ASSESSMENT OF IMPLEMENTATION OF DEBTORS’ MANAGEMENT POLICY
IN UTILITY COMPANIES:
THE CASE OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED (TANESCO) - By
Mkola, Amani Isaya & Stewart Mbegu
A Research Report Submitted to the Faculty of Commerce for Partial/Fulfillment of the Bachelor
Degree of Accounting and Finance of Mzumbe University.
2009 /2010
ABSTRACT
The report starts by examining the debt collection policy used at TANESCO which is found at the back of the invoice/bill (appendix 1) and examines its actual implementation. Then it assess whether the company is doing fine in the act of collection of debtors’ and able to meet the collection target so as increase the liquidity of the company and hence keep it away from technical insolvency using that policy.
The study included sample of 30 customers who were interviewed to know the extent of implementation of the debtors’ collection policy. The findings obtained from the field showed that the company implements the debt collection policy to the extent of 82.5% which was good although it was lower than set up criteria of 90%. The reasons for these results among other things was found to be lack of knowledge about the collection policy by the staff as well as low commitment from TANESCO staff who do not perform their responsibility honestly.
Other information found was that, the actual collection in relation to the target collection which was found to be 99.1% and the actual collection in relation to sales was found to be 95% which were above the criteria of 95% and 90% respectively. These data shows that the company is doing well in meeting collection targets as well as collections in relation to the sales. However there is need for improvement for the policy and its implementation so as to show the desired results and improve much better.
CHAPTER ONE
BACKGROUND, PROBLEM DEFINITION AND STUDY OBJECTIVES
1.1 Introduction
In this chapter, the researcher has discussed the background to the problem, where a brief of how the researcher come out to discuss on the problem; statement of the problem, where the problem has been defined; objective of the study; significance of the study to the users and limitation of the study and how they have been overcame.
1.2 Background to the Problem
The concept of working capital is a broad concept of short term financial management. It involves the organizations decision of commitment to action, usually of resources that affect cash flows in the short term but with the long term effect to the organization.
The act of managing working capital is not an easy task to be performed. Salek (2001) says that if working capital management could be simple everyone could have done it. But that is not the case because its management needs high skill, attention and commitment.
One of the elements of working capital is accounts receivable which comes from firm’s credit sales policy. Customer’s credit service strategy is a method being used to mostly competing firms to influence new customers and maintain stability in the market. According to Pandey (2003) the firm sells in credit bases so as to attract potential customers to buy its products on favorable terms and on the side of the customers it helps them to acquire goods and services without having cash at hand. This helps to maintain market stability
The company (TANESCO) sells electricity on credit bases not for the sake of winning the market in the competition since it is a monopoly company. Instead it is just the mode of selling their electricity which was adopted since the establishment of the company.
It is said by many writers that selling on credit increases the sales volume as well as profit (Gropelli & Nikbaht, 2000; Van Horne, 2003). There are also associated risks such as nonpayment by customers, delayed payment and additional financing costs of accounts receivables.
When a lot of capital is tied on receivables, the company fails to provide its services smoothly as at any case it may suffer from technical insolvency. This research therefore aimed at assessing the implementation of debtors’ management policy in TANESCO.
1.3 Statement of the Problem
Accounts Receivable management is among the important aspect of managing working capital in an organization. Improper handling of accounts receivable make many firms face unnecessary shortage of funds for running their operations. Among the causes for this problem is handling large amount of delinquent debtors’. This is a result of unspecified debtors collection period (Debtor’s ACP) and poor debt collection strategies in general. (Salem 2004).
As explained in the background of the problem, TANESCO is the only company supplying electricity in Tanzania. Being a monopoly company, TANESCO is supposed not to use credit strategy to win the market. The selling on credit is only useful if the proper collection strategy is used and debtors’ management policy is implemented correctly.
The rate of revenue collected being the largest source of fund generated by organization can insure the effective and efficient delivery of services to the community. Good financial management requires the regular receipt and collection of funds from individuals, organizations and other parties who are indebted to the organization.
1.4 Objective of the Study
The general objective of the study was to assess the implementation of the management of debtors and debt collection policy in TANESCO Mbeya. Specifically the study aimed to:
i. Determine the effectiveness of implementation of debt collection strategy used by TANESCO Company.
ii. Determine effectiveness of meeting debtor’s collection targets through their laid down procedures.
iii. Assess the adequacy of debtor collection practices at TANESCO in relation to best world practices.
1.5 Significance of the Study
The study has unveiled the level at which TANESCO management implement the debtors’ management policy as how it prophesizes. These are the internal credit management practices of which are laid down in the strategies of the company in the process of managing debtors.
The research revealed the extent to which TANESCO adheres to the best practices credit collection used by other successful companies in the world. These are the external and classic practices which assure the liquidity and profitability of the company is maintained (Raheman and Nasr, 2007).
