Principles and practice of effective accounts receivable management in Kenya: a case of selected manufacturing firms in Thika municipality
Kimani, Joseph Waweru
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Accounts receivable constitute a significant portion of current assets in manufacturing firms. Management therefore has to formulate strategies of effectively managing this important yet sensitive asset. This study aimed at investigating the principles and practices adopted by manufacturing firms in the management of accounts receivable in Kenya with specific reference to manufacturing firms in Thika municipality within KiambuCounty. The study further aimed at examining the strengths and weaknesses of the various strategies used by the firms and advice on the best strategies and practices for effective and efficient accounts receivable management in the sector. The study was descriptive in nature and targeted a population of 52 manufacturing firms licensed to operate within Thika Municipality.Data was collected using semi structured questionnaire administered to the chief finance officers and key credit control department personnel in the selected firms to collect both qualitative and quantitative information.Where necessary, personal interviews and documentary analysis were conducted to enhance validity of information gathered using questionnaires.Data was analyzed using descriptive statistics where measures of central tendency and measures of dispersion were computed to give results. Charts, tables and graphs were used to report findings.The results from the study revealed several factors that affected the management of accounts receivable such as lack of a formal credit policy, delayed or non review of the credit policy manual, inconsistency on credit risk analysis procedures and haphazard variation of credit terms. The study revealed erratic fluctuation in the average collection period and significant amounts of bad debts written off. A large number of firms did not have a credit control function at all. A sizeable number of firms were still using manual invoicing system and others took a considerable time to present invoices to their customers. The study recommends that firms should create a credit extension policy which should be adhered to always and periodically reviewed to see when it should be changed to match with economic conditions. Firms should create a credit collection policy setting out the procedures and practices to be used by the company to collect overdue or delinquent accounts receivable. Management should approve the formation of a well-run autonomous credit department that will allow the imposition of a comprehensive set of operating policies and procedures. Credit monitoring should be enhanced to evaluate the quality of accounts receivables to reduce over-investment in accounts receivable. Firms should automate their invoicing system to cut down on the time taken to present invoices to customers. The study was undertaken despite a number of limitations such as lack of co-operation by some potential respondents, lack of financial data for some firms for some time periods,and its scope which was limited to manufacturing firms within Thika municipality.