CHAPTER 01

INTRODUCTION
1.1 BACKGROUND OF THE STUDY

A firm credit policy is the set of principles on the basis of which it determines who it
will lend money to or gives credit the ability to pay for goods or services at later
date.
In simple words the credit policy of financial institution or business is a set of
guidelines that highlight the following points.
i. The terms and conditions for supplying the goods on credit
ii. Customers credit worthiness
iii. Collecting procedure
iv. Precautionary steps in customer default
(An article- Educational General) credit policy having two types of policies
(a) Lenient or loss credit policy
Under this policy firm or company sell on the credit to customers very liberally even
to those customers whose creditworthiness is not known or doubtful. Through this
policy the companies increase the sale and as well as result profit increase and hence
the firm faces the problem of liquidity.
(b) Stringent or Restrictive credit policy
In this policy the firm or company is very selective in extending credit. Credit sale
are made only to those customers who have proven worthiness because the tight
credit standard chances of bed debts and other credit cost are minimized but the
same time sale and profit margin are restricted.
(2017)Henry buwule musoke and Florence nameere. The study thought to determine
on an empirical basis whether credit policy influence the financial performance of
the commercial bank in Uganda.
The study concluded that credit policy is crucial to financial performance

1
 Of the company .the study among the other recommended that it should be linked to
credit worthiness of perspective borrowers and company should also maintain loan
ageing record of the company
Financial performance refer the result of company policies and operations in
monetary terms these result are reflected in the firm returns on investments return on
assets value added etc. (Business Dictionary)
(Declan flood –CEO Irish credit mgmt. training and credit professional) it clarify the
work for credit and sale to work together in positive environment to grow the
business
(Google search) credit policy outline the term under which customer s who buy on
account must repay the balance suppliers commonly extend credit account to its
regular customers to encourage repeat business strict credit policy means enforcing
tight limit on the amount of times a buyer can pay a debt .

1.2 STATEMENT OF THE PROBLEM

Credit policy is that perspective of the organization where the organization greatly
depend on the credit policy, under this policy firm sell on the credit to customers
whose credit worthiness is not known or doubtful .
Through this strategy the company increase sale and as well as a result profit also
increase and hence the firm face the problem of liquidity. Liberal credit policy relax
the customers with low rate of return and high length of period but increase the level
of current asset in Account Receivable. Whereas restrict policy complex terms for
customer but low the level of liquidity.

1.3 MAIN OBJECTIVE

1. To estimate the relationship between credit policy on financial performance
2. The impact of credit policy on company financial performance.
3. The significance level of credit policy on firm financial performance.

2
1.4 RESEARCH QUESTION
1. How to estimate the relationship between credit policy and financial performances of
the company
2. What will be the impact of the credit policy on financial position of the company
credit decision

1.5 HYPOTHESIS
H01.there is a no relationship between credit policy and financial performance of the
company
H11.there is relationship between credit policy and financial performance of the
company

H02.there is a positive impact of credit policy on financial performances of the

company
H12. There is a negative impact of credit policy on financial performances of the
company

1.6 SIGNIFICANCE
Credit policy run the overall financial structure of the company and also
improves the cash flow of the firm. Lenient credit policy reduce instance
of loan default and speed up the account receivable turnover, credit
policy maximize the company sale operations.
 Credit policy run the overall financial structure of the company
 Credit policy improve the cash flow of the company

 Lenient credit policy reduce instance of loan default and speed up the
account receivable turnover

3
 Credit policy maximize the company sale operation
 Credit policy reduce ambiguity to proceed their operation

1.7 LIMITATION

Due to limited time and availability of data this study is confined only to 25 textile mills
and their data of 10 years. A future research can analyze more firms of textile and other
industries and even more years’ should be gathered and analyzed in depth.

4
 CHAPTER02

LITERATURE REVIEW

2.01 PREVIOUSE LITERATURE

Carhart (1997) investigated and presented an overview of the European mutual fund
industry and investigates mutual fund performance using a survivorship bias controlled
sample of 506 funds from the 5 most important mutual fund countries. The latter is done
using the Carhart (1997) 4-factor asset-pricing model. In addition we investigate whether
European fund managers exhibit “hot hands”, persistence in performance. Finally the
influence of fund characteristics on risk-adjusted performance is considered. Our overall
results suggest that European mutual funds, and especially small cap funds are able to
add value, as indicated by their positive after cost alphas. If the researchers add back
management fees, 4 out of 5 countries exhibit significant out-performance at an aggregate
level. Finally, we detect strong persistence in mean returns for funds investing in the
United Kingdom. Our results deviate from most US studies that argue mutual funds
under-perform the market by the amount of expenses they charge.