This research study has also been an important event to the researcher because it permitted the integration of the same practical experience with theoretical knowledge gained during the lectures at Mzumbe University.
1.6 Limitation of the Study
Cooperation: The researcher used intensive interview and observation so as to solve the problem of cooperation and ensure that the information gathered are reliable and relevant to the research. Also he established rapport with the workers there, which made the researcher to be entrusted hence be ready to be supported with relevant information.
Time limit: In order to make sure that the researcher does not suffer from time limit problem, he made sure that the information is collected on daily basis, and analyzed often hence the time was no longer be a problem, although more information were gathered
CHAPTER TWO
LITERATURE REVIEW ON ASSESSMENT OF IMPLEMENTATION OF DEBTORS’ MANAGEMENT POLICY
2.1 Introduction
This chapter reviews the various scholarly writings. The researcher has gone through various theories, principles and subjects which relates to the topic. Previous researches were examined and the ideas linked to develop new knowledge.
2.2 Working Capital
Working capital has been defined by various writers in a similar manner. In the notion of many writers, working capital is a firm’s investment in current asset (Mwisho, 2002; Kaijage & Tarimo, 1990).
The term net working capital refers to the difference between a firm’s current assets and current liabilities (Anord, 2006; Mwisho, 2002). Current asset are the assets, which can be converted into cash within one accounting period. They include cash, short term securities, accounts receivable, bills receivables and inventory.
Working capital takes important part of assets of any firm. It plays a major role in business success, so it needs effective management by formulating good working policies such as cash debtors, bills receivables and creditors.
2.2 Working Capital Management
Working capital management usually is considered to involve the administration of assets namely, cash and marketable securities, receivables and inventories, and the administration of current liabilities.
According to Mathur (2002) working capital management involve not only the management of current assets but also the management of current liabilities, and the relationship between the two. In practice, a distinction is usually made between investment decisions concerning current assets and financial decisions concerning working capital. To some extent, this separation exists because models have developed to help determine the optimal quantities of assets, such as inventories, that should hold.
Khan and Jain (2004) say working capital management is concerned with problems that arise in attempting to manage current assets, the current liabilities and the interrelationship that exist between them. The term current assets refers to those assets which in the ordinary course of business can be or will be converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm.
Furthermore the management of working capital can be done in five ways which are; management of stock, management of debtors, management of cash, management of trade creditors, and management of bank overdraft. According to Mwanga (2008) the management of working capital it is an important part in a business short term planning process.
2.3 Accounts Receivable
Accounts receivable refers to the current asset, which gives rise to an anticipated future benefit. The future benefits are cash inflows, which occur when the accounts are paid. A specific sale is generally only treated as an account receivable after the customer is sent an invoice for the money which is owed to a company for the products and services provided on credit (www.investorwords.com/52/accounts_receivable).
In the view of Woods (2002) a debtor (accounts receivable) is a person who owes money to a business for goods and services supplied to him. According to Pandey, trade debtor is the customer from receivable or book debts that have to be collected in the future. That is the firm is expected to collect it in the nearer future and represent the firm’s claim or asset.
2.3.1 Accounts Receivable Management
This refers to the company’s plan of organization and related method and procedures adopted by an entity for the purpose of safe guarding its asset (debtors). According to Van Horne (1995) the investment of funds in accounts receivable involves a trade between profitability and risk.
The proper management of accounts receivable done will ensure the safety of the company from undergoing technical insolvency. Salek (2001) contributes into this by mentioning the benefits of managing accounts receivable to include increase cash flow, higher credit sales, reduced bad debts, lower administrative costs in the entire revenue cycle and decrease deduction and concession tossed. This can only be done if the proper management practices are adhered and implemented.
Accounts receivable management is the area in which a person needs to do rightly or otherwise there is a risk of extremely cost consequences (Jarvis & Mandel, 2003; Salek 2001). The proper management of accounts receivable done will ensure the safety of the company from undergoing technical insolvency.
Accounts receivable management assists financial credit managers in determining the opportunity costs associated with holding receivable balances. Key concepts of this type of analysis are a determination of company’s investment in accounts receivable, its discount policy and relaxation of credit standard all aspects of receivable management that have an impact on a company’s bottom line (Siegel, Shim & Hartman, 2000).
Moreover, officers dealing with the administration of account receivable should be motiveless by the top management. High quality account receivable offers a firm opportunity to participate in asset based financing arrangements.
2.3.2 Protecting the Accounting Receivables
Among the ways of protecting Accounts receivable is minimizing the size of bad debts in the company. Rao (1994) comments that, for minimizing the bad debts and otherwise protecting the accounts receivables, the following step should be taken:
• Collection information about credit worthiness of client, his requirement for credit necessary information could be collected from client himself, his banker, his associate and often the firm own records if it was already dealing with him. The decision to grant credit should depend on the customer’s characters capacity his need and his resources.
