Working capital and some solutions to increasing capital in utilization at Petrolimex Asphalt commercial limited company

Working capital and some solutions to increasing capital in utilization at Petrolimex Asphalt commercial limited company FOREWORD In the market economy, capital plays an important part for enterprises. It has a significant meaning to identify its followi

In the market economy, capital plays an important part for enterprises It has asignificant meaning to identify its following steps in the process of producing.Therefore, enterprises want to exist for developing sustainably have to focus oncapital management activities in utilization to gain optimum profitable target.

Business capital is divided into 2 parts : Fixed capital and working capital.Enterprise management in increasing effectively In fact, Petrrolimex Asphaltcommercial limited company is a enterprise which is doing business in tradingfield have been making efforts in capital using and management, especiallyworking capital occupied a large proportion in the total capital.

Stem from appreciating of working capital in reality as well as to meetincreasing demand effectively in every enterprise, for the past probrationaryperiod, I`ve decided to chose this subject for my thesistation.

“Working capital and some solutions to increasing capital in utilization atPetrolimex Asphalt commercial limited company”

The graduation thesis`s content consists of 3 parts

Chapter 1: Overview of producing activities in Petrolimex Asphalt limitedcompany

Chapter 2: The real state of working capital management and utilization inthe company

Chapter 3 : Some primary solutions to increasing effective capital inutilization and management

Materials for working : as in kind form it is called working assets As forvalue form, it is called Working capital of enterprise.

Working Assets included : Working assets for manufactoring and workingcapital for circulating.

Working Assets for manufactoring included such as : raw materials, fuels,materials, alternative accessories, half of products, unfinished products … are allbeing in process of reserve or manufactoring.

Working Assets for circulating included : finished products are waiting forconsumption, capitals in cash, capitals in payment, prepaid costs … In producingand businessing process, working Assets fo manufactoring and working assets forcirculating are always mobilising, transforming to each other and at last aiming toensure non-stop produce and business process.

It is also an expressed form of working assets, so the characters of workingcapital exercises are always affected by working assets`s characters Workingcapital will be transformed and repeated consecutively So, they will createrepeated cycle of working capital One cycle starts since investing capital under

the monetory form then finishing at the production cycle to come back its initialstate.

To the manufacture enterprises, the cycle of working capital process alwaysmobilises under the following formula :

TLSX

T-H … SX … H’- T’ SLĐ

For commercial enterprises, the repeated cycle of working capital processalways mobilises under the following formula :

T – H – T’

Therefore, Working capital is under the monetory, it is an expressed form ofworking capital or in other words, it is monetory on prepaid account to take shapeof working assets for producing and working assets for circulating to ensureprocess of produce and business are going on smoothy.

1.2.Working capital and the classification

1.2.1 The classification under expressed form

According to the classification, working capital is divided into 2 parts :- Capital in cash and accounts receivable : It consists of monetory in funds,bank`s deposit, capital in payment, short-term investment in securities …

- Capital in materials, goods : They are working capitals which are under theexpressed forms such as raw materials and materials, unfinished products, half offinished products, finished products …

The classification will help enterprises to evaluate the level of inventory andability of payment.

1.2.2 The classification under the working capital`s role in produce andbusiness process

Under the classification, working capital are divided into 3 parts :

- Working capital in producing reserved : Including of prime materials, submaterials, fuels, alternative marterials, tools.

- Working capital in producing process : Value of unfinished products, finished products and other costs.

semi Working capital in circulating process : Value of finished products, capitalin cash, short-term investment, mortgages, pay a security, pay earnest money inshort-term and accounts capital in payment.

1.3 Working capital`s structure and driving factors behind

There are many factors that have influences on capital`s structure, including manyparts There can be divided into 3 main groups below :

- The factors related to supply materials such as : The distance betweenenterprise and supplier places, market and ability of supply materials, materialprices, the scale of production.

- The factors related to production : Character, technology, producingtechnology of the enterprise, the complexion of produced products, the lengh ofproduce cycle, the level ability of producing process organization, professionalskills of Workers.

- The factors related to payment method : payment methods and theexecution of payment principles between enterprises.

1.4 Working capital resources

1.4.1 The classification with the relation of ownership

According to the classification, it is divided into 2 parts :

- Loan Accounts : It is the capital resource of borrowing from commercial banks orfinancial organizations, Customer ccounts receivable enterprise is entitled to usethem in a given temporary

- Owner`s equity : This is account capital which is under enteprise ownership,including

* Mobilised capital inside : left benefit, funds.