White (1980) and Hansen (1982) Which journal articles have had the most impact on
finance research? Which articles were most cited in each of the last 30 years? Which
journals dominated finance research in the 1990s? Did any finance sub-discipline stand
out or lag behind in the 1990s? We answer these and similar questions using a
comprehensive sample of journals, an extensive time period, and a new ranking method
that avoids problems inherent in the existing literature. We find that although six of the
ten articles most highly cited by finance journals were published in econometrics or
economics journals, and Journal of Finance accounts for only one of the top ten, Journal
of Finance still dominates with the article cited most frequently in eight of the last ten
years. We also find that methodological papers such as White (1980) and Hansen (1982)
are very highly ranked. We use the most influential papers to construct suggested Ph.D.
course reading list

5
Arnold, Butler, Crack, Altintig, A. (2001). Investigates how investors who face both
market risk (interest rate risk) and credit risk in addition to equity risk would optimally
allocate their financial wealth in a dynamic, no arbitrage, and continuous-time setup. I
model credit risk through a default able zero-coupon bond and solve the sto- chiastic
differential equation of it under the recovery to market value scheme. I obtain a closed-
form solution to this investment problem, which enables me to analyze the impact on
investors’ decisions of various risk parameters. One interesting insight of this paper is
that a non-zero recovery rate of the credit-risky bond affects investors’ decision in a
fundamental way. This is manifested in a dividend-like adjustment term in the drift of the
stochastic differential equation (SDE) of the default able zero-coupon bond’s return
process. The optimal asset allocation involves the "separation effect" and "integration
effect" . As a result, the relation between myopic demands for bonds and market prices of
risk becomes relatively complicated compared with that in the traditional setup. In
addition, I show the cross-markets correlation is an important factor in the asset
allocation decision. In particular, it affects investors’ ability to hedge against or speculate
on the stochastic risk premium of the default able bond. Numerical examples show that
the inclusion of credit markets significantly enhances investors’ welfare. I also find
modeling interest rate as a stochastic process greatly reduces model risk, giving investors
more realistic prospects in their investment decisions.

Otten, R., & Bams, D. (2002) explained the employs a new database, which contains the
market and accounting data from more than 1000 Chinese listed companies up to the year
2000, to document the characteristics of these firms in terms of capital structure. As in
other countries, leverage in Chinese firms increases with firm size, non-debt tax shields
and fixed assets, and decreases with profitability and correlates with industries. We also
find that ownership structure affects leverage. Different from those in other countries,
leverage in Chinese firms increases with volatility and firms tend to have much lower

6
long-term debt. The static tradeoff model rather than pecking order hypothesis seems
better in explaining the features of capital structure for Chinese listed companies

Stock-flow adjustments are typically measured as the difference between changes in

gross debt and deficits. These are interpreted as a proxy for unexplained fiscal
discrepancies, and often associated with a lack of fiscal transparency. However, such
measures fail to capture the role of financial assets and valuation changes and therefore
do not correctly predict fiscal transparency. The purpose of this paper is to provide a
more detailed exposition of stock-flow residuals and the relationship with fiscal
transparency, highlighting government acquisition of equities and investment fund shares
and their performance in secondary markets. The results suggest that the performance of
government equity portfolios correlates with fiscal transparency to the extent that fully
transparent governments are expected to generate between 6 and 8 percent higher returns
on their equity portfolios than others. These findings suggest that the performance of
government assets may be a promising area for future research of fiscal transparency and
stock-flow residuals

Chen, J. (2002). Investigated the influences of Free Cash Flow, Tobin’s q, and Price-
earnings ratio on the investment decisions by using North American monthly data from
January 2000 to March 2017. Correlation Analysis and three Generalized Linear Models
(GLM) are employed in this empirical research. The company size effect and within
industry Effects are controlled, and the reverse causality issue in the regression is
considered. The Reasons and implications of the strong cash flow/investment relationship
are explored and discussed. Tobin’s q and cash flow/investment relationship are
combined to identify the Liquidity constraint and the overinvestment of the free cash
flow. Moreover, the CEO Pay Slice, which contains the CEO compensation information,
is included in the regression Model to investigate the impact of the CEO on the capital
spending decision of the company.