• Through proper administration of credit policy like fixing credit limits on the basis of requirement of credit to the client and his credit worthiness the time limit before which the credit is to be repaid, obtaining collateral security or third party guarantee for the amount of credit, bad debts could be minimized.
• Insuring Account Receivables
• Fixing responsibility on the employee and coordinating their work for granting credit, collection of credit.
• One of the means of ensuring that bills are paid on time is offer discounts on the bills amounts for paying on time and adding interest or some penalty in case the bills are not paid before the credit limit expires.
These are the ways in which the firm can protect the accounts receivable but they are not easily applicable to the firm like TANESCO. Assessing the customers by looking on their credit worthiness cannot be easily done due to kind of customers who are there and their sizes. These procedures of protecting accounts receivable can only easily be done by financial institution dealing with credit customers like banks and pension funds.
2.3.3 Collection Policy
It is obvious that any company operating in credit terms needs a collection policy because not customers pay the firm’s bills in time (Pandey, 2006). Some customers are slow payer while others are non payers. The collection effort should, therefore aim at accelerating collection from slow payers a reducing bad debts losses. A collection policy should ensure prompt and regular collection.
Weston (1981) defines collection policy as the procedures the firm follows to obtain payment of past due accounts. Mwisho (2002) says that in order to collect the slow paying account the firm should follow collection procedures in a clear cut sequence. For example, it may send a letter to such accounts when they are ten days past due, it may use a more threatening letter, followed by a telephone call, if payment is not received within thirty days; and it may turn the account over to a collection agency after ninety days.
Collection policy of any company needs to be known to its stakeholders. Raheman and Nasr (2007) emphasize this by saying it is important for the customers to know the credit policy and/or terms of the payment before they start doing the business with that company.
2.3.4 Monitoring the Receivable Position
A firm needs continuously monitor and control its receivables to ensure the success of collection efforts. The methods mostly used in evaluating the monitoring and management of receivables, are the Average Collection Period (ACP) and aging schedule.
2.3.4.1 Average Collection Period
Average Collection Period (ACP) can simply be defined as the maximum number of days which takes for the firm to collect debts from the customers. In the view of Mwisho (2002) Average Collection period determines the speed of payment by customers. It measures the number of days for which a credit sales remains outstanding. Average collection period (ACP) is calculated compared with the firm’s stated credit period to judge the collection efficiency.
An extended collection period delays cash inflows impairs the firm’s liquidity position and increases the chances of bad debt losses. The average collection period measures the quality of receivable since it indicates the speed of their collect ability.
2.3.4.2 Aging Schedule
The term aging schedule has been defined many writers as a list of accounts receivable broken down by number of days until due or past due (Pandey 2003; Ross 2005). In the view of Edwards (1983) aging schedule classifies accounts receivable according to the age of each individual account. These accounts receivable can be classified as those overdue for 30 days, 60 days, 90 days or 120 days. By this classification it is easy to make follow up for the overdue accounts which exceed the average collection period of the organization.
The aging schedule removes one of the limitations of the average collection period as it breaks down receivable according to the length of time for which they have been outstanding. Example if the average collection period of the company say is 30 days and we analyze that there are other overdue accounts we can easily trace the monitoring of the accounts receivables. Thus, aging schedule provides more information about the collection experience; it helps to spot out slow-paying debtors.
2.3.5 Notice of Delinquency – Procedures
Before making any cut of services in utility companies it is recommended that there should be some steps to be followed. These procedures where provided in the case of Us Supreme Court Decision in Memphis Light, Gas and water division V Craft (1978). In this case it was explained that, a customer must be given adequate notice of the delinquency and an opportunity to bring the account current, particularly before shutting off a utility for nonpayment.
• It is very important for a company to establish a step-by-step process prior to service termination and apply this process to all customers in a consistent, rigorous, and timely manner. The following checklist should help guarantee that all necessary procedural requirements are met:
• Clearly identify billing and due dates on the utility bill.
• Note on the utility bill or in a customer letter that charges remaining unpaid after a specified number of days of the billing or due date (30 days is the average) used by company will be considered delinquent and subject to interest and penalties.
• The method used for computation of penalties should also be shown on the utility bill if space allows.
• The order of payment applicability should be stated clearly in the utility’s policies and on the utility bill if space allows.
• Provide notice that if delinquent charges are not paid within a specified number of days from the due date (10 is the average), utility service will be discontinued and shut off at the meter
• Mail notice of delinquency as soon as an account becomes delinquent
• Include in the notice a statement of the utility procedure regarding termination of the service, including notice of hearing rights, deferred or budget payment availability, penalties, interest, and additional charges for re-establishing service
• Notify delinquent customers that termination of service does not relieve them of the obligation to pay all outstanding bills and charges;
• Customers should also be notified that before service can resumed, all outstanding bills and charges, including utility turn on charge, must be brought current and that an additional deposit may be required
Policies regarding all unpaid utility bills may not be waived arbitrarily or applied in a discrimination manner, but must be applied equally to all customers. Policies may be adopted which allow delinquencies to be paid over time. If the necessary terms and conditions for repayment can be agreed upon, utility service can be restarted. This option must be available to all similarly-situated customers.
