8 IMPROVING WORKING CAPITAL MANAGEMENT IN MINH DUC BA VI LIMITED LIABILITY COMPANY

MINISTRY OF FINANCE ACADEMY OF FINANCE - - STUDENT: Phung Ngoc Mai GROUP : CQ54/51.01 GRADUATION THESIS TOPIC: IMPROVING WORKING CAPITAL MANAGEMENT IN MINH DUC BA VI LIMITED LIABILITY COMPANY Major : English for Finance of Accouting Student Code : 165D2202010025 Supervisor : Cao Phuong Thao,MSC Hà Nội – 2020 Graduation Thesis Academy of Finance DECLARATION This thesis is assured to be my independent scientific work All data and results stated in the thesis are honest and clearly derived I also certify that this thesis is not submitted to any other organization thus this is the only published version approved by my thesis review committee Hanoi, 20th May 2020 Student Phung Ngoc Mai Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance ABSTRACT This thesis is conducted to investigate the factual state of Improving working capital management in Minh Duc Ba Vi limited liability company from the viewpoint of a fourth year student of Faculty of Foreign Languages, Academy of Finance The study focuses on clarifying the current situation of working capital management in Minh Duc Ba Vi limited liability company In addition, the study proposes some recommendations to improve working capital management to make sure the company always maintains sufficient cash flow The thesis focuses on some outstanding aspects which are brought in three main parts as follow Firstly, the thesis presents some fundamental concepts related to working capital management Secondly, the thesis gives out the information introducing about Minh Duc Ba Vi limited liability company in working capital management Finally, the thesis raises out some personally recommendations to help the firm improve the current situation in managing working capital more effectively and efficiently By and large, this research may be a helpful suggestion leading to better development for the company’s working capital management in the near future Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance ACKNOWLEDGEMENTS I would like to express my deep gratitude to all those who have given me the possibility to complete this graduation thesis In preparing this graduation thesis, I have had generous help and advice from my teachers, my colleagues, my family and my friends I would like to express my great thanks to all of them First of all, I would like to express my deepest gratitude to my supervisor, MA Cao Phuong Thao, lecturer at Faculty of Foreign Languages, Academy of Finance, who has given immeasurable help, constant guidance with many careful instructions, comments and valuable advice to me whenever I need Without her support, I am not able to have a complete thesis And I really appreciate her patience in reading and correcting my thesis Second, I wish to show my sincere thanks to all my teachers at Academy of Finance, who have provided me with worthy lessons throughout years of study at Faculty of Foreign Languages, Academy of Finance Moreover, I have furthermore to thank every accountant as well as all the people work in Silky Vietnam Trading and Services Limited Company for their valuable supports during my internship period Without their helps, it would be impossible for me to finish this work Last but not least, I would like to send my loving thanks to my family whose great love and care in both spirit and health to encourage me to complete the thesis Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance LIST OF ABBREVIATIONS AP AR Assoc Prof BEP CA DSI EBIT EBT FTA GDP MDBV NWC ROA ROE ROS WC Phung Ngoc Mai Account payables Account receivables Associate professor Basic earning power Current assets Days sales of inventories Earnings before interest and tax Earnings before tax Free-trade agreement Gross domestic product Minh Duc Ba Vi limited liability company Net working capital Return on assets Return on equity Return on sales Working capital CQ54/51.01 Graduation Thesis Academy of Finance LIST OF ILLUSTRATOR, FIGURES AND TABLES TABLE OF CONTENTS Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance INTRODUCTION 1.Rationale of the study Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company It deals with current assets and current liabilities Working capital management is important due to many reasons For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets For a distribution company, they account for even more Excessive levels of current assets can easily result in a firm’s realizing a substandard return on investment However firms with too few current assets may incur shortages and difficulties in maintaining smooth operations Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand Many surveys have indicated that managers spend considerable time on day-to-day problems that involve working capital decisions One reason for this is that current assets are short-lived investments that are continually being converted into other asset types With regard to current liabilities, the firm is responsible for paying these obligations on a timely basis Liquidity for the firm is not reliant on the liquidation value of its assets, but rather on the operating cash flows generated by those assets Taken together, decisions on the level of different working capital components become frequent, repetitive, and time consuming Working Capital Management is a very sensitive area in the field of financial management It involves the decision of the amount and composition of current assets and the financing of these assets Current assets include all those assets that in the normal course of business return to the