7
Hou, Y. (2002). Present novel empirical evidence that conflicts of interest between
creditors and their borrowers have a significant impact on firm investment policy. We
examine a large sample of private credit agreements between banks and public firms and
find that 32% of the agreements contain an explicit restriction on the firm’s capital
expenditures. Creditors are more likely to impose a capital expenditure restriction as a
borrower’s credit quality deteriorates, and the use of a restriction appears at least as
sensitive to borrower credit quality as other contractual terms, such as interest rates,
collateral requirements, or the use of financial covenants. We find that capital
expenditure restrictions cause a reduction in firm investment and that firms obtaining
contracts with a new restriction experience subsequent increases in their market value and
operating performance

Huang, & Song (2000). Governmental bodies are increasingly incorporating the work of
private credit rating agencies into regulatory standards. In this comment, Professor
Jackson examines how a recent proposal of Basel Committee on Banking Supervision
would extend this practice by factoring the credit ratings of borrowers into capital
adequacy requirements for commercial banks. After reviewing various criticisms of the
Basel Committee’s proposal, the Comment considers alternative approaches to measuring
the credit risk of commercial banks and concludes with a discussion of implications for
regulatory policy in a global financial services industry

Seiferliing, M., & Tareq, S. (Jan 2015) Thousands of companies around the world,
including a majority of the Global Fortune 250, voluntarily report on their environmental,
societal, and economic impacts, a practice known as corporate responsibility (CR)
reporting. The practice is alternatively known as corporate social responsibility (CSR)
reporting, sustainability reporting, citizenship reporting, or triple bottom line (TBL)
reporting.

K, X. (23 April 2017). A brief history of regulation-by-disclosure and CR reporting is

presented. The authors then review related business and legal scholarship. Two broad

8
lines of inquiry emerge: first, are CR disclosures associated with businesses that perform
well financially, and, second, are CR disclosures associated with businesses that perform
well environmentally. The authors test both of these relationships simultaneously using
logistic regression. The authors discuss the results of the statistical testing and conclude
with suggestions for future lines of research.

Jackson, H. E. (2000). This article therefore makes a significant contribution to legal and
management scholarship by determining the impact that financial and environmental
variables have on whether or not a company utilizes CR reporting. The results should
provoke further research in the fields of both business and law.

Kiff, J., Michaud, F. L., & Mitchel, J. (2002). The objective of this study is to address the
issue of the relationship between corporate social and financial performance by
moderating company size and financial leverage. With the use of type of industry as
control variable. The Corporate social performance (CSP/CSR) is measured using seven
item developed initially by Michael Jantzi Research Associate, Inc. and used by Mahoney
and Robert (2007). To attaint main research objective, the measure of CSP composite is
used. Furthermore, company size, financial leverage, and type of industry are measured
by total asset, degree of internal and external source to finance the company’s assets, and
dummy variable (0 for non-manufacture and 1 for manufacture), respectively. A
moderated multiple regression models are used in the present study. Four models are
developed in the study based on the theory of slack resource and good management. The
result of the present study is that corporate social performance (CSP/CSR) has no effect
on corporate financial performance (CFP) under slack resource and good management
theory it is also shown that only financial leverage could moderate the interaction
between CSP/CSR and financial performance (CSP). However, based on the overall
analysis, it may be reasonable to come to conclusion that the relationship between CSP
and financial performance is spurious as

9
Orlitzki (2000) concluded the form and content of the capitalist world economy is fast
evolving and we find capital Being increasingly concentrated and centralized as the battle
of market competition Intensifies. Companies have to keep running just to stay in the
same place so intense is the competition. One of the factors that make the critical
difference between the Companies is the public perception of a business's value systems
that are best exhibited by Initiatives in discharging its Corporate Social Responsibility
(CSR). From a long time Several Researchers have reported a positive, negative, and
neutral impact of corporate Social responsibility (CSR) on financial performance. This
inconsistency may be due to Flawed empirical analysis.

Chi, Y., Geobey, S., & Lin, H. (2017). study the relationship between social and
Financial performance of a company. In present study Top 1000 Indian firms are
Examined for the financial year 2007-08, which are rated by karmyog (Mumbai base
NGO), but for the purpose of research only 37 companies were considered, who spend
Some amount to fulfill their corporate social responsibilities and then relationship
between Their financial performance and expenditure on corporate social responsibility is
Measured by using correlation and regression. The analysis reveals that there is a positive
Relationship between CSR and financial performance and the descriptive and inferential
Measures shows that corporate social expenditure depends upon the financial
Performance of the Company. But at the same time we also observe that most of the top
Indian companies are spending nothing on part of their social responsibilities:

Sulkowski, A., & White, D. S. (2011). Study measures the relationship between
organizational performance and financial management practices like capital structure
decision, dividend policy, investment appraisal techniques, working capital management
and financial performance assessment in Pakistani corporate sector. Sample of the study
consisted of forty companies operating in Pakistan, related to different sectors and listed
at Karachi Stock Exchange. The finance executives and financial analysts of the
companies responded to questionnaire that identified through company profiles and
references. The questionnaires were self-administered to collect the data from
respondents. The results show a positive and significant relationship between financial
management practices and organizational performance in Pakistani corporate sector.