2.4. Collection Policy used by TANESCO
TANESCO Mbeya sells electricity mostly through post-paid service and few in prepaid service through LUKU (Lipia Umeme Kadiri Unavyotumia). The customers who buys on prepaid basis through LUKU are not concerned with this because they are not debtors as they pay ahead of time and hence company’s creditors. Those concerned here are those who use post paid service and hence debtors of the company.
The collection policy objectives of TANESCO aim at achieving sufficient income from debtors and being commercially focused utility supporting the development of Tanzania. This will be attained by providing a framework in which the desirable targets are set outlining the necessary measures to guide the entire range of actions and actors with a view of improving debt collections.
The customers who have got connection of electricity are required to have their account number in order to make payment for the purchases of consumed by them. Payment from customers can be made to the head offices of TANESCO Mbeya or district offices as well as at sub-offices of Mbalizi and Uyole.
The debtor’s collection policy of TANESCO as provided by the company’s invoice/bill (appendix 1.) states that:
• This account (customer’s account) should be paid within 7 days otherwise power will be disconnected after 48 hours notice. The counting of these days starts one week after invoice date so as to cover the time of posting the bills and the time of delivery to the customer.
• Account not settled within 30 days from the date of the invoice shall be surcharged interest at 2% per outstanding debt per month.
• All payments of the electricity bills are paid at any local TANESCO office or agent near by the customer.
• If a customer does not receive a bill within the first week of the month he/she should obtain the bill from TANESCO offices so as to pay early their due debts.
2.4.1 Debt Collection Procedures
The debt collection procedures are very important since they give a guide for revenue follow up and assist in meeting targets of the debt collections.
According to TANESCO Mbeya the following are the debt collection procedures:
• Revenue accountant shall analyze the debts
• Revenue accountant shall remind Public Institutions, Industrial customers and big consumers to pay their bills.
• Revenue accountant shall remind domestic customers and commercial customers to pay their bills.
• Revenue accountant shall use Disconnection sub-department to disconnect electricity services to non payers after the notice of 48hours.
• Revenue accountant shall authorize part payments and full payments from disconnected customers; then shall receive the payments and issue receipts to customers.
• After the payments have been done, the revenue accountant through Reconnection sub-department shall return the Cut-outs instruments for the reconnections purposes to customers.
2.5.1 Research Questions
i. Are the management practices and procedures of debtors’ collection and follow up implemented as stated in the company’s policy?
ii. Are the debtors’ collection targets achieved by the organization as planned?
iii. What are the other best collection procedures which can be implemented by the company to easy the process of debt collections?
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter explains the research design used by the study, name of research design; data collection strategy and data analyses strategy as well as how the researcher has drawn conclusion from the analyzed data.
3.2 Name of Research Design
The researcher used the case study design in carrying out the study where TANESCO Mbeya was selected as a unit of investigation. The reason for TANESCO is because company deals with debtors due to most of its services being provided on credit bases.
Case study design enables the researcher to complete the study within a short framework of time as a time allocated for that purpose allows. Krishnaswami (1998) provides the merits of using a case study that it facilitates intensive investigation of the study and it is flexible with respect to data collection methods, that is all methods of data collection can be used.
3.2 Data Collection Strategy
The researcher collected both primary and secondary data from the field. Primary data is the data collected by the researcher at the field for the purpose of answering research questions or issue (Adam & Kamuzora, 2008). Primary data ensured that the data collected are the one which describes current situation.
Secondary data are data obtained from the literature sources or the data which are not current but they have been collected before by other interested parties for one reason or the other (Saunders et al, 2008). Secondary data show the experience so that data comparison is made from those of the past to current data. The methods of data collection which were used by the researcher are as follows:
3.2.1 Interview
Interview was used to collect Primary data from the field. The study used face to face interview, where by the researcher conducted interview with the customers at TANESCO offices. A sample of 30 customers out of the customers who were going to the office for various TANESCO services were interviewed. The sampling technique used here to select was simple random sampling. Simple random sampling ensured that the information is obtained without bias and they are relevant and reliable
The information which was obtained from customers using interview is that of whether the debt collection policy is implemented by the TANESCO staff as how is pointed out in the company’s invoice/bill. This included knowing if they receive bills on time; pay on time, interest charged for the overdue accounts and if there is service disconnection for the invoices not paid at the time of 7 days after invoice date. Also included to check whether the customers go to TANESCO to collect their bills if they have not received them at the first week of the month as how is provided in the TANESCO bill.