form of cash within a short period of time, ordinarily within a year and such temporary investment as may be readily converted into cash upon need The Working Capital Management of a firm in part affects its profitability Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance The ultimate objective of any firm is to maximize the profit But, preserving liquidity of the firm is an important objective too The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm Therefore, there must be a tradeoff between these two objectives of the firms One objective should not be at cost of the other because both have their importance If we not care about profit, we cannot survive for a longer period On the other hand, if we not care about liquidity, we may face the problem of insolvency or bankruptcy For these reasons working capital management should be given proper consideration and will ultimately affect the profitability of the firm Firms may have an optimal level of working capital that maximizes their value Large inventory and a generous trade credit policy may lead to high sales Larger inventory reduces the risk of a stock-out Trade credit may stimulate sales because it allows customers to assess product quality before paying Another component of working capital is accounts payable Delaying payments to suppliers allows a firm to assess the quality of bought products, and can be an inexpensive and flexible source of financing for the firm On the other hand, late payment of invoices can be very costly if the firm is offered a discount for early payment A popular measure of Working Capital Management (WCM) is the cash conversion cycle, i.e the time lag between the expenditure for the purchases of raw materials and the collection of sales of finished goods The longer this time lag, the larger the investment in working capital A longer cash conversion cycle might increase profitability because it leads to higher sales However, corporate profitability might also decrease with the cash conversion cycle, if the costs of higher investment in working capital rise faster than the benefits of holding more inventories and/or granting more trade credit to customers This discussion of the importance of working capital management, its different components and its effects on profitability leads us to the problem statement which we will be analyzing in this following thesis For every business, when starting a business or planning a business strategy, using capital in the most economical and effective way is the most important aspect In Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance order to so, the financial management and capital management of enterprises must be implemented accurately, fully and promptly to ensure it following the law and regulation that implemented by the State Recognizing the importance of working capital management for the stable and sustainable development of enterprises in the current economic period is the reason why the writer choose the topic “Improving working capital management in Minh Duc Ba Vi limited liability company” as graduation thesis 2.Aims of the study The purposes of this research are to study, analyze and evaluate the current state of working capital management in Post and Telecommunication Joint Stock Company to understand its existing achievements and limitations Under that basis as well as the company’s own development strategy, this thesis recommends, suggests and proposes solutions to improve the efficiency of working capital management for the corporate in the future 3.Scope of the study The object of the research is working capital management during the period of 2018-2019; working capital source, how it is implements and its effective on the company’s operation 4.Methodology The thesis uses a combination of many research methods including but not limited to: time-based comparison method (between this term and previous term; between reality and plan) to know the change as well as the trend of the business economic; space-based comparison method (between internship company and the industry on average) to evaluate the position and role of the company in the industry as well as changes in capital movements and assets of the company This provide the information to calculate and establish the necessary financial ratios for the process of evaluating the situation and efficiency of using capital and assets, thus analyze the cost, revenue and profit of the company Phung Ngoc Mai CQ54/51.01 Graduation Thesis Academy of Finance 5.Organization of the study In addition to these sections: preface, list of terms, table of contents, conclusions, references and appendices, the main contents of thesis include chapters: Chapter 1: Overview of working capital and working capital management Chapter 2: Current status of working capital management Chapter 3: Main solutions to strengthen working capital management Hanoi, 20th May 2020 Student Phung Ngoc Mai Phung Ngoc Mai 10 CQ54/51.01 Graduation Thesis Academy of Finance Table 2.14: Receivable management Unit: VND ITEMS III Current accounts receivable 2019 378.294.000 2018 11,05% 58.950.000 Different 1,75% 319.344.000 541,72% 9,30% Source: Financial report Phung Ngoc Mai 63 CQ54/51.01 Graduation Thesis Academy of Finance From the table, the receivables at the end of 2019 became 378,294,000 VND, increased by 319,344,000 VND compared to the beginning of 2019 (corresponding to an increase of 541,72%) The main reason for the volatility of receivables is because during the 2019, the Company signed up many different contracts However, due to the terms and conditions in these