall average perception of all categories resulted in a total mean score of 3.768, with 

an F- value of 20.86. With a P-value of 0.009 < 0.05, the variations in the mean viewpoint of the ten 

firms were statistically significant. As a result, based on the overall mean score of respondents' opinions 

between the RCP and CFL, the receivable collection policy is highly related to the degree of cash inflow. 

This falls within the “strong” option on the scale of 1 to 5 on the research instrument. 

 

Test of Hypotheses 

Table 3. Summary of Regression Results of the impact of credit management strategy on Firms' 

Profitability 

 

 N Model 1 Model 2 Model 3 Model 4 

Model Summary      

R 355 0.554 0.498 0.472 0.643 

R2  0.592 0.589 0.640 0.601 

Adj. R2  0.521 0.573 0.581  

ANOVA      

Sig.  0.005 0.025 0.017 0.000 

F. Statistics 355 18.321 16.477 14.528  

Coefficients      

t- statistics  10.532 8.912 9.487 7.367 

( Constant)  4.617 3.839 3.541 4.783 

CRA, DRS, RCP 355 0.421 0.568 0.462 0.576 

Std. Error  0.043 0.064 0.0867 0.053 

DW  2.342 1.346 1.092 2.003 

Source: Researcher's Computation 

 

The bivariate analysis of hypotheses 1, 2, and 3 revealed that R = 0.554, 0.592, and 0.521 for the 

three constructs, respectively, as shown in Table 3. These findings show that independent variable 

proxies (credit risk assessment, debt recovery technique, and receivable collection policy) have a 

favorable impact on dependent sub-variables (ability to pay, bad debt level, and cash inflow). The F-

statistics of 18.321, 16.477, and 14.528 support this. The R2 values of 0.592, 0.573, and 0.581 indicated 

that CRA, DRS, and RCP were responsible for 52 percent, 57 percent, and 58 percent of the variation 

in liquidity and profitability of quoted industrial goods businesses in Nigeria, respectively. The 

independent sub-variables had statistically significant effects on dependent sub-variables (P = 0.005, 

0.025, and 0.017). The t-statistics of 10.532, 8.912, and 9.487 verified this. The null hypotheses 1 to 3 

were rejected based on the data presented above, whereas other hypotheses were not. ATP = 4.617 + 



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0.421 (CRA); BDE = 3.839 + 0.568 (DRS); and CFL = 3.541 + 0.462 (CFL) are the basic linear 

equations for the three structures (RCP). In the industrial goods sector in Nigeria, a unit increase in CRA, 

DRS, and RCP would push 42 percent, 57 percent, and 46 percent increases in ATP, LBD, and CFL, 

respectively.  

The overall R= 0.643, indicating that liquidity (LID) has a considerable positive impact on 

profitability, according to the results of null hypotheses 4. (PRO). LID was responsible for 60% of the 

variation in the PRO in the industrial goods sector in Nigeria, according to the R2 = 0.601 result. LIDS 

had a statistically significant effect on PRO (P = 0.000 < 05). PRO= 4.783 + 0.576 (LID) was the simple 

linear equation, which meant that a unit change in LID resulted in a 57 percent rise in PRO. As a result, 

null hypothesis 4 is rejected, while the alternate hypothesis is not. Based on the statistically significant 

positive effective of the CMS three components, it can be concluded that the CMS multi-variance has 

adequately described liquidity and profitability in aggregate. Hypotheses one to four produce results that 

are consistent with the a priori expectation: CRA > 0, DRS > 0, RCP > 0.  