10
Fauzi, H. (2009). Capital intensity indicates how much money is invested to produce one
rupee of sales revenue. Business tangible properties or tangible assets are real things that
a company has such as buildings or equipment. Capital intensity and tangibility has the
vital role in the firms’ financial performance. This paper addresses to explore the impact
of capital intensity and tangibility on the firms’ financial performance. For the purpose
of analyzing data in this research, the sample was selected on the availability of data in
range from 2007 to 2011, for banking and insurance companies listed in Colombo Stock
Exchange (CSE). Capital intensity is represented by the capital intensity ratio which is
calculated by dividing the Total assets by the sales and the Tangibility is represented by
the Total Debt Ratio and Debt to Equity Ratio. The financial performance of the firm
represented by the Profit Margin (PM), Return on Assets (ROA) and Return on Capital
Employed (ROCE). To find out the association and impact of the variables the
correlation and regression analysis has been made by using Statistical Package for Social
Science (SPSS). The findings of this study revealed that there is a significant relationship
between the Capital Intensity and tangibility and the financial performance. It means that
the firm’s capital intensity and tangibility increases it will significantly affect to
increasing firm’s financial performance and future stability, and the financial mangers
always act to increase firm’s value in order to maximize the shareholders wealth.

Bedi, H. S. (2009). Motivated by the growing practice of using social network data in
credit scoring, we analyze the impact of using network-based measures on customer
score accuracy and on tie formation among customers. We develop a series of models to
compare the accuracy of customer scores obtained with and without network data. We
also investigate how the accuracy of social network-based scores changes when
consumers can strategically construct their social networks to attain higher scores. We
find that those who are motivated to improve their scores may form fewer ties and focus
more on similar partners. The impact of such endogenous tie formation on the accuracy
of consumer scores is ambiguous. Scores can become more accurate as a result of
modifications in social networks, but this accuracy improvement may come with greater

11
network fragmentation. The threat of social exclusion in such endogenously formed
networks provides incentives to low-type members to exert effort that improves
everyone’s creditworthiness. We discuss implications for managers and public policy

Butt, Hunjra, & Rehman (2010) studied the effect of credit risk on commercial banks
performance in Nigeria. The study is motivated by the damaging effect of classified
assets on bank capitalization and would be of utmost relevance as it addresses how credit
risk affects banks’ profitability using a robust sample and the findings would serve as the
basis to provide policy measures to the various stakeholders on how to tackle the credit
risk in order to enhance the quality of banks’ assets and reduce bank risk. Secondary data
source was explored in presenting the facts of the situation. The secondary data are
obtained from annual reports, relevant literatures and CBN’s statistical Bulletin
publication. The result shows that the ratio of loan and advances to total deposit
negatively relate to profitability though not significant at 5% and that the ratio Non-
performing loan to loan & Advances negatively relate to profitability at 5% level of
significant. This study shows that there is a significant relationship between bank
performance (in terms of profitability) and credit risk management (in terms of loan
performance). Loans and advances and non-performing loans are major variables in
determining asset quality of a bank. Some of the recommendations made in this study
are; management need to be cautious in setting up a credit policy that will not negatively
affects profitability and also they need to know how credit policy affects the operation of
their banks to ensure judicious utilization of deposits and maximization of profit.
Improper credit risk management reduce the bank profitability, affects the quality of its
assets and increase loan losses and non-performing loan which may eventually lead to
financial distress. CBN for policy purposes should regularly assess the lending attitudes
of financial institutions. One direct way is to assess the degree of credit crunch by
isolating the impact of supply side of loan from the demand side taking into account the
opinion of the firms about banks’ lending attitude. Finally, strengthening the securities
market will have a positive impact on the overall development of the banking sector by
increasing competitiveness in the financial sector.

12
Grm, G., & Y, R. (2014) aims to examine the relationship between the length of
receivable conversion period as a measure of credit policy and operating profit margin as
a measure of operational performance of construction firms listed in the Saudi stock
market This relation is examined using dynamic panel data two- steps robust system
estimation for the period 2004-2013. The analysis is applied at the levels of the full
sample and divisions of the sample by crisis and non-crisis periods, sector, and by size.