contracts, the payment for building and construction the Company made can only be paid after finished the product As many customers of MDBV has trouble for its operation and financial activities, the Company had hard time to collect the debt Inventories management For any production or manufacture enterprise, this index is also account for a high proportion But the problem is that it is needed to be large at a reasonable level, which is enough to ensure the continuous production and business process Too much could cause stagnation of capital, while shortage could cause disruption of the production and business process or loss of business opportunities In order to understand the volatility of inventory, we consider the variation in its structure Phung Ngoc Mai 64 CQ54/51.01 Graduation Thesis Academy of Finance Table 2.15: Table: Inventories management Unit: VND ITEMS IV Inventories 2019 Value Proportion 2018 Value Proportion Different Value Ratio Proportion 157.414.256 4,60% 568.464.689 16,87% (411.050.433) 72,31% -12,27% Source: Financial report Phung Ngoc Mai 65 CQ54/51.01 Graduation Thesis Academy of Finance From the above table, we could see that: The total value of inventories at the beginning of 2019 was 568,464,689 VND and at the end of 2019 was 157,414,256 VND, so inventory decreased by 411,050,433 VND, corresponding to a decrease rate of 72,31% The decrease in inventory is due to the fluctuation of its components Conclusion: In general, after analyzing the criteria and index for evaluating the management of working capital of MDBV, we see that in 2019, the company was still in a good situation in managing working capital and performance The management and use of working capital has been improved, reflected in the increase in the circulation of working capital, the reduction of the working capital period and the reduction in the amount of working capital In order to achieve this, the company has improved in many aspects such as product quality, cost management, search and exploit market, resulting in the profit From that, it positively affects the ratio of working capital profit margin This is what the company needs to develop in the coming years Phung Ngoc Mai 66 CQ54/51.01 Graduation Thesis Academy of Finance CHAPTER CONCLUSION In the first part of chapter 2, it helps us understand more about the formation and development of Post and Telecommunication Equipment JSC in term of the organizational structure and tasks of each department in the company management structure; from research and development on production organization characteristics, in every stages from input to output Through a general study of the actual operation of the company, this will be a basis for easier access, processing and quantitative identification of production factors Especially as these are factors related to working capital that should be used to assess the effectiveness of using According to the results that we calculated: + In general, we see that the company has a good working capital utilization, reflected in the increase in working capital turnover, but this increase wasn’t reach to the level of demand of working capital, especially in 2019, which reduce the effectiveness of working capital management + In details of the fluctuation of the components in working capital, we see that some items have an increase that is considered to be suitable for a larger scale of production (such as items in the structure of inventories), and a number of reduced items also show the effectiveness from the policies that set out in managing these items (i.e short-term receivables) And especially the company has a very strong financial situation, an acceptable amount of bank deposit In addition to the advantages of using working capital, the company still has some certain limitations in terms of proportion of items: cash and cash equivalent, receivables and inventories For example, the inventory is accounted for a huge amount in current asset’s proportion It is not in good shape, so is the debt and cash Phung Ngoc Mai 67 CQ54/51.01 Graduation Thesis Academy of Finance CHAPTER 3: RECOMMENDATION OF MINH DUC BA VI COMPANY LIMITED 3.1 The development strategy 3.1.1 Forecasting Vietnamese economy development The year 2020 is expected to be a turning point for Vietnamese economy According to reports, due to COVID-19 Vietnam is one of many countries that will suffered from effect of the pandemic However, Vietnam also among the most promising emerging economies in this darkest time in the world Specialists predict that the South East Asian country will dropped from its stable growth level into around 12% However, according to a ADB’s recent research, Vietnam is expected to be the most emerging economy this year with the rate of about 5-6% The outbreak of the coronavirus epidemic in China — the world’s second-largest economy, responsible for almost a fifth of global GDP — is having a significant impact on commodity markets, as trading patterns are disrupted and economic growth forecasts are revised lower In this white paper, Argus assesses the immediate fallout from the virus on multiple commodities and the potential impact for the rest of this year Phung Ngoc Mai 68 CQ54/51.01 Graduation Thesis Academy of Finance Illustrator 3.1 : Coronavirus cases The March 16th publication of a report by Imperial College epidemiologist Niall Ferguson that forecast millions of potential deaths from COVID-19 in the US and UK prompted an escalation of public health measures by governments around the world, including in Vietnam Vietnam’s Government essentially shut its borders to foreigners on 22 