DEBTORS MANAGEMENT, WATER LOSS MANAGEMENT ANDFINANCIAL PERFORMANCE OF NATIONAL WATER AND SEWERAGE            CORPORATION IN THE SOUTHWESTERN                                                      REGION OF UGANDA

SECTION ONE

1.0 INTRODUCTION

1.1 Background to the Study

World over, the provision of Water and Sanitation services is intrinsically related to the sustainable development of every economy (Galaitsi, et al., 2016). Water lies at the heart of humanity’s social and economic transformations (Agnew and Woodhouse, 2010). Therefore, there is need for sustainable water management entities in every country to adequately provide such a resource. In Uganda, this mandate was entrusted to the National Water and Sewerage Corporation (NWSC), a state-owned utility that was established under the NWSC Act, Cap 317 (2000). The objective of the Corporation is to operate and provide water and sewerage services in areas entrusted to it under the Water Act, Cap 152 (2000).Indeed, one of the requirements for the NWSC to fulfill its mandate is provision of water supply and sewerage services on a sound commercial and financially viable basis. This implies that its financial performance must remain stable since it is paramount to sustainability.

Financial performance principally reflects business sector outcomes and its results show overall financial health of the sector over a specific period of time(Naz, Ijaz, & Naqvi, 2016). It therefore indicates how well an entity is utilizing its resources to maximize the shareholders wealth and profitability. This can be evaluated using various metrics such as Return on Investment (ROI), Return on Assets (ROA) and Average Return on Assets (AROA) among others (Nyangoma, 2012; Opanga, 2013 and Gatuhu, 2013). The NWSC has for overtime recorded an increasing trend in its financial performance but has consistently fallen short of its set targets. The corporation has not met its performance targets for revenues and profits in the last two financial years (NWSC performance report, 2017/2018). Existing studies have linked financial performance to debtors and loss management, though not in isolation. For example, studies by Ruguwa, (2018).  indicate that debtors management affects firm financial performance. Moreover, studies by Dong & Su, (2010)indicate that a firm’s profitability and liquidity are influenced by its debtors management strategies. Similarly, the works of Mburugu and Gekara (2016) indicate that there is a relationship between debtors’ management and firm performance and this is in agreement with works of Madegwa et al (2018), Kondo (2013) and Osoro et al. (2013).Moreover, theories such as the Operating Cycle Theory and the Cash Conversion Theory have also been used in previous studies to explain the relationships between debtors’ management practices and organisational financial performance. Hence this study will adopt the two theories to explain the relationships between the variables.

With the consistent trend of the corporation falling below its financial targets, the researcher suspects that this perhaps could be attributed to poor debtor’s management and water loss management gaps. Besides, extant literature has tended to partly associate financial performance of a firm to debtors and water loss management. Moreover, there is limited research explaining the same in NWSC Uganda and specifically to the NWSC branches operating in the South Western region. This therefore motivated the researcher to conduct this study.

1.2 Statement of the Problem

Although the NWSC has recorded an increasing trend in its financial performance, over time, it has continuously fallen short of its set financial targets according to existing reports. In the financial year 2013/2014, it generated revenue of 88.1b against a target of 94.4b, profit after tax was 20.8b against a target of 21.6b and there was also a shortfall in the current assets by 4.1b (NWSC performance report, 2014). In the financial year 2017/2018, the target turnover was 390b against the actual of 387.8b while profit after tax target was 77.27b against the actual of 60.59b. This phenomenon has not been explained by the existing literature and remains a problem that needs attention if NWSC is to achieve good performance. Moreover, previous studies such as those conducted by Awuah & Addaney, (2016) and Kondo (2013) indicate that debtor’s management and water loss management are key factors towards financial performance of a company but they don’t explain the same case in the context NWSC here in Uganda. Besides, there is limited research that has been carried out in Uganda to explore the causes of the declining financial performance of NWSC. The researcher therefore intends to investigate this matter in the context of NWSC Uganda, using NWSC branches operating in the South Western Region to contribute on bridging the gap.

