Late payment from customer problem in HP company

COMPANYBACKGROUND

Establishedin2006,HoangPhatWire&Cable(HPCompany)isatrustedcompanyspecializesinth emanufacturingofwireandcablewithdifferentkindsofmarketsuchash o u s e h o l d uses,profe ssionaluses,andotherelectricalneeds.AllproductsbearingHPb r a n d mustgothroughextensivean dqualifiedmanagementprocesstoensurequalityanddurability.Undermotto"Taketrust-

Givequality",HPaimstomakesuretheproductsa r e higherqualitythanrequeststosatisfycustomer. Afternearly10yearsoperatinginthee l e c t r i c a l materialsmarket,HPalwaystriestoupgradethe latesttechnologyinordertoimprovecompanyperformance.

 Headoffice:53Street19,TranNao,BinhAnWard,District2,HCMC.

 Factory:StreetNo.1,TanDongHiepBWard,DiAn,BinhDuong.

Asanyothercompanies,employeesorlaborforceisthetop- priorityinHP.Tooperatinginindustrialsector,itrequiresalaborforcewithskillssotheworkeristh eprimarylaborsourceinHP.TheyappliedISO9001-

2008QMS,theQualityManagementSystemthata u t h o r i z e d byAustraliatoensureallthesteps fromthebeginningofthesalecontracttotheproductiontominimizetherisks.Thoseemployeesm ostlywereemployedfrom2 0 0 9

SITUATION&SYMPTOMSANALYSIS

Profitabilityistheprimarypurposeofallbusinessenterprisesbygettingmorerevenue,sustainablede velopmentandfairlycompetitionintoday’scompetitivemarketconditions.P r o f i t a b i l i t y ismeasuredbyafewaccountingratios,suchasreturnonequity(ROE),r e t u r n oncapitalemploye d(ROA) 4Here theauthoralsosuggestsusingtheseratiostomeasurethecompany’sprofitabilityofHP -Petrocable.

BeforeconductinginterviewswithHP’smembers,company’sannualreportsareprovidedt o analyze. Financialdocumentsrevealthebasicsofthecompany’ssituationduringthep e r i o d of4years.

IncomparisontoTAYAVietnam,whichisanothermanufacturerofwireandcable,thedataalsoindi catesthepooroutcomefromHP.ROAofHPwasextremelylowincomparisontotheindustryofelect ricandelectricalequipmentandbecamenegativein2 0 1 3 at-

2%.Duringtheperiodof3yearsfrom2013to2015,TAYAVietnam’sROAr em a i n atahighlevelfr om5.27%-

8.33%.Itcanbeeasilynoticedtheineffectiveinw o r k i n g ofHPinthelast4years.Thefiguresbelow willshowthedetails.

TAYAVietnam,HP’scashratiosaretheworst.WhileTAYAVietnam’sratiosreachedtheh i g h e s t pointin2014afterthatin2015theratiowasnearlythesamewiththeindustry,therewasasignificantga pbetweenHP’sratioandtheothers.Thecomparisonswiththe

Currently,lowcashisconsideredasaseriousissueinHPCompany.Onemaximis:“ r e v e n u e isva nity,cashflowissanity,butcashisking”anditseemslikeHPuseituptheircashbalance.Thecashand cashequivalentholdaverysmallamountincomparisontothecurrentliabilities,thismakethecashr atioverysmallandcausemoredifficultiestothebusiness.

ThissituationhasmadeHPmanagerstrytoresearchabestwaytoenhancetheirprofitandi m p r o v e companycompetenceonthemarketassoonaspossible.ConductinginterviewswithmembersofHP,t heyrevealmanyissueswhichhaveinfluencesonthecompany’sperformanceandcashisoneofthem ostchallengingtroublesinrecentyears.A c c o r d i n g toMrs.Ngoc,theowneranddirectorofHP,“W earefacingaverychallengingtrouble,theshortageincashmakeourcompanysituationmoreandm oredifficult”.Lowlevelofcashisconsideredasabigtroubleinthecompany,butthatshouldberecog nizeda s thesymptomorwhatwecanseefroman“iceberg”,therealproblemandunderlyingcauses needtobefoundandanalyzedtoimprovethesituation.

SIBLEPROBLEMS

Thefirsttentativeproblem:IntenseCompetition

In a recent interview, Mr Hoanh, co-owner and Sales Manager of HP Company, highlighted the

Reinmoeller 5observed thatpricewarsalwayslinkwiththeseriousdropsinfinancialperformance.Inthis casethiscanbeunderstoodthatpricecompetitionsomewhatleadtothebadresultsinHPCompanywit htherevenueandROA,ROEalso.Moreover,the

12 competitiontakesplacenotonlyfordomesticenterprisesbutalsofamousforeignmanufacturers likeLSVINA,TAYA,TAIHAN,TAISINwith100%foreigncapitalinvested… alsohavethelatestandupdatedmachinery,strongcapitalfromoverseasandcompetebypricestrat egystronglyinordertokicktheweakandsmallenterpriseoutofthebusinesstopenetratethemarket.

However,Reinmoeller 5 again addressedthatwhenthepricewarsstart,profitwillnarrowconsider ablyandweakcompetitorhaddifficultyinb u s i n e s s Mrs.Ngocmentionedthat“Weofferedquit ealotpriceproposalpermonth,thatmeansthedemandisstillverygoodbutithardlywinthecontrac tbecauseofthelowp r i c e offerfromtheothercompany,profitmarginofcableisinthelowlevelabo ut10%sowecannotdiminishthepriceanymore”.Theconsequenceofthelowpricerivalswilla f f e c t oursales,profitandcashdefinitely.