Nobanee, H., & Ellili, N. O. (2017). The results show negative and significant
relationship between receivable conversion period as a measure of credit policy and
profitability for the full sample. The result of the relationship between receivable
conversion period and profitability for small firms is negative and significant. The results
also show negative and significant relationship between receivable conversion period and
profitability of real estate companies and negative and insignificant relation for building
and construction companies

Wei, Y., Bulte, P. V., & Dellarocas, C. (2015). As with any financial institution, the
biggest risk in bank is lending money and not getting it back. This study examined the
impact of credit management and bank performance in Nigeria. The study adopted cross
sectional survey design. The population of the study consisted of all management staffs
of commercial banks operating in Nigeria. The sample sizes of eleven (11) select
commercial banks were considered by systematic technique. The Purposive sampling
technique was adopted; hence six respondents were administered questionnaire (Bank
Manager and five senior staff) from each bank to make up a 66 respondents for the study.
Multiple regression analysis was adopted for the study to determine the influence/impacts
of credit management variables (Credit Appraisal, Credit Risk Control, and Collection
policy) on bank performance. The study revealed that credit management has a
significant impact on bank performance in Nigeria. The study also revealed that among
the credit management variables considered, credit risk control has the highest driving
force for bring about an effect financial performance of bank in Nigeria. It was
recommended that financial institution should not only take credit management serious,
but should recognize the role of credit risk section if they aim at increasing profitability.

13
Collins, A., Sira, Z., & Miebaka, G. (2017) explores China’s green credit policy from a
credit risk perspective. Green finance has been growing rapidly in China since the
government issued its Green Credit Policy. The objective of this study is to explore
whether green loans are less risky than non-green loans. Based on a five-year dataset of
24 Chinese banks, we used panel regression techniques, including two-stage least square
regression analysis and random-effect panel regression to examine whether a higher
green credit ratio reduces a bank’s non-performing loan ratio (NPL ratio).

Samuel, O. L. (2014). The results suggest that allocating more green loans to the total
loan portfolio does reduce a bank’s NPL ratio. We conclude that institutional pressure by
the Chinese Green Credit Policy has a positive effect on both the environmental and the
financial performance of banks. The study contributes to the literature on the correlation
between green lending and credit risks, as well as to the literature on the impact of
institutional pressure on environmental and financial risks.

2.02 List of literature

Scholar Year Title Variables Statistical Remarks

name tool

Arnold, 2001 Impact: What Credit finance Correlatio Impact on

T., Influences n and financial
Butler, Finance regression performance
A. W., of the
Crack, T. company
F., &
Altintig,
A

14
Otten,r 2002 European mutual Mutual Funds, factor Our overall
Bams D fund performance Performance asset- results
Evaluation, pricing suggest that
Portfolio model European
Management, Mutual mutual
Fund funds, and
Performan especially
ce Models small cap
funds are
able to add
value, as
indicated by
their
positive
after cost
alphas.
Chen, J 2002 Intertemporal intertemporal VAR- Hence the
CAPM and the CAPM, VAR GARCH first insight
cross section of is that if a
stock return factor
reflects the
changes in
the
investment
opportunity
set, its risk
premium
should be
linked to the

15
 amount of
information
that it
conveys
about the
future
Hou, Y 2002 Integrating Default present Credit risk
market risk and value, value of Defaultabl is no longer
credit risk a interest rate, e Bond stranger to
dynamic asset value of treasury Pricing investor
allocation bond. Model
perspective
el 2002 Instruments of Credit risk and Correlatio Credit risk
Kiff, J., Credit Risk financial stability n and closely
Michaud, Transfer: Effects regression effect the
F. L., & on Financial financial
Mitchel, Contracting and stability of
J Financial the firm
Stability
Sulkows Novemb FINANCIAL FINANCIAL Correlatio This article
ki, A., & er 2009 PERFORMANC PERFORMANC n and therefore
White, D. E, POLLUTION E regression makes a
S MEASURES CORPORATE significant
AND THE RESPONSIBILI contribution
PROPENSITY TY to legal and
TO USE managemen
CORPORATE t
RESPONSIBILI scholarship
TY REPORTING by
determining
the impact

16
 that
financial
and
environment
al variables
have on
whether or
not a
company
utilizes CR
reporting
Fauzi, H 2009 Corporate Social Corporate social Regression the measure
and Financial performance, and of CSP
Performance: corporate social correlation composite is
Empirical responsibility, used the
Evidence from financial relationship
American performance between
Companies corporate
social and
financial
performance
Bedi, H. 2009 FINANCIAL Corporate, Correlatio descriptive
S PERFORMANC Empirical, n and and
E AND SOCIAL Financial regression inferential
RESPONSIBILI Performance measures
TY: INDIAN shows that
SCENARIO Corporate
social
expenditure
depends
upon the