1.3 Purpose of the Study

The purpose of the study is to examine the relationship between debtors’ management, water loss management and financial performance of NWSC in the South Western Region of Uganda

1.4 Specific Objectives of the Study

1. To establish the relationship between debtors management and financial performance of NWSC in the South Western Region of Uganda
2. To establish the relationship between water loss management and financial performance of NWSC in the South Western Region of Uganda

• To establish the combined relationship between debtors management, water loss management and financial performance of NWSC in the South Western Region of Uganda

1.5 Specific Research Questions

1. What is the relationship between debtors’ management and financial performance of NWSC in the South Western Region of Uganda?
2. What is the relationship between water loss management and financial performance of NWSC in the South Western Region of Uganda?

• What is the combined relationship between debtors’ management, water loss management and financial performance of NWSC in the South Western Region of Uganda?

1.6 Scope of the Study

1.6.1 Content Scope

The study will investigatethe relationship betweendebtor’s management, water loss management and the financial performance of NWSC in the South Western Region of Uganda. In breaking down this concept, three issues will become of great concern to the researcher. First, debtor’s management as an independent variable will be viewed in terms of debt collection, debt age analysis and disconnection notices given. Secondly, water loss management also as an independent variable will be viewed in terms of illegal disconnections control, accuracy in meter readings and leaks & bursts detection. Finally, financial performance as a dependent variable will be viewed in terms ofprofitability, revenue growth and liquidity.

1.6.2 Geographical Scope

The study will be based on the National Water & Sewerage Corporation operational areas in the South Western towns of Lyantonde, Rushere, Mbarara, Bushenyi, Kamwenge, Ntungamo, Ruhama, Rukungiri, Kabale and Kisoro.

1.6.3 Time Scope

The study will cover a time scope of one year since it will focus on events happening in a point of time using a cross-sectional design.

1.7 Significance of the Study

1. The findings of the study will give an understanding to the management of NWSC on how debtors management and water loss management impact the financial performance of NWSC
2. The findings of the study will be of significant help to the government, management consultants, academicians and researchers as a source of knowledge.

• The research findings will be of importance to policy makers, private water management organisations as they design debtors and water loss management policies aimed at enhancing financial performance

1. Academicians who wish to undertake further research on debtor’s management, water loss management and financial performance will also find the literature arising from this study to be of great value.

1.8 Conceptual Framework

Source: Developed by the researcher from reviewing past literature on this study: Mutikanga (2012), Mburugu and Gekara (2016), Nyangoma (2012)

The conceptual framework above shows debtor’s management and water loss management are independent variables while financial performance is the dependent variable. Good debtor’s management practices such as timely collection of revenues, aging of debtor’s and timely issuance of disconnection notices lead to improved financial performance and vice versa. Similarly, well managed water losses such as controlling illegal connections, accurate metering and timely detection of leaks and pipe bursts save costs and improve the financial performance of a company, and the reverse is true. Debtor’s management will be measured in terms of existing revenue collection strategies at NWSC, debt age analysis and issuing disconnections notices to customers who delay to pay their bills. On the other hand, water loss management will be measured in terms of existing controls towards illegal connections, accuracy in the metering as well as the detection of leaks and bursts in the piping system. Finally, financial performance will be measured by return on investment, return on assets and average return on assets.

SECTION TWO

LITERATURE REVIEW

2.0 Theoretical Literature Review

2.1 Operating Cycle Theory

The Operating Cycle Theory was advanced by Richard & Laughlin in 1980. This theory looks explicitly at current assets which debtor’s is a major component and gives income statement measures of a firm’s operating activities which includes production, distribution and collection. Debtors for instance are directly affected by the credit management policy of an organization and the frequency of converting these debtors into cash differ from one industry to another. For instance a liberal credit policy will increase the profitability of a firm at the expense of liquidity hence the need for tight balancing. The operating cycle theory is one of the very important theories in debtor’smanagement. It measures the efficiency of debtor’smanagement strategies and takes into cognizance the debtors related to working capital. The cycle traditionally commences from the receipt of raw materials to the collection of cash from debtors of the stock sales produced from those raw materials.