* Mobilised capital outside : From the members of enterpsie, joint-venture

capital , State budget capital, Share capital is mobilised by issuing shares to thepublic.

1.4.2 Classification of working capital follwoing to mobilising time andutilization methods

According to the norm, enterprises`working capital included : regular capitaland current capital.

- Regular capital : Including the Owner`s equity and long-term debts Thecapita is stable and can use for along time Enterprises use it for investment,buying Fixed assets or using all or part of regular working capital which isnecessary for business activities.

- Current capital : Including of short-term loans from banks and other creditorganizations, long-term debts fall due, Accounts receivable from suppliers,Accounts payable for workers, Accounts payable for the State budget … This isshort term capital that enterprise can use it to meet the temporary working capitaldemand in produce and business activities.

The classification will help managers to evaluate the mobilised capital whichis suitable to quality and in the time to use necessary factors for business activities.

1.5.Working capital demand and the driving factors behind

Working capital demand always changes and depend on many factors In

there, we need to care about following the fomula and the main factors :

- The factors related to Business features such as : Business period, Businessscale, it is temporary Business activities, The changes of producing technology …The factors have affected directly to the level of working capital that enterprise hasto meet the prepaid capital with a required time demand.

- The factors related to buy materials and product consumption :+The distance between enterprises and sppliers.

= Inventories +

Customer accountsreceivable

Suppliers accounts

prepaid

+ The fluctuations of goods and material costs which are being used inproduce and business of the enterprises.

+ The gap between enterprises and selling market + Conditions and means of transportation …

- Enterprise`s policies in consumption activities and credit with paymentorganization impact on payment term and scale of Accounts receivable.Consumption activities organization and carry out the payment activitiesorganization of selling goods have strongly affected to enterprise`s working capitaldemand.

2 Working capital and its importance in increasingly effective utilization.

2.1 Working capital and norms to reflect its cycle speed

2.1.1 Payment ratios

* Short-term debts payment ratio

It is the relation between short-term assets and short-term debts ( including:short-term debts in term and long-term debts fall due ).

Value of current aassets

The current ratio = ––––––––––––––––––––––––––– Short-term debts

This ratio assesses changeable ability of short-term assets into cash in order topay Short-term debts in term of Enterprises.

Short term Assets = Inventories + Cash and equivalent + Accounts receivable.Among them, Inventories is a part of working capital which has the lowestability to change into monetory.

* Quick ratio

Value of current assets – Value of InventoriesThe quick ratio = –––––––––––––––––––––––––––––––––

Short-term debts

This ratio reflects accounts debts in the fastest time.This ratio providesinformation regarding the firm`s liquidity and ability to meet its obligations Itindicates a company financial strenghts (or weaknesses) but this ratio can be goodor bad, this depends on character of every business field.

* Current ratio

Cash and cash equivalent

The cash ratio = ––––––––––––––––––––––––––––––––– Short-term debts

The current ratio measures whether or not a firm has enough resources to pay its debts over the nest 12 moths It compares a firm`s current assets to its current liabilities.

A comparison with the industry of the firm`s current ratio, and a comparisonwith average, can help determine if the current ratio is high or low at this period in the time`s comparison These comparisons do not indicate why the current ratio is higher or lower than industry For some possible reasons of the current ratio is out of line, which can be found from analysis of the individuals account that has been usually performed for Accounts receivable and Inventories.

2.1.2 The number of Inventory cycle

The number of inventory cycle are the times of average inventory, which is mobilised in term.

Costs of goods sold

The number of Inventories cycle = –––––––––––––––––––––––– Average Inventories

The number of inventory cycles are more and more higher, the business will be better because enterprises only need to invest a small level of Inventories but they still achieve a high turnover.

2.1.3.The number of accounts receivable cycle

The norm reflects ability of capital recovery for payment in enterprises

Accounts receivable

Net Sales

Remainder average Accounts receivable

The cycle is more higher, the more better It proves that the fast speed ofrecovery of Accounts receivable Enterprises will needn`t to invest too much inAccounts receivable.

2.2.The primary factors have influences on the utilization effects of workingcapital

* Objective factors

+ Fluctuations of economy : If economy with its inflation causes the risingof goods prices, including input material costs, produce costs will grow, productprices will be raised and of course to make the consumption will becomeineffciently.