17
 financial
performance
of the
Company
Butt, B. 2010 Financial Financial Correlatio The results
Z., Management management n and show a
Hunjra, Practices and practices regression positive and
A. I., & Their Impact on Organizational significant
Rehman, Organizational performance relationship
K. U Performance between
financial
managemen
t practices
and
organization
al
performance
in Pakistani
corporate
sector.
Grm, G., 2014 THE IMPACT Capital Correlatio It means
& Y, R OF CAPITAL Structure Capita n and that the
INTENSITY & l Intensity, regression firm’s
TANGIBILITY Tangibility capital
ON FIRMS intensity
FINANCIAL and
PERFORMANC tangibility
E increases it
will
significantly
affect to

18
 increasing
firm’s
financial
performance
and future
stability
Wei, Y., 2015 Credit Scoring Credit Scoring Correlatio The impact
Bulte, P. with Social n and of such
V., & Network regression endogenous
Dellaroca Data. Marketing tie
,C Science formation
on the
accuracy of
consumer
scores is
ambiguous
Collins, 2018 IMPACT OF : Credit risk regression The results
A., Sira, CREDIT Banking Firms showed that
Z., & MANAGEMENT the effect of
Miebaka, ON BANK credit risk
G PERFORMANC on bank
E IN NIGERIA performance
measured
by the
Return on
Assets of
banks is
cross-
sectional
invariant.
Samuel, 2014 THE EFFECT Credit risk Correlatio The study

19
O. L OF CREDIT management n and recommend
RISK ON THE loan performance regression ed that
PERFORMANC bank probability managemen
E OF t need to be
COMMERCIAL cautious in
BANKS IN setting up a
NIGERIA credit policy
that will not
negatively
affect
profitability
Nobanee, 2018 Does Credit Credit Policy, Correlatio The results
H., & Policy Affect Profitability, n and also show
Ellili, N. Performance of Small Firms, regression negative
O Saudi Financial Crisis, and
Construction significant
Companies relationship
between
receivable
conversion
period and
profitability
of real
estate
companies
and
negative
and
insignificant
relation for
building and

20
 construction
companies
Chi, Y., 2018 The Impact of Credit risk Correlatio conclude
Geobey, Green Lending n and that
S., & on Credit Risk in regression institutional
Lin, H China pressure by
the Chinese
Green
Credit
Policy has a
positive
effect on
both the
environment
al and the
financial
performance
of banks

21
 CHAPTER 3
RESEARCH METHODOLOGY
3.1 NATURE OF THE STUDY
Research is conducted on two approaches that are descriptive and inferential
study.in this study both approaches was operationalized. This study can be understood in
reality in nature and suggest on focusing the impact of relationship between credit policy
and financial performance of the firm. The credit policy was examined for their impact
on financial performance of the company. The data gathered for this study and literature
was conducted from different sources i.e. from electronic and previous studies. The
sources which are used for collecting data for literature review and overall study that
have been published in this journal represent high maintaining research standards. After
this quantitative data obtained through annual reports were analyzed statistically through
MS excel and SPSS the use of these statistical tools purpose is to test the hypothesis.

3.2 SCOPE OF THE STUDY:

It is absolutely clear in the title of the study the research will be applicable in the
title of the study (relationship between credit policy and financial performance of the
company/firm) related to textile mills of Pakistan some kinds of information to the
literature that how can credit policy influence the financial performance of textile
industry in Pakistan and the study investigate that which ratio the credit policy can affect
the financial performance of textile companies in Pakistan. .

3.3 AREA OF THE STUDY:/POPULATION

This study was implemented on the data of Textile mills of Pakistan. So this
research is choosing for the study of industry and textile specially references to textile
mills which are located in Pakistan.

3.4 SAMPLE SIZE OF THE STUDY

25 textile mills of Pakistan was collected for the sample size of the study which are as
under: Spinning, Weaving, Finishing of Textiles, (Colony) Sarhad Textile Mills Ltd,
(Colony) Thal Textile Mills Ltd, Adil Textile Mills Ltd, Ahmed Hassan Textile Mills

22
Ltd, Al-Qadir Textile Mills Ltd, Ali Asghar Textile Mills Ltd, Allawasaya Textile &
Finishing Mills Ltd, Amtex Ltd, Apollo Textile Mills Ltd, Ashfaq Textile Mills Ltd,
Artistic Denim Mills Ltd, Asim Textile Mills Ltd, Ayesha Textile Mills Ltd, Azgard Nine
Ltd, Babri Cotton Mills Ltd, Bhanero Textile Mills Ltd, Bilal Fibres Ltd, Blessed Textiles
Ltd, Brothers Textile Mills Ltd, Chakwal Spinning Mills Ltd, Chenab Ltd, Colony
Textile Mills Limited, Crescent Fibers Ltd, D.M. Textile Mills Ltd, Dar Es Salaam
Textile Mills Ltd. Total observation of the study is 250. That is more than 10% of
population.