The traditional approach of relying on current or acid-test ratios as solvency indicators is quite defective compared to the operating cycle approach of relying on current or compared to the operating cycle approach where debtors and inventory turnover measures are incorporated as useful in liquidity management. This is quite clear because Average Collection Period (ACP) as a proxy for firms average debtors investment is converted to cash. One critical aspect to note is that changes in collection and credit policy have a direct effect on the balance of debtors outstanding, in relation to annual firm`s sales (Laughlin, & Puxty, 1980).   According to operating cycle theory when firms grants more liberal credit terms to its customers there is a higher tendency of having a bigger, but ultimately less liquid investment in cycle (that is, the inventory turnover) shows the number of times with which business firms converts the totality of their raw materials stock, their work-in-progress and ultimately the finished goods into product sales.

Understanding an organisations operating cycle therefore helps the firm to effectively and efficiently collect from its debtors by applying various strategies and this would enhance its financial performance. This theory will therefore inform the study by checking the NWSC operating cycle, looking at the different strategies used in debtors management in the aspect of revenue collection, analysis of the age of the debtors as well as management of its disconnections.

2.2 The Cash Conversion Cycle Theory

The Cash Conversion Cycle theory approach was developed by Richards and Laughlin in 1980. In their work, the duo saw the need to have a critical look at working capital management and its individual components. They felt that although a substantial portion of financial manager`s time is spent on decision relating short-term assets and liabilities, little attention has been given by most of the literature and researchers in this direction. Accordingly, they describe the debtors, inventories and payables as the constituents of the cash conversion cycle model.

The theory of the cash conversion cycle centers on explaining a cycle that begins from the payment for the purchase of raw materials, through to its transformation and the emergence of new product, to the collection of receivables from the buyers and possible debtors of the interaction as a result of the stock sale. Undoubtedly, financial managers and all related financial analysts appreciate at least at an intuitive level that all working capital investments do not have the same life expectancy, and their transformation rate to usable flows of liquidity is always not at the same speed (Richard & Laughlin, 1980).

Therefore, in the overall, one can conveniently say that the cash conversion cycle theory is the most central one in explaining debtor’smanagement as it is concerned with all the concepts and components, ranging from raw materials to finished products, and outputs representing inventory levels, to receivables and payment representing the cash aspect. This theory will inform the study in a sense that having an effective cash conversion cycle would tackle the question of debtor’s management in terms of revenue collected and age of debtors which would boost the liquidity levels of the firm and generally the financial performance.

2.3 Empirical Literature Review

2.3.1 The Concept of Financial Performance

The financial performance of an organisation is a general measure of a firm’s overall financial health over a given period of time (Nyangoma, 2012). It can be reflected in the firm’s profitability measured by different metrics such as Return on Investment (ROI), Return on Assets (ROA) and Average Return on Assets (AROA). Maintaining optimal liquidity demonstrates that there are economies of scale associated with the cash levels required to confront the normal transactions of the firm. Revenue growth is often used as a measure of performance and it is argued that if revenues increase, profits will eventually follow. Information on financial performance is useful in predicting the capacity of the enterprise (Opanga, 2013).Return on Investment (ROI) is a financial performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. ROI is a popular metric used as a measure of a company’s profitability. This could be the ROI on a stock investment, the ROI a company expects on expanding a factory, or the ROI generated in a real estate transaction. Another metric used to measure profitability is Return on Assets. Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company’s management is at using its assets to generate earnings. These metrics together with Average Return on Assets (AROA) will be used in this study to conceptualize financial performance as a dependent variable.

2.3.2 Debtors Management and Financial Performance

All organisations need capital to run their operations. Generating capital through debtor management systems has become a necessity for the growth of every organisation.Addaney (2016) advances that debt is the amount of monies incurred during abusiness period which payable to the organisation providing goods and services. Aspen Law and Business book depository defines debt as an amount owed to a person or organization for funds borrowed or for goods sold on credit. For the purposes of this study, debt is defined as any amount due to any organisation for which payment has not been effected.Addaney (2016) argues that debtor management is any approach that is adopted to guide an individual or business organisation to manage its debtors. This definition includes debt recovery, bankruptcy, debtor’s consolidation as well as other techniques that assist businesses to collect from outstanding debtors.

