PROVISION FOR BAD DEBTS: A STRATEGY FOR ENHANCING BUSINESS GROWTH IN SMES

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PROVISION FOR BAD DEBTS: A STRATEGY FOR ENHANCING BUSINESS GROWTH IN SMES

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

According to Wikipedia, a bad debt is an amount recorded by the enterprise as a loss to the enterprise and recognized as an expense, since the bad debt due to the enterprise can not be obtained and all the efforts required to recover the debt are unrecoverable. exhausted. probably remains uncollectible and is written off. Bad debts appear as an expense in the company’s income statement, which reduces net income.

In general, companies estimate the bad debts that could be incurred in the current period based on past earnings estimation processes, and most companies account for them because not all their accounts receivable will likely do so. . United States federal law defines “debt” as an obligation for the consumer to pay money resulting from a transaction in which money, goods, insurance or services have changed hands. The Cambridge International Dictionary defines a “guilt” as an extra amount of money someone owes.

How long does it take for debtors (borrowing clients) to pay their debts? Understanding the payment behavior of potential customers is essential for evaluating credit management in any organization, as insufficient credit controls can lead to significant financial planning issues (Atradius 2012).

According to Atradius (2011), late payments and payment defaults are still of great importance worldwide. The study also revealed that 305 of the debts are paid too late, while 3% go wrong, the main reason being that the buyers do not have sufficient funds to pay.

Credit problems are usually identified at the end of the credit channel (Katoh 2004). Before a loan becomes bad, it must be granted. In addition, the poor quality of a loan is sometimes due to factors other than the credit process, such as negative selection and moral hazard (Satiglitz and Weiss, 1981), or any external shock that may change the nature of the loan. borrower’s ability to borrow. repay (Minsky 1985).

According to Gitman (1992), several aspects suggest sound management of bad debt. These include credit standards, credit terms and collection procedures.

1.2 Problem statement

The issue of borrowers has become a subject of concern in the global financial circuit. Financial experts are still exploring different ways to solve this problem. Over the years, we have been discussing the method that worked best. Experts agree that no method stands out, the choice is independent of other factors such as economic stability and the effectiveness and reliability of the national database. The SME has also developed various ways to remedy this anomaly. Credit facilities are therefore the main commercial asset and the main source of revenue for most SMEs. However, some loans, especially purchases, are bad and have a negative impact on the profitability and overall performance of the institutions. In Nigeria, most medium-sized companies face the challenge of canceling bad debts, which requires effective default management strategies.

1.3 purpose of the study

The broad objective of the study is to examine how the Provision for Bad Debts is a useful strategy for Enhancing Business Growth in SMEs Specific objectives are;

1. To identify the causes of bad debt.
2. To assess the impact of bad debt on the performance of SME.
3. To recommend suitable strategies on how to minimize the debt in SME.

1. 4 Significance of the study

The study aims to help the SME take a comprehensive approach to bad debt. The study will also be of interest to public universities, higher education institutions, research institutes and individual researchers interested in SME growth and development and will use the results for further research. This study will encourage researchers to identify the effectiveness and efficiency of the SME. The research will help individual public companies understand their position relative to the standard of their bad debt.

1.5 study hypothesis

HO1: Provision for Bad Debts is a not a significant strategy for Enhancing Business Growth

1.6 Scope and Limitations of the Study

The study scope is limited to investigating the Provision for Bad Debts is a useful strategy for Enhancing Business Growth in SMEs in Lagos state. Limitation faced by the research was limited time and financial constraint

1.7 Definition of Basic terminologies

Bad Debt

A bad debt can be understood as a loan which the creditor finds difficult or impossible to recover.

Bad Debt Estimation

The methods used in estimating doubtful accounts also differ depending on the nature of the company or business.

REFERENCE

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Thordsen S. and Nathan S (1999); Micro lending: A budding industry.

Adjei, K .J.(2010), Microfinance & Poverty Reduction: The Experience of Ghana.

Alton R.G and Hazen J.H (2001), As Economy Flounders, Do we see A Rise in Problem Loans? Federal Reserve Bank of St Louis.

Bloem, M. A and Gorter N.C, (2001), Treatment of Non-performing Loans in Macroeconomic statistics, IMF Working Paper, WP/01/209

Caprio, G Jr and Klinggebiel D, (1996): Bank Insolvency-Bad Luck, Bad Policy or Bad Banking, Annual World Bank Conference on Development Economics.

Daniel Allotey, (2008), Developing Paths to Self-sufficiency.

Gerald Pollio& James Obuobi (2010), Loan Default Rate in Ghana: Evidence from Individual Liability credit contract.

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