This method of data collection (interview) was used so as to increase the percentage of response and be able to gather other supplementary information concerning debt collection policy and procedures from the customers. Adam and Kamuzora (2008) explains the advantages of Interview as a method of data collection, among other things that, it facilitates wide response rate, wide coverage, flexibility and the researcher can control the interview situation so that can have right information and reliable data.
3.2.2 Documentary Review
This was used in collection of secondary data. This method included passing through various information and documents of TANESCO concerning the study topic. These data helped the researcher for comparison purposes and for analysis of data. Various documents which were obtained by the researcher from the area of study by this method include:
The targets set aside concerning debtors’ collection and the actual collection for the 6 months from July to December 2009. These months were picked purposively as they were current hence they were able to reflect the current situation. This data concerning collection targets and actual collections helped to know the management’s effectiveness in meeting collection targets.
Another important documents which were viewed, is that of the figure for the actual collections as related to total sales in the period of 6 months from July to December 2009. This data helped to know how the position of management is, in the area of debt collection using their laid down debt collection policy and procedures.
In addition to these documents, the researcher visited various website and reports relevant to the research problem to see how the collection policy of TANESCO can be compared to the rest of the companies in the world.
3.3 Data Analysis Strategies
Both quantitative and qualitative data analysis were employed when answering the research questions. These were used in analyzing both the data collected using interview and documentary review methods.
The opinions of the customers concerning the implementation of the debts collection policy was analyzed qualitatively to know the percentage of the response. The percentage of the responses concerning the implementation of debt collection policy displayed the level at which the management works on that policy and how the policy benefits the company.
In quantitative analysis, descriptive statistical was used in computation of percentage of actual debt collection over target debt collection for that period of 6 months from July to December 2009. This helped in determining the efficiency in debts management by the company.
In analyzing the relationship between the actual collections to total sales the following process was done; the percentage of actual collection to total sales was computed to see if the management is effective in debt collection. This was done for the data of months of July to December 2009.
3.4 Drawing Conclusions
In the implementation of debtors’ management policy by the company, the researcher used the opinions of the customers. Upon determining whether the company adheres to the debt collection policy as how is provided in the invoice (Appendix 1), the researcher used the criteria that, if the percentage reaches 90% the management is effective but less than that the management is not effective in implementation of debtors’ collection policy
On determination of debtors’ management the researcher used the following criteria: if the average of percentage of actual collection over target collection for those 6 months is 95% or above then it indicates that there is efficiency in debtors’ management because they will be able to collect around the targeted collection.
Also upon comparing percentage the actual collection over total sales, the decision criteria which was used is that; if the average of actual collection over total sales for those 6 months is greater or equal to 90%, the implication is that management is effective in debt collection, however if it is less than that then the management is not effective in debt collection.
CHAPTER FOUR
DATA ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Introduction
In this chapter the researcher has discussed and analyzed various findings obtained from TANESCO office concerning implementation of debtors’ management policy. The findings discussed here include the level the TANESCO adheres to their debt collection policy which is provided in their invoices/bills; the actual collection against target collection, and the collection against sales, both for the period of July-December 2009.
4.2 Management Implementation of Debt Collection Policy
At the back of the TANESCO customers’ invoice/bill there is debt collection policy (appendix 1). The researcher wanted to find out whether that policy is implemented by the management as how is provided in the invoice. The researcher conducted an interview with a sample of 30 TANESCO customers who were selected randomly.
4.2.1 Payment of account within 7 days otherwise power to be disconnected after 48 hours notice
In the debt collection policy of TANESCO the account is supposed to be paid within 7 days otherwise the power is disconnected after 48 hours notice. According to the Control Accountant (personal communication, 23rd December, 2009) these seven days are counted after one week of the respective month’s invoice where the first week is considered as invoice postage and deliverance to customer’s time.
The data obtained from the sample of 30 customers, 21 which is 70% of the sample showed that they received the bills at the first week and pay them at due time. The remaining 9 customers which is 30% of the sample said they do not receive their bills within the first week of the respective month and hence they do not pay at due time. Among those 9 customers who do not pay their due bills within 7 days as required from the policy, 7 customers who is 77.8% of them, claimed that power was disconnected as provided from the policy.
The reason for all not responding within seven days as provided in the policy was claimed to be number of factors which are: late postage by TANESCO staff, problems in postage offices, late receiving of bills since some customers receive through offices such as churches and schools addresses and lack of sufficient information about the collection policy of the company. The solution to these challenges can be done by improving working ability in the company to ensure that the bills are prepared early as supposed to be. Also they can improve it by sending the bills direct to the customers as how is done by Mbeya Urban Water Supply Authority which sends the bills at the customers houses or using an agent to send the bills direct to the customers.
The other challenge they face is as we can see that 2 customers out of 9 who did not pay at due time which is 22.2%, enjoyed the service without payment for the service. The reasons for this was said to be that: the number of staff is not big enough to cut the services to all the customers who do not pay, remoteness of the customers houses and the issue of corruption where it was claimed that some staffs were bribed when they went to cut the services hence left without disconnecting.