Debtor’smanagement is an act of trying to get one’s debtors under control and become responsible for repaying associated obligations (Addaney, 2016). It can therefore be inferred that debtors management is a conscious measure taken by an organisation or agents hired on their behalf to reduce the debtors burden or strategize to eliminate the debtors through acceptable payment terms (Addaney, 2016). Cecchetti et al. (2011) observe that a reasonable debtors level improves welfare and enhances growth but high level debtors can lead to a decline in growth of a firm.

Reinhart, & Rogoff, (2015) reinforces this assertion by arguing that properly managed debtorsimpact positively to the performance of a firm only when it is within certain levels. He opines that an organisation becomes vulnerable to financial crisis when the ratio goes beyond certain levels. Stern Stewart and Company shares a similar view that high level of debtors increases the probability of an organisation facing financial distress. Specifically, on the nexus between debtor management and performance of organisations, the findings from the literature analysis show that debtors management plays an important role in any organisation. Thus prudent debtor’s management ensures that organisations are able to improve their performance. A similar study by Dong and Su (2010) concluded that a firm’s profitability and liquidity are influenced by its debtor management practices.

2.3.3 Water Loss Management and Financial Performance

A well-established water loss management system improves the financial performance of any water management company. This is mainly because it saves the company from unnecessary revenue loss through the lost water. According to Wangchuk, (2005).  about 30000ML of water is delivered to customers in the developing countries per day, but is not paid for because of water theft, employee’s corruption and poor metering practices. They estimate that about US$3billion of revenue is lost per year in the developing countries due to commercial losses. They go on to conclude that the financial viability of utilities in developing countries is constrained as a result and this hampers necessary service expansions especially for the poor. This clearly demonstrates that a well-established and functioning system of managing water loss would improve the financial viability of a utility company which justifies that there is a positive relationship between water loss management and financial performance

2.3.4Debtors Management, Water Loss Management and Financial Performance

Debtor’smanagement is the method by which you collect and control the payments from your customers. Gatuhu (2013) describe credit management as methods and strategies adopted by a firm to ensure that they maintain an optimal level of credit and its effective management. It is an aspect of financial management involving credit analysis, credit rating, credit classification and credit reporting. A proper credit management will lower the capital that is locked with the debtors, and also reduces the possibility of getting into bad debts.

Effective management of accounts receivables involves designing and documenting a credit policy. A sound credit policy is the blueprint for how the company communicates with and treats its most valuable asset, the customers. German et al., (2013) proposes that a credit policy creates a common set of goals for the organization and recognizes the credit and collection department as an important contributor to the organization’s strategies.The water service providers lose considerable quantity of water on a daily basis caused by water leakages during pumping, storage, transmission in main pipes or in distribution networks, thefts or illegal connections and metering inaccuracies. On the other hand, water service providers may not count, or bill, the quantity consumed by particular entities; such as government and public utilities.

Therefore, the total of non-revenue water can be viewed as the aggregate of leakages, illegal connections, metering inaccuracies, and unbilled consumption (Makaya, 2016). This leads to a reduction in the expected water sales for the service providers and increasing the water production quantities to cover the lost volume. From a financial point of view, the quantities of nonrevenue negatively affect water service providers on three scales. They reduce the operating revenue, increase the cost of production, operations and maintenance and increase investment provisions and budget allocation for capital expenditures as additional amount have to be spent on investment in facilities which all affect the financial performance of the service provider.

SECTION THREE

RESEARCH METHODOLOGY

3.0 Introduction

This section presents the research methods that will be used to carry out the study. It covers the research design, study population, sampling design, data collection methods, measurement of variables, reliability and validity tests, data analysis & tests and anticipated limitations.

3.1 Research Design

The researcher will use a cross-sectional research design. This is a type of design where data is collected at one point in time. For this study, the researcher will follow the cross-sectional research design because the design provides a snapshot of the distribution of factors and outcomes in the population at a specified period of time and the prevalence of the specific factors and outcomes that can be calculated for the population and the levels of exposure to factors and outcome status can be easily compared (Kothari 2014). The researcher will adopt the quantitative approach. This is a kind of approach that enables researchers to express their findings in numeric terms. This approach will be adopted because the research objectives can be accurately answered following the quantitative approach

3.2 Study Population

The target population under study will be from 10 NWSC offices situated in the South Western Region of Uganda.  These will be considered because they are deemed to possess adequate information about the variables under study.According to NWSC, there 10 main water offices in the South Western region and on average, the researcher will target 13 respondents from different sections of each main office, making a target study population of 130 respondents.

