THE IMPACT OF CREDIT ON THE PERFORMANCE OF AN ORGANIZATION

ACASE STUDY OF SSEBAGALA & SONS ELECTRO CENTRE LTD

1.0 INTRODUCTION

The study will provide the background information which will highlight the historical background of the problem. It will then explain the statement of the problem, objectives of the study, research questions, scope of the study, significance of the study

1.1 Background of the study

Credit is a risky enterprise because repayment of credit can seldom be fully guaranteed, it involves implicit contracts between lenders and borrowers, thus, a well managed credit can lead to better performance of small and medium, enterprise, (Falk et al, 2004), Credit management is a system which is very essential for lending institutions to stay in business and as such an institution with poor credit management ability is at risk of collapse, (Fehr et al, 2005).

The money given out by banks with a future date of repayment (credit) is crucial to the economy due to its multiplier effect. Nnanna, (2001) observes that the bank credit is important for the take-off and efficient performance of any enterprise.Firm’s assets are typically financed with a combination of debt and equity, referred to as firm’s capital structure. Capital structure decision is one of the most important financial decisions taken by a firm because it has an impact on the firm’s financial performance (Ahmad et al, 2012).

There has been an increase in the recognition of the role played by business organization both small and large because of the numerous benefits they play in the economy, including provision of jobs and taxes to the economy (Ebaid, 2009).

According to (Shubita & Alsawalhah, 2012), the determination of a firm’s optimal financial structure is a difficult one since it involves an analysis of several factors, key among them risk and profitability. The decision becomes even more difficult, in times when the economic, social, technological and political environments in which the firm operates exhibits high degree of instability (Shubita & Alsawalhah, 2012). According to  Chiang, Chan and Hui (2002) financial performance as measured by profitability and capital structure, a subset of financial structure, are interrelated hr further asserts that the choice among ideal proportion of debt and equity can affect the value of the company, as well as financial performance.

The inability to access long-term finance can force firms to use short-term debt to finance long-term projects. This will create mismatches of assets and liabilities and depletes working capital. Depletion of working capital will negatively affect firm operations. It is crucial that the primary source of loan repayments should be cash flows from the project ((Salazar, Soto & Mosqueda, 2012).

Maritala (2012) examined the optimal level of capital structure which enables a firm to increase its financial performance. The study found that there was a negative relationship between the firm’s debt ratio and financial performance measured by return on assets and return on equity. Fosu (2013) also conducted a similar study in South Africa to investigate the relationship between capital structure and corporate performance with focus on the degree of competition.

Root (2009) contends that, debt management is an act of trying to get one’s debt under control and become responsible for repaying associated obligations. It can therefore be inferred that debt management is a conscious measure taken by a debtor or agents hired on their behalf to reduce the debt burden or strategize to eliminate the debt through acceptable payment terms. Cecchetti et al. (2011) observe that a reasonable debt level improves welfare and enhances growth but high level debts can lead to a decline in growth of a firm.

1.2 Statement of the problem

There has been a considerable increase in the number and size of the small scale enterprises in Uganda, however most of the business face a challenge of debts from creditors who are mainly Banks and micro finance institutions (Kasekende, 2003), Most of the firms in Uganda donot have the necessary capital to acquire necessary equipments that are vital for growth and development , this has therefore prompted them to seek for an alternative financing options to increase capital and be in position to import new machinery and equipments necessary for expansion and start up (Mutebile, 2010) , this has however not yielded positive results as majority of the these firms have not presented positive growth patterns. It’s basing on this background that this study therefore intends to investigate into the impact of credit on the performance of an organization, with specific references to Sebbaggalla and sons electrical centre.

1.3 General objectives of the study

To investigate into the impact of credit on the performance of Ssebagala & Sons Electro Centre Ltd.

1.4 Research Objectives

1. To establish benefits of credit on the performance of ssebagala & Sons Electro Centre Ltd.
2. To establish the challenges of credit to the performance of ssebagala & Sons Electro Centre Ltd.

• To establish factors that affects the performance of Ssebagala & Sons Electro Centre Ltd.

1.5 Research Questions

1. What are the benefits of credit on the performance of Ssebagala & Sons Electro Centre Ltd?
2. What are the challenges of credit to the performance of ssebagala & Sons Electro Centre Ltd?

• What factors affect the performance of Ssebagala & Sons Electro Centre Ltd?

1.6 Scope of the study

This section includes the content scope, geographical scope and time scope of the study.

1.6.1 Content scope

The study will focus on benefits of credit, challenges of credit and factors that affects the performance of Ssebagala & Sons Electro Centre Ltd.

1.6.2 Geographical scope

The study will be carried out at Ssebagala & Sons Electro Centre Ltd located at Nakasero Plot 9, Market Street, Tourist Hotel Building. The reason for choosing the organization is because during the years of 2013 to 2016 , Ssebaggala and sons has been one of the best performing SMEs in Uganda.

1.6.3 Time scope

The period of reference will be from 2013 to 2018, this time period has been chosen because during this time period Ssebagala & Sons Electro Centre Ltd has been one of the top 100 SMEs in the country.

1.7 Significance of the study

The study will help financial institutions have information on the benefits of credit to an organization so as to enable the government develop plans regarding credit policies.

The study will provide literature to future researchers on the related field.

The study will enable the student get research skills which will be helpful in further studies.