Credit Management Mechanism and Financial Performance in Utility Companies in Uganda: A Case of Umeme Limited

Abstract

This research sought to analyze the effect of credit management mechanisms on the financial performance of utility companies in Uganda with specific reference to Umeme Limited. This research utilized the Information Asymmetry Theory to discuss potential information gaps between utility providers and their customers in credit terms, standards, and collection processes. The new enhanced financial evaluation process bifurcates the information asymmetry which refers to the inequality that arises from the differences in knowledge between the managers in business and the lenders. The investigation is based on earlier evidence which shows that a lack of equality in information results in problems like moral risk and adverse selection. The study was aimed at assessing the impact of credit terms, credit standard and credit collection procedures on Umeme’s financial performance. Details of the research finding also indicated that credit terms do not significantly influence (R² = 0.045; p > 0.05) on financial performance. Compared to the credit standards (R² = 0.0768; p < 0.05) and the credit collection (R² = 0.2139; p < 0.0001), the credit standards and credit collection are the most effective factors in influencing financial outcomes. The most significant influence of credit collection procedures showed effective credit management practices on financial performance. As a result of those findings, the study advised that Umeme re-design its credit collection processes to include tighter monitoring and follow-up procedures which could include automated reminders and increased interaction with customers. Topics for future research include: exploring alternative credit management practices, as well as regulatory effects on utility companies. It is also recommended that the organization has a well-established training program for credit personnel that outlines appropriate and clear flexible credit terms according to the needs of the customers and ensures on-time payment of dues without worst atmosphere from either of the organizations which would improve both financial performance and customer satisfaction. Establishing this relationship provides understanding of credit management practices and their impact on financial performance of utility companies and thus would be useful for Umeme (and other utility companies) to manage credit-related risks for improving their overall financial stability.