The unit of analysis will be National Water and Sewerage Corporation (NWSC)branches in south western Uganda.

The unit of inquiry will be the different employees in the categories of commercial officers, accounts and finance officers, billing officers, area engineers, area managers and branch managers.

3.3 Sampling Method, Procedure and Size

The study will be based on a sample size of 97 respondents that will be drawn from a population of 130 employees. The sample size will be determined using Krejcie and Morgan Tables (1970). The researcher will use purposive simple random sampling techniques to select the respondents.

3.4 Sources of Data

3.4.1 Primary Data

Primary data will be obtained from employees of NWSC in the categories of Area Managers, Branch Managers, area engineers, Commercial Officers, Accounts & Finance and Billing officers, who will fill in the questionnaires administered to them.

3.4.2 Secondary Data

This will be obtained from the available literature; journals, textbooks, articles, reports, newsletters and other available records on small business enterprises. The data will then be analyzed, interpreted and evaluated by the researcher in line with the study variables before being presented in the report.

3.5 Data Collection Instrument

The key data collection instrument that will be used will be the questionnaire. The questionnaire will be used in light of the fact that the data will  be gathered from a large sample in a brief time frame since the respondents will be able to read and compose (Bill, 2011). The questionnaire will comprise of closed-ended questions purely structured in nature whose variables will be measured on a 5-point Likert scale (5 strongly Agree, 4 Agree, 3 Not sure, 2 Disagree and 1 strongly Disagree) in order to gather the different perceptions and views of the respondents to answer the questionnaire.

3.6 Measurement of Variables

As explained in the conceptual framework, the independent variables are debtor’s management and water loss management while the dependent variable is financial performance. These variables will be measured using factors drawn from existing literature and theories. All the constructs and sub constructs shall be anchored on a 5 point Likert scale ranging from 1= Strongly Disagree to 5 = Strongly Agree. The respondents shall be required to indicate the extent to which they are in agreement with the prescribed items using their perceptions.

3.7 Reliability Tests

Reliability assesses the extent to which the factors in a questionnaire generate consistent responses over several trials with different populations in the same setting or circumstances (Miles &Huberman, 1994).Reliability test indicates the extent to which the questionnaire is without bias or error free, and hence ensures consistent measurement across time and across the various factors in the questionnaire. In this study, Cronbach’s alpha coefficient will be employed to determine the internal consistency of the 5-point scale used to measure the items of the study variables (Cronbach, 1951). According to Malhotra et al., (2006). a certain number of items that will be found to affect the reliability of the scales shall be deleted to improve the reliability. According to Sekaran (2003), some professionals as a rule of thumb, require a reliability of 0.70 or higher (obtained on a substantial sample) before they use an instrument. Upon performing the test, the results that will be 0.7 and above will be considered reliable.

3.8 Validity Tests

Validityis the extent to which research instruments measure what they are intended to measure (Saunders et al., 2003). According to Sekaran (2000), content validity test ensures that the measures include an adequate and representative set of items that tap the concept. The more the scale items represent the domain of the concept being measured, the greater the content validity. The test will be conducted at the questionnaire development stage where the draft questionnaire will be given to four different experts (2 academicians and 2 practitioners) to assess the appropriateness of the items to capture the study variables. Validity will be determined using content Validity Index (CVI).

CVI = Number of items rated relevant    x 100%

Total number of items

As recommended by Saunders et al. (2003), for the instrument to be valid, the CVI should be at least 0.7

3.9 Data Processing, Analysis and Presentation

Data collected from the field will be tabulated, sorted, edited, classified and coded into a coding sheet. The cleaned data will be summarized and converted into frequencies and percentages using the category system. The researcher will then use Statistical Package for Social Scientists to (SPSS), version 26, to analyze the data collected. The data analyzed will be presented using frequency distribution tables for easy interpretation. Pearson’s Correlation Coefficients will be run to establish the relationship among the study variables as set in the objectives.