4.2.2 Interest of 2% Surcharged per outstanding debt per month
In the collection policy of the company there is a clue that if the account is not settled within 30 days it is surcharged with 2% interest per outstanding debt per month. This has been done at 100% perfect as how it is written at the back of the customer’s invoice. A customer who has a debt will find the interest automatically appearing in his/her succeeding month invoice.
The reason for the perfection of this is because, there is a formula already inserted in the computer system for billing customers which calculates the 2% interest per outstanding debt in each month. The system which is currently used for billing the customers from January 2010 is HiAffinity while before that the system used was CUSTIMA.
4.2.3 Payment of the account at the nearest local TANESCO office
This has been done effectively since there is no any other alternative which the customers can pay. The offices in which the customers used for payment are: Mbeya Regional office, Mbalizi and Uyole branches in Mbeya city as well as district offices in the districts of Mbeya.
This payment of account in the TANESCO offices is good but need to be improved since the offices are few hence increase queuing to the customers when they go for payment especially at the end of the month. What is supposed to be done is to increase the offices which the customers can pay so that they will be comfortably that their time can be used efficiently.
4.2.4 Obtaining the Bill from TANESCO office if not received within the first week of the Month
According to the policy of TANESCO the customers are supposed to obtain their respective bills at TANESCO offices if they have not received at the first week of the month. According to the data from TANESCO, out of 10 customers who did not receive their bills at the first week of the month, only 6 of them (which are 60%) came to seek for the bill at the TANESCO office while the rest came after hearing there is a disconnection of power program (appendix …).
Lack of enough knowledge to the customers about the company’s collection policy has been a major factor for that response. The customers who were interviewed by the researcher responded that they did not know if they are supposed to do so although it has been written at the back of their bills, which mean they do not read carefully their bills. TANESCO can improve the knowledge of the customers by conducting various programs in the media to explain and teaching their policy to the customer. This will make the customers aware and hence comply with this collection policy.
Therefore the research findings from the selected sample of 30 customers provided the following information about the implementation debt collection policy of the company: paying the account within 7 days is 70%, surcharging the 2% interest per outstanding debt per month is 100%; Payment of the account at TANESCO offices is 100% and customer coming to take their bills at TANESCO offices in case they have not received within the first week of the month is 60%. From the above data the average of these findings is 82.5%. Therefore from the data obtained and analyzed about the implementation of debt collection policy of TANESCO, the policy is implemented to the extent of 82.5%.
The desire of workers to see the company progressing smoothly and to make sure that the vision of the company is achieved has influenced the level of policy implementation achieved. This has been the major factor of achievement from the staff side. Also the fear of being disconnected from the service has influenced the customers’ side from abiding to the policy. In addition to these reasons the knowledge of this collection policy to staff and some customers has added the level debtors’ collection policy implementation.
However the implementation of debtor’s collection policy was below to the standard set by the researcher of 90% by 7.5%. The implementation of debtors’ management policy to higher level is hindered by the some factors. These include technicians who do not disconnect services to highly indebted customers, or dishonestly they reconnect the services to those highly indebted customers due to individual relationship or bribes. Also the ignorance of some customers has added the breakage in the efforts of the company from making sure that the policy is implemented as how it is.
4.3 Management Effectiveness in Meeting Collection Targets
The researcher obtained the following information in his study concerning the ability of the management in meeting the collection targets. These are the target and actual collection for the period of July to December 2009. According to L.Chale, Regional Revenue Accountant (personal communication, January 21, 2010), at TANESCO the collection target for the particular month is calculated by taking 96% of the previous month sales.
Also the Regional Revenue Accountant added that, the actual collection for the particular month’s sales is taken by taking 93% of that monthly collection while the remaining 7% is considered to be the collections that pertain to previous months (arrears).The data for these six months are shown in table 4.1 below:
Table 4.1 Actual collection against target collection for the months of July-December 2009
COLLECTIONS
Year 2009 TARGET COLLECTION In Tshs. ACTUAL COLLECTION In Tshs. ACTUAL/TARGET COLLECTIONS (%)
JULY 1,327,776,342.61 1,271,295,377.34 95.6
AUGUST 1,189,450,576.40 1,230,075,638.26 103.5
SEPTEMBER 1,357,538,403.98 1,329,160,125.25 97.9
OCTOBER 1,328,232,892.32 1,268,660,866.47 95.5
NOVEMBER 1,386,635,185.72 1,439,425,107.02 103.8
DECEMBER 1,299,339,804.64 1272873096.95 98.0
Source: TANESCO Monthly Cash Collection Summary.
TANESCO Monthly Cash Sales Summary Ref no. IT3011.