+ The non-stop development of Science and Technology also contribute toincreasing effecient utilization of working capital Science and technology aredeveloping that it can be helpful factors or can be adverse factors to enterprise ifenterprise produces redundant products and they can not be consumed Thereforethis will be negative factors.

+ Business environment : The number of rising competitors, alternativeproducts, changed market demand … They will impact on the ability ofconsumption, even though leading to the situation of capital losing.

+ The State with marcro policies : The state`s policies are very important toenterprises` operations In each policy has 2 effects, may be positive and may benot positive to Business activities in their fieds.

2.3 some solutions aiming to increase the utilization effects of working capital

2.3.1 Secification of the level necessary working capital demand for businessoperation

Specification of necessary Working capital regularly, this will ensure the levelenough capital to meet the demand of Business process amd avoid unliquidedcapital or short of capital, leading to interrupted production situation.

Business activities have to ask for capital to come into operation When starting toproduce and do business, enterprise has to calculate the level of necessary capitaldemand and one of the most important is that enterprise has to calculate accuratelyin line with developing period in general and in produce process in particular.Because of this will help enterprise`s business operation go on smoothy andefficiently.

2.3.2 To push up the working capital` s rotate speed highly

The effects of Working capital are evaluated by its rotate speed If Workingcapital has a highly rotated speed, it shows that the effect of working capitalutilization is very good So, it is necessary to hasten speed of liquided Workingcapital in 3 processes : reserve , produce and circulation.

2.3.3 Carry out of checking, analysing, surpervising Business activities tightlyand regulary

Executing of check activities regularly and consecutively will helpenterprises to evaluate their strong points and weak points Steming from there,enterprises can develop their advantages or prevent and modify shortcomings intime

Chapter 2

OVERVIEW OF PRODUCE ACTIVITIES IN PETROLIMEXASPHALT LIMITED COMPANY

1 Introduction

1.1 Some information about the company

Enterprise name : Petrolimex Asphalt commercial limited companyShort name : Petrolimex Asphalt co.,LTD

Headquarters : At 1 Kham Thien _Dong Da district _ Ha Noi

Petrolimex asphalt commercial limited company, to be a subsidiary of Petrolimex Petrochemical - a member of Viet Nam Petrolimex, head of company The company specialises in business with products related to asphalt in domestic market and regional South East Asia countries In order to meet the increasing demand of petrolimex asphalt products in the domestic market The ministry of Trading officially approved the company becameas a member of Petrolimex Petrochemical joint stock company and under the nameof Petrolimex Asphalt commercial limited company The company deloyed “underthe model of parents _subsidiary company ”.

PLC is one of the most dynamic members of Petrolimex Petrochemical and approved by the ministry of Trading.

Presently, the company is representative partner of BPETCO to supply high quality products of BP on market It has been the first doing business with 60/70 hot solid asphalt products in Viet Nam since 1997

1.2 Business sectors and main products

 Do business sectors

Do business with import and export petrolimex Asphalt products, in the short term,concluded 3 main sectors : lubricant , chemical, asphalt fields and some sectors related to them.

- Doing business with import and export material products, Asphaltequipments.

- Doing business with services related to : Shipping, stocks, mixtrure,alnalysis, consultancy and technical services.

- In the coming time, the company will take part in doing business withbuildings and real estate.

 Main products : Asphalt, chemical, lubricant.

1.3 Organization of management

Management` structure : Including, chairman, director, duty director

- Chairman: cotrol Business activities as well as making regulations, priciplesand the organization model and and have the authority to appoint director ofPetrolimex Asphalt limited company

- Director : Director is a person who is resposible for Business operations tochairman and directly running Business activities and has to report them tochairman.

- Duty director : Duty is a person who is intitled to help director and along with

director to run Business operations and to take the regulations and priciples ofmother company given into practice Duty director is also responsiblity to directorand chairman for given responsibility.

1.4 Accounting`s structure

Accounting department : responsible to financial accounting activities todirector Always updating and giving accurated figures in time The departmenthas to give balance sheet, financial report … calculate expensives such as : profits,make loss, taxes, salary, bonus, other policies for staffs.

At the being time, Accounting department has 9 people concluded : 1 chiefaccountant, 2 deputy chief accountants and 6 accountants (accountant takeresposible for the whole company, accountant for departments, accountant fordetails) They are all up to the standard of graduated University.

