Management of Trade Credit and Its Effect on Profitability

This study investigates the management of trade credit and its effect on firm profitability, focusing on the interplay between accounts payable and accounts receivable as key variables influencing profitability. It highlights the critical role of accounts payable and accounts receivable as key variables influencing profitability. Using a survey research design, the study employed a structured questionnaire to collect primary data from the selected firm. A random sampling technique ensured fair representation, and the data was analyzed using descriptive method of data analysis. This is done through the use of organizing the data into tables and analyzing it using simple frequency percentages, calculated to a total of 100%. The dependent variable (DV) is firm's profitability, measured by metrics such as Return on Assets (ROA) and Return on Investment (ROI), while the independent variables (IVs) include accounts payable and accounts receivable. Findings indicate that effective trade credit management significantly impacts profitability. The study concludes that moderate receivables management strategies yield the most consistent profitability while maintaining manageable credit risks. It recommends that firms adopt balanced strategies, implement robust debt collection policies, leverage financial management tools, and train finance personnel in trade credit and debt recovery best practices. Regular reviews of trade credit policies and their impact on profitability using metrics such as ROA and ROI are essential to align strategies with market dynamics and organizational goals.