This data can be presented graphically as follows:
4.1. Percentage of actual collection against target collection
According to the data obtained from the TANESCO concerning target and actual collection, they show that the management is effective in meeting the collection targets. This is caused by the figures shown above since the average of the percentage of actual collections over target collections is 99.1%, which 4.1% more than 95% of the decision criteria as is set by the researcher.
The reasons for these sound achievement on collection of money has been said to be company’s strategy of waiving interest so as encourage payment and the effective disconnection of electricity to late payers.
In the period of 6 months from 1st June 2009 to 30th November 2009, there was an interest free payment scheme to customers whose debts had interest in them as per letter of ref SMM/MCC/CUST dated 11th May 2009 (Appendix 2). This scheme encouraged many customers to pay their due debts at this time so as to get rid of the interest involves in their debts, which in turn increased the months’ collections for those responsible months.
Apart from this scheme, the effective disconnection of electricity services done by the company after the announcement in the public (Appendix 3), made the customers to pay their due debts on time hence increase the collections.
4.4 Management effectiveness in debt collection
In determining the effectiveness of the management in debt collection, the researcher looked at the proportion of the collections to sales for the months of July to December 2009. The invoices of the month’s sales are raised at the end of each month hence their respective collections are collected in the following months. Based on this information, the researcher compared the monthly sales with the corresponding collections made in the following month. In table.4.2 below are the findings obtained.
Table 4.2 Actual collections against their respective sales for the months of July-December 2009
MONTHS 2009 SALES COLLECTIONS COLLECTION /SALES (%)
JULY 1,239,011,017.06 1,230,075,638.26 99.2
AUGUST 1,414,102,504.15 1,329,160,125.25 94.0
SEPTEMBER 1,383,575,929.51 1,268,660,866.47 91.7
OCTOBER 1,444,411,651.79 1,439,425,107.02 99.7
NOVEMBER 1,353,478,963.17 1,272,,873,,096.95 94.1
DECEMBER 1,391,877,242.81 1,2671,875,69.22 91.1
Source: TANESCO Monthly Cash Collection Summary.
TANESCO Monthly Cash Sales Summary Ref no. IT3011.
This data can be presented graphically as shown in the figure below:
Figure 4.2. Percentage of collection against sales for six months of 2009.
According to the results obtained from the field, it shows that the average percentage for the months of July to December 2009 is 95%. This is 5% greater than that of the decision criteria which is 90%. Therefore the management is effective in debt collection as the information obtained from them is showing above.
The reason for these achievements was argued to be also the waiving of interest for the period of 6 months from 1st June 2009 t0 30th November 2009 (see Appendix 2). This increased the collection for the period of June to November 2009.
This scheme of waiving the interest to customers who are willing to pay the debts free of interest at a certain period of time has become advantageous to the company since it has increased the collections for those months. As well as abiding to the policy disconnect service from the customers with overdue accounts has helped the company in increasing the collection versus sales for that period of July to December 2009.
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
In this chapter the researcher has drawn the conclusion and pointed out the recommendations. Conclusion of the findings obtained at the research area has been compared against the decision criteria set before conducting research while in recommendations, the researcher points out what can be done to improve the implementation of debtor’s policy basing on the research findings.
5.2 Conclusion
In the study concerning the assessment of implementation of debtors’ management policy, the researcher came with the conclusion that there is a need to provide much education to the society about this collection policy of TANESCO. This is caused by the fact that, not all customers are aware of it hence do not adhere to it. As can be seen that the adherence of debtors’ collection policy is to extent of only 82.5%, this is lower than the set up criteria of 90%. Also the company needs to improve in the area of preparation of bills early and posting them for the customers to pay within the required time.
From the research it was discovered that the branch which is Mbeya Region do not have it own policy but rather depends on the country collection policy. In this way it is acting as a non autonomous branch since the books of accounts and major decisions are made at the headquarter Dar es Salaam. This also is a challenge because the working environments of different regions need different attention. Some customers, especially big companies and institutions need to be visited several times for them to settle their debts.
According to TANESCO Mbeya the task of visiting big companies and institutions debts settlement issue is performed by the Regional Customer Care Relation officer and the Credit Control Accountant. There is a need to employ other people for that task, since the two alone to do that task for the whole region including its districts is something which hinders perfection, considering that they have other responsibilities. Since it operates as a non autonomous branch the issue of recruitment is done at the headquarters, there is a need for the headquarters to consider that and employ more staff.
Generally as a branch, TANESCO Mbeya is doing fine at the issue of debts collection from sale. As can be seen from the data analyzed that, the actual collection is 99.1% of the target collection which is good achievement. Also the actual collection is 95% of the respective sales which is also good. The most important thing for the company to do is to increase the public knowledge about debt collection policy as well as employing more staff for more improvement.