2 The real state of working cappital`s utilization at Petrolimex Asphalt commercial limited company

2.1 Over view of assets and capital resources of the company

Look at the table 1, capital and business capital resources of the company washigher than last year because of extending lager scale of produce and business

Within 2 years of 2006 and 2007 working capital of the company accouted for ahigh ratio in the number of assets Namely, in 2006 it was 93.2% and 94.1% in 2007among of all assets value which made the company` fixed capital had only smalldensity in structure of assets For example, in 2006 it occupied 6.8% and reduced5.9% in 2007 This structure is entirely reasonable in line with enterprises doingbusiness in trading.

As for capital resourse, the company tended to use loans In 2006 theAccounts payable of 43.8% density and decreased slightly 42.1% density in 2007.Although reduced, it was still high in the total of the company`s capital Owner`sequity accounts for a small density in capital resource structure of the companysuch as 12.4% and 15.7% in 2007

Business capital is an value expression of assets It included : Workingcapital, it is a form of its value and short term investment accounts; Fixed capital isan expression of its value and long term investment Looking at business capitalstructure, showed that the business capital increased with high speed, the companywas expanding for a larger scale to control the market, namely : In 2006, businesscapital 954.698.725 thousand dongs Its value growed 199.592.549 thousand dongs

and present at 1.154.291.274 thousand dongs It increased relatively of high speed,equivalent of 20.1%.

To get the good results of growing business capital above, the companyused flexibly its financial resources included Owner`s equity and Accountspayable In 2006, Accounts payable were 743.176.105 thousand dongs, holding43.8% in the total capital Owner`s equity was 211.522.620 thousand dongs,equivalent of 12.4 % in the total capital In 2007, the scale of capital was increasedboth of Accounts payable and working capital : Accounts payable raised96.970.509 thousand dongs, equivalent of 13.04% ratio Meawhile, Its owner`sequity speed of 48.51%, equal to 102.622.041 thousand dongs This showed that,the rising rate of Owner`s equity was higher than Accounts payable in 2007,leading to ratio of capital resource changed, Owner`s equity increased by 48.51 %and Accounts payable reduced to 42.1% Although, the density of loans reducedbut accounted for a large propotion of total capital The structrure of the capitalrequired to execute activities of management and use it efficiently.

Because of business character, short term debt hold nearly entire in 2006 and2007 Long term obligation grew 192.432 thousand dongs, equal to 38.35% Shortterm debt occupied over high rate, under which the company has to set plans toaccomplish its accounts debt within required time, it would help the company toguarantee its prestige in payment.

2.2 The real situation of working capital`s utilization at the company

2.2.1.Working capital`s structure

Working capital is impossible not to have for the company since takenshape, especially to enterprises which have activities in business trading, workingcapital always account for high ration in all business capital Therefore, structureof working capital in every company which is doing business in trading such asPetrolimex Asphalt limited company, it would impacted on its results ofprocessing line and business activitives.

Look at the table 2, capital`s structure of PLC, we find out its Workingcapital scale in 2007 increased 223.080.993 thousand dongs higher than 2006,equal to 25% It included 3 component parts : Cash capital, Inventories, Accountsreceivable, almost all was increasing in value.

The density of capital in cash moved up in 2007 compared to 2006, whichpushed ability of payment for the company Working capital has been driven, causedby cash and bank deposits were all increased In contrast, the density of them were allreduced from 15.1% to 13.5%, which showed that the company had a tendency todecrease the density of availabe cash funds in order to increase the effectiveutilization of capital So, the company should consider exactly the level of areasonable cash reserve Avoiding situations of being over lack or redundant cashfunds

Accounts receivable were over high, following that it would reduce abilityof making profits, then capital could not liquidized continuously, even unnecessarycosts could be raised related to the management activities of recovering capitalcosts … Customer accounts receivable played a majority in accounts receivable.Thus, the company really needs good measures to manage and recover it in datedtime in order to avoid bad accounts debts which could be leading to lose its capital.Inventory capital was more and more higher because of enlarging its scale.Requiring the company should have big goods reserve levels to meet the hugecontracts demand in time under which would help it make a good image Werealised that almost all of goods were imported, so every time in import is aprocess leading to increasing the cost of time and money Therefore, the companyalways has enough goods in stock to meet the selling demand and avoid situationsgoods out of stock which could impact on the company`s prestige Howerver, overredundant Inventories would raise costs of storage, keeping in good condition andcapital unliquidized … So the company shoud canculate the level inventoryreserves accurately and namely.

2.2.2 The situation of management in ability of payment