3.5 TOOLS OF DATA COLLECTION

In this research Secondary data is used for the collection of data the sources are as
follows;

a) SECONDARY DATA

The secondary data have been gathered so far in this study from different financial
statements/annual re annual reports/final account of 25 textile firms for a period of 10
years from 2007 to 2016.correlation tools is used to establish relationship of variables and
ANOVA is used to estimate the significance level. The data is analyzed by descriptive
and STATA table.

3.6 LIMITATIONS OF RESEARCH:

The data was collected from annual reports only up to 2016, because the data of 2017
was not available and the annual reports are not yet published by the firms

23
 3.7 ECONOMATRICS MODEL
Y=a+bx
FP= 54.744-61.599(policy)

3.8 CONCEPTUAL FRAME WORK

DEPENDENT VARIABLE INDEPENDENT VARIABLE

FINANCIAL PERFORMANCE CREDIT POLICY

24
 CHAPTER 04

DATA ANALYSIS

4.01 Descriptive Analysis

Descriptive Statistics

Minimu Std.
N Range m Maximum Mean Deviation

Statisti
c Statistic Statistic Statistic Statistic Std. Error Statistic

Account 260 68869413.0 .00 68869413.0 2.5639E 6.75880E 1.08982E7

Receivabl 0 0 6 5
e
Average 260 55387315.5 18.00 55387333.5 2.5578E 6.58415E 1.06166E7
0 0 6 5
PM 260 31207.90 - 1496.28 - 114.4375 1845.2504
29711.62 116.774 8 8
2
ROA 260 63.85 -37.11 26.74 -.1672 .51759 8.34595
ROE 260 1942.69 -1212.48 730.21 -12.3721 7.33500 118.27339
Average 260 10414.37 -9910.00 504.37 -43.1043 38.24057 616.61067
Return
Valid N 260
(list wise)

Interpretation

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The descriptive analysis for this study the variable Account Receivable, for the purpose
total 260 observations was taken. The descriptive analysis shows that Account
Receivable range is 68869413.00, the mean value is 2563900.00 with standard deviation
is 1.08, the observed value involve 675880 standard error. The observation minimum
value is 0 and maximum value is 68869413.

The descriptive analysis for this study the variable Average, for the purpose total 260
observations was taken. The descriptive analysis shows that Average range is
55387315.50, the mean value is 2557800 with standard deviation is 10616600, the
observed value involve 658415 standard error. The observation minimum value is 18 and
maximum value is 55387333.5

The descriptive analysis for this study the variable PM, for the purpose total 260
observations were taken. The descriptive analysis shows that PM range is 31207.901, the
mean value is -116.77 with standard deviation are 1845.25, the observed value involve
114.43 standard error. The observation minimum value is -29711.61 and maximum value
is 1496.28

The descriptive analysis for this study the variable ROA, for the purpose total 260
observations were taken. The descriptive analysis shows that ROA range is 63.85, the
mean value is -0.16 with standard deviation is 8.34, the observed value involve 0.51
standard error. The observation minimum value is -37.109 and maximum value is 26.739.

The descriptive analysis for this study the variable ROE, for the purpose total 260
observations were taken. The descriptive analysis shows that ROE range is 1942.69, the
mean value is -12.37 with standard deviation are 118.27, the observed value involve
7.335 standard error. The observation minimum value is -1212.48 and maximum value is
730.2104

The descriptive analysis for this study the variable Average Return, for the purpose total
260 observations was taken. The descriptive analysis shows that Average Return range is
10414.37001, the mean value is -43.10 with standard deviation are 616.61, the observed
value involve 38.24 standard error. The observation minimum value is -9910 and
maximum value is 504.37

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4.03 Correlation Analysis

Account
Receivab Averag
le e Policy PM ROA ROE FP
Account
Receivable 1
Average 0.974222 1
-
Policy -0.09822 0.04281 1
0.01499 -
PM 0.014764 3 0.04944 1
0.06422 - 0.06920
ROA 0.058406 9 0.08005 3 1
0.03011 0.00667 0.14802
ROE 0.030145 2 4 0.00102 9 1
Financial 0.01717 - 0.99790 0.08300 0.06562
performance 0.016919 1 0.04926 1 8 2 1

The correlation metrics shows that Account receivable is positive strongly correlated with
average value between account and average is .97 which is positive, that’s mean both
variables move in same direction.

The correlation matric shows that account receivable is weakly correlated with policy the
value between account receivable and policy is -0.98which is negative. Its mean both
variables moves inversely proportion.