3.10 Ethical Considerations

The researcher will acquire an introduction letter from the University together with the identity card presented to the organizations under study as well as the respondents. Assurance will be made to management and staff that the information needed is for academic purposes and would be handled with confidentiality. The assent issue will be resolved by obtaining an informed consent informing target respondents of the purpose of the study, the expected participation from them and any other information about the research that they would want to know. Confidentiality of the respondents will be paramount except in the case where they would give permission to be cited in the study.

3.11 Anticipated Limitations to the study

Some respondents may become suspicious about data required from them for fear of their job security. Clear explanations will be provided emphasizing how the research is strictly for academic purposes.

The study may be affected by non-response from some of the targeted respondents. They may view the required information as private. The researcher will obtain a reference letter from the school to confirm that information will be handled with confidentiality

In some instances where the required responses are not on duty, it may be hard to get the information needed from their deputies or may cause delays since the researcher may have to wait till they come back on duty.

REFERENCES

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Awuah, S. B., & Addaney, M. (2016). The interactions between microfinance institutions and small and medium scale enterprises in the Sunyani municipality of Ghana. Asian Development Policy Review, 4(2), 51-64.

Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The real effects of debt.

Dong, H. P., & Su, J. T. (2010). The relationship between working capital management and profitability: a Vietnam case. International Research Journal of Finance and Economics, 49(1), 59-67.

Galaitsi, S. E., Russell, R., Bishara, A., Durant, J. L., Bogle, J., & Huber-Lee, A. (2016). Intermittent domestic water supply: A critical review and analysis of causal-consequential pathways. Water, 8(7), 274.

Gatuhu, R. N. (2013). The effect of credit management on the financial performance of microfinance institutions in Kenya. Unpublished MBA Dissertation, University of Nairobi, Nairobi.

German, L., Schoneveld, G., & Mwangi, E. (2013). Contemporary processes of large-scale land acquisition in Sub-Saharan Africa: legal deficiency or elite capture of the rule of law?. World Development, 48, 1-18.

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Makaya, E. (2017). Performance Based Water Loss Management for Gweru, Zimbabwe. American Journal of Water Resources, 5(4), 100-105.

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QUESTIONAIRE

MAKERERE UNIVERSITY BUSINESS SCHOOL

Questionnaire for the Research Study on “Debtors Management, Water Loss Management and Financial Performance of NWSC: A Case of South Western Region, Uganda”

Dear Respondent,

Iam FrancisOlukaa postgraduate student of Makerere University Business School conducting a research on “Debtors Management, Water Loss Management and Financial Performance of NWSC”. Kindly answer these questions as objectively as possible so that the results of the data analysis are fairly accurate. Thank you very much for your cooperation.

SECTION ONE: DEMOGRAPHICS OF RESPONDENTS

A1Gender of respondent:       Male                Female

A2 Age of respondent: 18-27             28-37               38-47               48-57               58+

A3Respondent’s level of Education:

PLE       O-Level           A-Level         Diploma            Degree

A4 For how long has NWSC been in existence?

Less than a year          1 – 5 years           5 – 10 years            10 years & above

SECTION TWO: DEBTORS MANAGEMENT

This section contains questions about Debtors Management. Debtors Management are looked at in terms of debt collection, debt age analysis and disconnection notices. In the tables below, the numbers 1-5 represent levels of agreement from strongly disagree to strongly agree. Please mark the given statements according to your level of agreement.

Levels of Agreement

Debtors Management

SECTION THREE: WATER LOSS MANAGEMENT

This section contains questions about Water loss management. Water loss management is all about the mechanism put in place to minimize water loss at NWSC. In the tables below, the numbers 1-5 represent levels of agreement from strongly disagree to strongly agree. Please mark the given statements according to your level of agreement.

Levels of Agreement:

Water Loss Management:

SECTION FOUR: FINANCIAL PERFORMANCE

This section contains questions about Financial Performance. Financial performance will be looked at in terms of return on investment, return on assets and adjusted return on asets. In the tables below, the numbers 1-5 represent levels of agreement from strongly disagree to strongly agree. Please mark the given statements according to your level of agreement.

Levels of Agreement

Financial Performance

Financial performance (Simpson et al., 2004)

Thank you very much for your time and responses

God bless you.

TIME SCHEDULE

PROPOSED BUDGET