 

Discussion of Findings 

The findings of Muritala and Taiwo (2013), who said that return on assets has a strong positive effect 

on current ratio, supported Hypothesis 1, 2, and 3, validating the financial fragility crowding out 

hypothesis. Also, according to Oyadonghan and Bingilar (2014), a favorable company's credit policy 

pushes a desirable degree of liquidity. The findings are also consistent with Kaitibi et al. (2018)'s report, 

which concluded that better bank profitability in Sierra Leone was due to effective lending policy. These 

hypotheses were supported by the report studies of Martnez-Sola et al. (2010); Khan et al. (2012); Kungu 

et al. (2014); Kagoyire and Shukla (2016); Ofoegbu, Duru, & Onodugo, (2016); Nwanna and Oguezue, 

(2016); Martnez-Sola et al. (2010); Khan et al. (2012); Khan et al. (2012); Khan et al. (2012); Khan et 

al. (2017). However, the findings of this study contradict those of Alarcon (2008), who asserted that 

while credit management may promote items and increase sales, it will impair financial system 

profitability and performance if not properly managed. The findings also contradicted Onuora and 

Nwafili (2017), who found a significant negative link between credit policy and liquidity management 

and return on assets. Hypothesis 4 demonstrated not just a positive but also a significant association 

between liquidity and profitability. Ifurueze (2013), Owolabi and Obida (2012); Ismail (2016); Jindal, 

Jain, and Vartika (2017); and Ezejiofor, Adigwe, and John-Akamelu (2013) all came to similar 

conclusions (2015). 

 

SUMMARY, CONCLUSION AND RECOMMENDATIONS 

Summary of Findings 

Credit management strategies are plans of action aimed to guarantee that trade credit is granted and 

controlled appropriately. It would improve receivable collection from trade debtors by implementing 

appropriate methods, resulting in improved sales volume, total revenue, and lower financial risks. The 

goal of this research is to see how credit management tactics affect liquidity and profitability. This was 

determined by examining the influence of credit risk assessment strategy on customers' ability to pay, 

the impact of debt recovery strategy on bad debt levels, and the impact of credit collection method on 

cash inflow levels. The fourth sub-objective looked at the impact of liquidity on profitability as a 

moderating factor. The following is a summary of the research findings based on the analysis: 1. 

Hypotheses one to three revealed that the three tactics of credit risk assessment, debt recovery, and credit 

collection all had a positive and significant impact on a company's liquidity as assessed by customer 

ability to pay, bad debt level, and cash inflow. 2. Giving customer's credit would enhance sales and raise 

the industry's market share. 3. Credit management solutions increase liquidity through proper plans of 

action, improve receivable collections, and help the organization achieve its goals. 4. Adequate liquidity 

allows businesses to take advantage of the cash discount rate and engage in initiatives with a positive 

net present value, which boosts profits. 

 

 



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Conclusion 

Credit management strategies, as measured by credit risk assessment, debt recovery strategy, and credit 

collection strategy, have a positive and significant impact on liquidity and profitability of quoted 

industrial goods firms in Nigeria, according to the findings of this study. The following is a policy 

recommendation based on the study's findings: 

 The customer's capacity to pay is influenced by the credit risk assessment strategy. Setting a 

credit period, evaluating the degree of the durability of collateral presented as security before 

credit is granted, offering rebates to speed up receivables collections, and raising an invoice as a 

credit instrument for transaction proof are all requirements for organizations in this industry. The 

controller should review financial accounts of customers and determine their creditworthiness to 

assess consumer information and avoid risk.  

 The company's bad debt level is influenced by the debt recovery approach. To facilitate debt 

recovery, debt recovery plans should be established and implemented, particularly for overdue 

debts resulting from credit sales to customers. This would aid businesses in increasing receivable 

collections and reducing bad debt losses.  

 The way you collect receivables has a big impact on your cash flow. 

 

Recommendations 

Industrial goods sector in Nigeria should pay particular attention to receivables and liquidity. When 

properly managed, this initiative is likely to have an impact on the company's financial performance. 

The study thus, suggest that companies in the industry should enhance their liquidity in order to achieve 

the targeted profit level by having effective credit terms and proper risk assessment strategy, designing 

and implementing debt recovery plans to aid collection of the overdue debt, adopting a stringent credit 

collection method, and employing and retained qualified accountants and credit administrators with 

excellent knowledge of credit control techniques 

 

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