27
The correlation metric shows that account receivable are positively correlated r value
between account receivable and profit margin is 0.014 which is positive and shows that
both variables move in same direction.

The correlation metric shows that account receivable is positively correlated with return
on asset r value between account receivable and return on asset is 0.058 which is positive
and shows that both variables move in same direction.

The correlation metric shows that account receivable is positively correlated with return
on equity r value between account receivable and return on equity is 0.03 which is
positive and shows that both variables move in same direction.

The correlation metric shows that account receivable is positively correlated with
financial performance r value between account receivable and financial performance is
0.016 which is positive and shows that both variables move in same direction.

4.04 hypothesis testing model:

Interpretation:

The output of the data as shown that the data was strongly balanced for further testing the
panel data need to be test for model fitness whether the random effect model is suitable or
fixed effect model is suitable to know that the houseman test was used with following
hypothesis.

H0. Random effect model is appropriate

H1 fixed effect model is appropriate

The houseman test suggests the random effect model is fit for the data analysis the above
analysis shows that here were 250 observations with 25 subgroups.

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Interpretation:
in this study the relationship between credit policy and financial performance of the
company the data were collected from 25 companies for 10 years to check the panel
data to be balanced the strata software help in analysis and interpretation the panel
data was checked using “xtest” with the parameter of a company code and years .R 2
within group is 0.01 the value between companies is 0.037 and overall value is 0.0003
where the value 0.01 is effected by explain variation form total variation.

The p value of the study is 0.7841 which is greater than 0.5 it indicates that there is
insignificant impact of credit policy on the financial performance.

Model Analysis

The model summery of the study relationship between credit policy and financial
performance of the company as below

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Model Summary

Std. Error Change Statistics

Mode R Adjusted of the R Square F Sig. F
l R Square R Square Estimate Change Change Change

1 .049a .002 -.001 617.055 .002 .627 .429

a. Predictors: (Constant), Policy

The model summary shows that the r value is .049 postulates positive relationship
between variable, this relationship is quite weak. The coefficient determination is the
table is shown by R square, is .002 which means that the total variation in model is
effected by explaining variation by 2%. The standard error involved in model is 617.05.
the F statistics shows that if the total variation is equally distributed on observations the F
value is .627 the significance level is .429 that shows there is no impact of credit policy
on financial performance.
ANOVAb

Sum of
Model Squares df Mean Square F Sig.

1 Regression 238919.661 1 238919.661 .627 .429a

Residual 9.824E7 258 380756.355

Total 9.847E7 259

a. Predictors: (Constant), Policy

b. Dependent Variable: Financial Performance
The total variation involved in the model is 9.847E7. The explain variation is 238919.661
and by unexplained variation value to 9.847E7. The mean square of explain variation is
238919.661 and the Residual mean is 380756.355. The F statistics shows that if the total
variation is equally distributed on observations the F value is .627 the significance level
is .429 that shows there is no impact of credit policy on financial performance.

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Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta T Sig.

1 (Constant) 54.744 129.315

Policy -61.599 77.763 -.049 -.792 .429

a. Dependent Variable: Financial Performance

Y=a+bx

FP= 54.744-61.599(policy)

The coefficient of model is shown in the above table. The constant coefficient is 54.744.
the beta coefficient of the model is -61.599. The negative beta shows the inverse
relationship between variables. The standard error of constant is 129.315 and the standard
error of policy is 77.763. The T value of model is -.792 with p value .429. The P>.05 so it
can be interpreted that there is no significant impact of policy on account receivable.

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 CHAPTER 05
CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion

The study about credit policy and financial performance of the Textile mills in
Pakistan. The credit policy was investigated for their impact on firms’ financial
performance and performance was measured by return on assets and return on equity.
The findings on the basis of data analysis are following:

1. According to analysis, it was found in the sample that there is positive correlation
between credit policy and return on assets but sig value is 0.04926 which is less
than .70 is Positive weak direction.
2. The linear regression shows that there is no significant impact of inventory
turnover on Financial Performance because the P value in ANOVA is.429 which
is greater than .05. The result shows that there is no relationship between
variables.

In this study of credit policy and financial performance it was found in the sample that
there is positive correlation between credit policy and return on assets but this correlation
is insignificant. Further it was found that no significant impact of credit policy on return
on assets. It was also found in Pearson correlation of inventory and return on equity that
there is positive correlation and this correlation is significant. Finally linear regression
shows that there is insignificant impact on credit policy on financial performance.

5.2 Recommendation

 This study was conducted previously. While this study ends up the research
limitation and I recommend that this study for future future research/studies.
 This study would become based for future research studies.

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