March and imposed a “partial lockdown” on April Most people are meant to remain in their homes until 15 April, although many businesses including banks, factories, and grocery stores are still operating – albeit with heightened precautions, including the mandatory use of face masks in public, limitations on people gathering, and other measures.1 According to Government reports, there are now nearly 70,000 people in some form of supervised quarantine (i.e., either in centralized quarantine centers or “selfquarantined” at home with random spot checks by local authorities throughout the day) Source: Vinacapital’s economic note Phung Ngoc Mai 69 CQ54/51.01 Graduation Thesis Academy of Finance Illustrator 3.2: Hospital beds per 1000 popilation (2017) Vietnam’s exports/GDP ratio is around 100%, and imports/GDP are also around 100%, which means that Vietnam imports high-value components that are made in China, Korea, and Japan, and then the country’s low-wage work force assembles those components into the finished smartphones products, digital cameras, and others that are sold to end-customers This activity does not actually add much value to the country’s economy, although it does employ many people, and it provides a path for Vietnam to become wealthier in the future as local firms start to make more-and-more of those high-value components For that reason, a slowdown in Vietnam’s exports has less of an impact on the economy than would a comparable magnitude slowdown in tourist arrivals The value that Vietnam captures from each dollar that foreign tourists spend in the country is higher than that earned by assembling products for export by profit maximizing multinationals That said, it is believed that the two easiest ways for the Government to support economic growth in 2020 are: 1) immediately ramp up infrastructure spending, and 2) un-freezing the country’s real estate market Regarding the former, the Government previously raised an enormous amount of money (circa 6%/GDP) that is earmarked for the development of the country’s Phung Ngoc Mai 70 CQ54/51.01 Graduation Thesis Academy of Finance physical infrastructure However, due to a range of internal issues, this money was deposited into the nation’s banking system rather than disbursed on badly needed projects Regarding the latter, Vietnam’s real estate market has suffered from a dearth of activity over the last few years due to an on-going corruption crackdown discussed in some of our previous research reports (the problem intensified since the publication of those reports, as has the unmet demand for housing by emerging middle-class consumers over the last two years) 3.2 3.2.1 Assessment of Minh Duc Ba Vi limited liability company The achievement and shortcoming In the current market economy, every company operates with the highest objectives of maximizing profit and company’s value In order to get these achievements, specific development strategies should be established Thong Nhat Co., Ltd considers the following objectives: Utilizing all abilities, promoting creativity, togetherness in order to meet requirements of the expansion in the company’s operation Maintain the positive aspects of recent structure of assets and capital while enhancing current assets management with the aim of getting maximum efficiency of Operating and Financing Leverage Employing and training high level staffs to assure the performance of the operating strategies and process Tightening up working protection to create working-safety environment thus make the employees feel confident to contribute Promoting marketing, especially market research Retaining good relationship with perennial partners as well as finding new cooperations In term of working capital, MDBV focuses on these following strategies: Reasonably determining the amount of cash which is capable to carry out payments at any time and assure the consumption demand as well On the other hand, cash is not reserved too much in order to avoid capital stagnancy Phung Ngoc Mai 71 CQ54/51.01 Graduation Thesis Academy of Finance Estimating working capital needs rightly to perform the company’s operating process efficiency Besides, MDBV also needs to make wise choice when considering methods of raising its capital 3.2.2 a Recommendations Determining working capital demand It is clear that the method that MDBV used to estimate working capital need was not efficient Therefore, the company should find another forecasting tool which reflects all the correlation between items that make impact on the calculation of working capital An advance method which concerns with detailed financial expectation is suggested b Cash management Considering cash management, the company attained some achievements It is encouraged that the company recovered the amount of cash reserved in 2019 that brought some positive into its liquidity However, the value of cash and cash equivalent was still probably low thus may lead to the inability to perform payments up to date The company should reconsider this situation, especially when it is utilizing Financial Leverage at a higher level The company should reduce its expenses in order to decrease the outflows Considering the low level of payables, MDBV can promote this type of appropriated capital from suppliers by which reduce the amount of money spent Besides, credit term to customers also needs to be monitored The company should recover its receivables more frequently in order to improve the cash generation ability The company should also strictly comply with the regulation: separating the functions of cashiers and accountants Frequent and