5.3 Recommendations
In accordance to the findings, the researcher came out with the recommendations on what should be done to improve in the area of debts collection management. These can much be used at the headquarters since there is where major decisions concerning the company are made, and some to the regional level, and they are as follows:
5.3.1 Widening the Payment base for the customers to settle their accounts
Paying the accounts in the few local TANESCO offices will not help much the office from obtaining the payments at due time. Many successful utility companies dealing with debtors have widened their payment base by using various organizations, institutions and procedures in which the customers can settle their bills. ESKOM, The electricity company of South Africa; and Florida Power and Light Company (FPL) of United States are the companies which have succeeded in that area of widening the payment base.
Customers of ESKOM can pay their due bills at the office or in several banks such as Ned bank and Standard bank. Also a customer of ESKOM can make payment at any financial institution and can pay the money in an ESKOM bank account as well as using easy pay through credit card or cheque at Supermarkets, Pick ‘ n pay Regional and mini markets and Foodworld . In addition to those the customer can pay through SAPO (South African Post office) branch with online facilities and through ESCOM agents.
Not only ESKOM, but also FPL (Florida Power and Light Company) has advanced in widening the payment base. There are various ways which are used in payment of the debts in FPL, and these include: Automatically Bill Pay where the money is automatically deducted from the account of the customer, online payment, using Credit and Debit cards payment as well as payment through phone.
These methods of payment are helpful to the company since they encourage the customers to pay without having a problem. It is true that it can need a lot of initial capital to do this but the benefit obtained will be greater than the cost incurred, therefore the researcher encourages the management to use this method and see their impacts.
5.3.2 Debt collection using Collection Agencies
In the current years many firms have added one method of debt collection which is using debt collection agencies. This method is used worldwide by many firms so as to quicken the process of debt collection. This helps the firm to collect the overdue debts in a clear and effective way as it delegates this activity to the other firm.
Tanzania Revenue Authority has been using this method for debt collection for the long time and it has shown the results for a time. This method of debt collection provides the assurance of collecting the debts without being directly involved as the company will be able to continue with its other activities. Also this method ensures easy collection of debts since the task is left to the company which specializes in that field.
This method can as well be used in the companies in Tanzania, since there are other companies which have specialized in debt collection from delinquent customers. TANESCO has not implemented this method of debt collection but for improving debts collections it need to use this method. The researcher recommends the company (TANESCO) to employ this method for the collection of overdue debts especially from the various institutions which has not paid their due accounts.
5.2.3 Emphasizing on Pre-paid service through LUKU
In order to reduce the problems which arises due to unpaid debts, the researcher recommends the emphasis to be made on prepaid services. Through LUKU no customers can extend overdue accounts since he/she needs to pay for the service before using them. This way is more suitable for the public organization and big organizations which do not pay on time since it will make them pay for the service before consuming it.
This method of payment is the one which is used by the mobile phone companies like TIGO, VODACOM and ZAIN and there success is evident to the society. The corporate social responsibility done by these companies like financing football league, students scholarships and supporting schools with books prove that they are making profit and they are liquid.
The process of changing the payment system from post paid to prepaid system of service needs high financing at the initial stage. This is a result of high need of money to have LUKU meters since they are different from the Conversion meters (ordinary meters) which are at a time spread more in many parts of the country. In order to make sure that this idea comes to pass, the government through the responsible ministry needs to support the company by supplying the required money and other material support.
The transformation of the payment system from post paid service to prepaid service has a lot of advantages to the company. Apart from becoming the best solution to slow payers and non payer customers, the use of LUKU reduces the company’s operating expenses. Using the new payment system the company will not need to incur the cost for say, employing many meter readers to read on the meter units before billing the customers hence reducing the operating expenses.
It is true that this idea may lead to some few disadvantages, like higher initial cost for changing meters from conversional meters to LUKU meters, as well leading to unemployment of some employees. These few disadvantages have small impact in reality, compared to the advantages that can be obtained when the payment system will be changed to prepaid system as how have been explained.
Recommendation for further research
In order for the other researches to be improved concerning the topic on implementation of debtors’ management policy in utility companies and have more significant results, the researcher recommends the following:
• The researches to be done including various branches of TANESCO and include the headquarters. This will give the clear picture of the company in the area of debtor’s management. Also the research to include various utility companies such as urban water supply authority so as to make comparison with TANESCO.
• The researchers should check the bases for using those targets. The reasons for taking 96% of that monthly sale to be the collection target for that month. Also reasons for considering that 7% of that collection, being that of the arrears and taking 93% as collection of that current month. This will help in assessing whether the company real meets the collection target.
• The researcher should look in detail about other international companies which deals with the same product (electricity). This will help to check properly the whether the company abides to the world standard collection policy and if not, assess whether the company can abide to those standard taking consideration of the level of economy and financial situation of the company.
Therefore these are the recommendations for the host of the organization as well as areas of concentration for further researches. This will help the company to improve in implementation of the collection policy hence increase the revenue as well as liquidity of the company and keep it away of technical insolvency. Also these recommendation can be used for further researches hence increase the usefulness of those researches.
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