EFFECTS OF CREDIT MANAGEMENT ON THE PROFITABILITY OF SMALL AND

MEDIUM ENTERPRICES IN KITALE

CHAPTER ONE

INTRODUCTION

1.1: BACKGROUND OF THE STUDY

In Africa, Private Sector Development as suitable alternative for promoting sustainable and

balanced growth, has attracted considerable attention. Many and developing organizations have

focused on the promotion of medium scale enterprises (SME) as a way of encouraging broaden

participation in the private sector. The promotion of SME and especially of those in the informal

sector is viewed as a variable approach to sustainable development because it suits the resources

in Africa.

The contemporary business environment faced with a number of challenges particularly the

globalization process is on course of attempting to standardize operation. One of the strategies

used in coping with the globalization is credit management. Credit management refers to those

decision variable that influence the amount of trade credit that is, investment in recurable which

a business firm may undertake to any given time. It plays a vital role in promoting business

enterprises in Africa. The promotion of small scale industrial business is well recognized and

much better strategies of industries development in developed and developing countries and its

ability to enhance entrepreneurial and management skills.

Small and medium enterprises play a crucial role in fostering economic growth, job creation and

poverty reduction in many countries including Kitale, Kenya. These enterprises contribute
significantly to employment creation, income generation and overall economic development.

However, SME often face numerous challenges including limited access to finance and credit

Access to credit is a fundamental requirement for small and medium enterprises to sustain and

expand their operations. It enables them to invest in equipment, raw materials, inventories and

other resources necessary for their day to day operations and growth. Effective credit

management within SME is essential to ensure the availability of working capital, maintain

healthy cash flow and reduce cases of bad debts.

Competent credit management seeks not only to protect the vender from losses, but also protect

the customer from creating more debt obligations that cannot be settled in a timely manner. This

is a major problem that leads to collapse of many SME because they lack capital to finance

themselves. If credit is managed well, it will lead to increased profit thus expansion of business.

It is from this reason that the researcher want to address and educate small and medium

enterprises on the impact of credit management on its profitability. Credit management is not

only a tool of controlling debts. Many entrepreneurs insist that instant payment should be made

not considering the importance of profit. If debts are paid on time, it does not mean you have all

it requires. Many debtors pay because they fear the rules that are given by creditors. Here the

researcher wants to come up with the means which will not favor one side. Debtors should be

given amounts or goods which they are capable of paying back. The problem arises when debtors

starts to accumulate their debts. This means that they come and borrow then without paying they

borrow again. This will result to failure or late payment because more debt will scare the debtor

and with the current situation money is like gold. Increasing life standard and prices of goods

will make the debtor not to pay back. Thus resulting to bad debts and this will be a liability to the

creditor or the business.

Small and medium enterprises should be taught on the ways of reducing bad debts and this will

make them increase their profits. Ways used to reduce bad debts is by:

i. Checking the credit worthiness. If the amount to be given is sufficient then the business is

allowed to credit.

ii. The paying period. The payback period should be low. This is because when the payback

is high, it means that the debtors will take long time to pay and this will lead to poor

performance of the business hence reducing its profit.

iii. The type of customers the business is lending money or goods to. If customers are

characterized with habits of late payment or even failure of paying back, they should not

be given credits.

By observing those rules, the business will be in a position to avoid bad debts. Apart from bad

debts, there are several factors used as part of credit management process to evaluate and qualify

a customer for the receipt of some form of commercial credit. This may include, gathering data

on the potential customers, current financial condition including the current score. The research

work is to analyze critically the impact analysis of credit management strategies to SME, the

problem in managing credit problems and aim of finding a lasting solution to the problems and

expand the activities of SME in order to increase their profitability level and attract more

entrepreneurs and customers.

1.2: STATEMENT OF THE PROBLEM

Small and medium scale enterprises in Kitale face significant challenges in managing their credit

effectively, which can impact their profitability. However, the specific problems and

implications remain relatively understudied. Therefore, this research problem aims to address the

following problems.

1.2.1: Inadequate credit assessment: Many SMEs in Kitale struggle with assessing the credit

worthiness of their customers effectively. This leads to granting credit to customers with poor

repayment capabilities, resulting in increased default rates and potential financial losses.

1.2.2: Inadequate collection practices: Timely and effective collection of receivables is critical

for SMEs cash flow management and overall profitability. However, many SMEs in Kitale face

challenges in implementing efficient collection practices. Limited knowledge of collection

strategies and inefficient follow-up mechanisms contribute to delayed or partial repayments,

adversely impacting SMEs profitability.

1.3: RESEARCH OBJECTIVES

1.3.1: General objective

To investigate the effect of credit management on the profitability of small and medium

enterprises in Kitale.

1.3.2: Specific Objectives

i. To determine the impact of cash flow protection on the profitability of small and

medium enterprises in Kitale.

ii. To find out the effect of late payment on the profitability of SMEs in Kitale.

iii. To identify the impact of credit assessment on the profitability of SMEs in Kitale.

1.4: RESEARCH QUESTIONS

1.4.1: Does cash flow protection influence the profitability of SMEs in Kitale?

1.4.2: Do late payment affect the profitability of SMEs in Kitale?

1.4.3: What is the effect of credit assessment on the profitability of small and medium

enterprises in Kitale?

SIGNIFICANCE OF THE STUDY

This research work will be of great significance to the small and medium enterprises in

Kitale. Both entrepreneurs who have already started the business and those having the idea of
 starting businesses in near future will benefit from this research. This is because, the research

will go a long way in enlightening them on the concept of credit management as well as the

best strategies to be adopted to monitor debts. This research work will as well be of benefit to

students and researchers because it will widen their scope from the information contained in

this research work.

1.6: SCOPE OF THE STUDY

1.6.1: Geographic Scope. The study will focus specifically on small and medium enterprises

located in Kitale. The research will consider the unique characteristics, challenges and

opportunities associated with credit management practices within this specific geographic

context.

1.6.2: SME sector: The study will target SMEs operating in various sectors within Kitale

including manufacturing services, retail and agriculture. By considering a diverse range of

sectors, the research aims to capture a broader impact of credit management on profitability

across different industry domains.

1.6.3: Credit management practices. The research will investigate various aspects of credit

management, including credit assessment, monitoring and collection. It will examine the

practices employed by SMEs in Kitale and their effectiveness in mitigating credit risks and

enhancing profitability.
1.7: CONCEPTUAL FRAMEWORK