Analyzing the Effect of Credit Management: A Case Study of the Hospitality Industry in Lusaka

Effective credit management ensures that organizations maintain a balance between extending credit to customers and safeguarding cash flow, thereby minimizing the risk of bad debts and financial losses. In Lusaka, the hospitality industry has experienced rapid growth, driven by increasing domestic and international tourism, yet many establishments face challenges in managing credit effectively due to limited financial expertise, poor monitoring systems, and inconsistent credit policies. The general objective of this study was to evaluate the effect of credit management on business performance in the hospitality industry in Lusaka. Specifically, the study sought to assess the credit management practices employed by hospitality businesses, examine the relationship between these practices and financial performance, analyze the role of credit risk assessment in improving business outcomes, and explore strategies used by successful establishments to manage credit and minimize bad debts. The study adopted a cross-sectional case study design employing a mixed-methods approach, focusing on businesses within the hospitality industry. The target population comprised 100 hospitality businesses. Participants were selected using convenience sampling, and data were gathered through a semi-structured questionnaire that included both closed- and open-ended questions. Data entry and statistical analysis were conducted using STATA, while Microsoft Excel 365 was used to present descriptive statistics in graphical form. For inferential analysis, the Chi-square test was employed to examine the relationships between categorical variables. In Lusaka’s hospitality industry, credit management practices emphasize short-term credit periods of 15–30 days (55% of businesses), centralized credit approval by finance teams (45%) or owners/managers (40%), and regular reviews of credit limits, mostly quarterly (50%), often supported by electronic record-keeping (50%). Credit decisions rely mainly on purchase history (40%) and customer reputation (25%), while overdue accounts are largely managed internally (60%), with payment monitoring increasingly conducted via accounting software (60%). Effective credit policies and structured risk assessments show statistically significant impacts on financial performance: frequent credit risk assessments reduce liquidity challenges (χ² = 96.667, p < 0.005), effective credit policies enhance profitability (χ² = 96.667, p = 0.009), and consistent enforcement of terms improves customer retention (χ² = 96.667, p = 0.001). Businesses use both internal records (40%) and external credit bureaus (30%) for risk assessment, take preventive actions such as reducing credit limits for high-risk customers (40%) or enforcing cash-only transactions (30%), and rely on credit insurance and credit limits (26% each) to reduce bad debts. Bad debts account for 5–10% of annual losses in half of the businesses, while extending credit increases customer loyalty (40%) and attracts new customers (30%), showing that disciplined credit management supports financial stability, operational efficiency, and growth. Overall, efficient credit management positively influenced profitability, liquidity, customer retention, and operational efficiency, though gaps remain in standardizing assessment methods and improving consistency across businesses. Based on the findings, the study recommends that hospitality businesses in Lusaka strengthen the consistency and enforcement of credit policies to reduce late payments and bad debts. Businesses should adopt standardized credit assessment tools, including credit scoring systems and formal evaluation of financial statements, to improve accuracy in risk evaluation. Regular staff training on credit management procedures should be maintained to sustain high levels of understanding and competence.