sudden examination about the matching of real cash in hand and cash in book can also improve the accurateness of recording cash c Receivables management Phung Ngoc Mai 72 CQ54/51.01 Graduation Thesis Academy of Finance According to section 2.2, the company maintained the account receivables at a stable amount This suggests that MDBV committed to its receivables management policies which were performing well Therefore, senior managers can take advantages of this situation and make some adjustment For instance, the company may considers its credits term in order to reduce the time of recovering capital which are appropriated by partners This may help generate revenue more efficiency d Inventories management The inventories of the company decreased quickly at a significant rate recently This situation may be disturbing for the construction company with the characteristic mentioned in the sections before Additionally, considering long-term period, this may harmful to the company if cannot be carefully managed As such, there are also many ways for the Company to improve this aspect of WC for its benefit First the company should reduce work in process by accelerating construction process as well as focusing on finalizing important projects in priority This may help the firm reduces costs of work in process and by the way, the earlier the projects are handed over, the shorter time the inventories are converted into revenue In other words, inventories turnover ratio is improved Besides, MDBV can assign responsibilities to investors in case of stagnant process due to short of capital Although this is all about the investors’ fault, the company also suffered because of negative affection to the construction process Not only operating efficiency is harmed, the fame of the company is also down On the other hand, raw materials also need to be managed reasonably despite of the small percentage of contribution to the total value of inventories To so, the company should consider those following suggestions: Planning the operation of the upcoming year strictly based on the situation of the current year If so, the company is able to estimate the demand of reserving raw materials in supply for manufacturing Apart from internal aspects, external impact Phung Ngoc Mai 73 CQ54/51.01 Graduation Thesis Academy of Finance such as the fluctuation of the input market also needs to be tracked in order to make addition timely Keeping good relationship with suppliers in order to get advance in credits and price as well as stable material sources ready at any time, even in bad situation of market Meanwhile, the company also needs to make new co-operation with other partners to expand the input Concerning with specific inventories such as raw materials for either constructing or sales, the company has to preserve carefully in order to keep those materials at a maximum quality Phung Ngoc Mai 74 CQ54/51.01 Graduation Thesis Academy of Finance CONCLUSION Like any other company, Thong Nhat Co., Ltd considers working capital as the key impact on the whole business operation The board deeply understands the importance of that term to a typical construction company in which cash, inventory and account receivables need to be well controlled at an adequate amount Over recent years, the company has experienced both success and failure in managing working capital The situation was reflected into all the aforementioned analysis Following all sections above, this thesis may hopefully presents an overview of working capital and working capital management of Minh Duc Ba Vi Company Limited as well as suggests some ways of improvement Due to the restriction when approaching data and knowledge limited, there may be some controversial points After three months internship in Minh Duc Ba Vi Company Limited the writer has had opportunities to approach the realistic situation of financial activities Such experiences will be the most valuable lessons at university At the end of the thesis, I would like to give my most sincere thanks to my supervisor, my internship guide, my friends and my family for support to complete my internship course Phung Ngoc Mai 75 CQ54/51.01 Graduation Thesis Academy of Finance LIST OF REFERENCES phD Bùi Văn Vần; phD Vũ Văn Ninh (2013), Corporate finance university textbook , Financial publisher, Hanoi Stephen A Ross; Randolph W Westerfi eld; Bradford D Jordan, Fundamental of Corporate Finance, Published by McGraw-Hill/Irwin, United States Financial statements of Minh Duc Ba Vi limited liability company Websites: http://niceaccounting.com/ ; http://www.cophieu68.vn/ (trung bình ngành) ; http://ven.vn/ ; http://baodatviet.vn/ ; http://baodautu.vn/ … A number of dissertations and research topics on working capital Phung Ngoc Mai 76 CQ54/51.01 Graduation Thesis Academy of Finance APPENDIX This section includes important financial statements for dissertation writing (Balance Sheet, Income Statement for 2017, 2018, 2019) (See the following pages) Phung Ngoc Mai 77 CQ54/51.01 ... of Finance CHAPTER 2: OVERVIEW OF MINH DUC BA VI LIMITED LIABILITY COMPANY 2.1 Overview of the Company 2.1.1 General information of Minh Duc Ba Vi Company Limited Minh Duc Ba Vi Company Limited. .. concepts related to working capital management Secondly, the thesis gives out the information introducing about Minh Duc Ba Vi limited liability company in working capital management Finally, the thesis... factual state of Improving working capital management in Minh Duc Ba Vi limited liability company from the viewpoint of a fourth year student of Faculty of Foreign Languages, Academy of Finance The