Smaller firms often extend more credit to customers as a marketing strategy to boost sales and foster long-term relationships, while larger firms typically rely on financing from suppliers due to their strong reputation and economies of scale According to Wilson et al., trade credit is a vital marketing tool that helps suppliers attract new business and establish solid customer relationships, particularly for new market entrants with limited connections If competitors provide better credit terms, businesses risk losing customers Trade credit is essential for competing within the same industry, as suggested by Niskanen et al., who argue that firms aiming for high growth offer more trade credit and longer payment terms than their rivals To increase sales, companies facing inadequate sales often adopt strategies that involve granting more trade credit, leading customers to compare credit standards among multiple suppliers to find the most favorable options.

The wire and cable industry has significantly expanded, fostering competitive pressure that drives technological innovation, quality enhancement, and productivity improvements while reducing product costs to offer attractive prices to customers Both domestic and foreign companies have embraced international quality management standards, registered trademarks, and brand development to build market confidence The power cables market now boasts over 200 businesses, including 40 large and medium enterprises with foreign investments Strong government capital investment has supported state-owned corporations like CADIVI, Tran Phu, and Viet Thai, which maintain strategic projects and a robust distribution network that has earned consumer trust over the years According to Mr Hoanh, major players in the cable industry offer appealing credit sales for large projects, allowing customers to defer payments by up to 30% of the contract amount, a benefit not available from smaller competitors, even if they charge slightly higher prices.

OneofseriousreasonsforcashshortageinHPcomesfromthecompanyexpenses.A c c o r d i n g toM r.Hoanh,“copperaccountsfor80%ofthecablecomponentssoitplaysav er yvitalroleintheproduct

”.Thusthecostofrawmaterialsisakeycomponentinthep r i c e ofcableproduct;however,“Theco pperpricefluctuationmakeitmorecomplicated toquotethecablerateandpredictthecompetitorprice,alsoraisecostofourproductsa n d impact ourabilitytomeetcommitmentstocustomers”.ItisevidentthatHPCompanyh as hardtimetodealwit hstronglyfluctuatingrawmaterialcosts.

Thecommoditypricingistheaddressableconcernforalotofmanufacturerstofindnewwaystostabili zetheexpenses.Asthesameasgoldprice,copperpriceisverysensitivea n d unpredictable.Alongwi ththegreatfluctuationingoldprices,copperpricetruckafirstpeaklevelin2008and2011,evennowi tisonthedownwardtrendbutforman uf actu r er s ofcable,thevolatilityintheglobalcoppermarke tgrowahostofpricingconcernsthatinfluencetheirclients- thecontractors.Noonecanforecastinwhichd i r e c t i o n materialpriceswillgo.Itwillgoupordown withoutanydiscerniblepattern.

The HP director recognizes the challenges posed by the unstable global market and fluctuating raw material prices Mr Hoang from the sales department notes that copper price variations can significantly impact product pricing, stating, "We purchase materials only after the customer signs the contract." This approach can lead to complications when material prices rise, as customers may resist price adjustments In cases where price increases are minimal or involve regular clients, the company may absorb some profit losses Such discrepancies between spot and contract prices can result in reduced profit margins or even losses for the producer Therefore, the volatility of raw material costs and ineffective price management can jeopardize a company's profitability To mitigate these risks, it is essential to prioritize the development of a comprehensive raw material management system to effectively control costs, rather than allowing these challenges to be overlooked or passively accepted.

“Externalfactorsbeyondourcontrolcancausefluctuationsindemandforourp ro du ct s and inourpricesandmargins,whichmaynegativelyaffectourresultsofo p era t i on s andcashflo w”.

Oneofthebusinessstrategiestoexpandsalesandprofitandtocompetewithotherrivalsisallowingcr editsalestocustomer.Tradecredithasplayedanimportantroleinourg l o b a l growthtoboosttheg oodflow.However,theissueoflatepaymenthasbeeni d e n t i f i e d asaurgentproblem,whichreduc ethesupplierfinancialperformance.

ConductinginterviewswithmembersofHPCompany,accordingtoMrs.Ngoc,thed i r e c t o r ofH PCompany,“OurCompanyhastodealwithabigamountofcashstuckintheaccountreceivables”.T hisisasignalofthefactthatthecompanyishavingd i f f i c u l t i e s collectingsalesoncredit.Intheinte rviewwithMissTuyen,whoworksinfinancial – accountingdepartment,shesharedthat“customersdelayedtheirdebtsforlongertime”anditmakes

“anamountofworkingcapitallockedupinthisaccountforlongtime”.Thiscouldbeunderstandwhy HPholdsabigamountofaccountreceivable,becausetheircustomer- thecontractorusuallydelaythepaymentaslongaspossible.

Zainudinetal 8stated thatthepracticeoflatepaymentandnon- paymentcan,anddoes,underminecompanies’cashflow,profitabilityandcompetitiveness.Itistru ewhennowH P Companyissufferingthecashflowproblem,insufficientprofitabilitycausedbythe w o r k isnotpaidinthestipulatedtimeframestuckinaccountreceivable.

AccordingtoMs.Tuyen“Ourprofitmarginisquitesmallandvariouswithinanorder,ifthecustomer delaytopay10%-

30%ofthecontractfrommorethan3months,itbecomeap r o b l e m affectourcompanyadversely”.C ablemanufacturerhaveasmallprofitmargina n d ifacustomerdelaytofulfilltheinvoice,theystill“h avetopay100%forthesupplierw h e n purchaseformaterial”.Thiscanbeunderstoodthereasonwh yacompanylikeHP

– TAYA Vietnam, there was a significant gap between HP’s turnover and TAYA that

Itisobviousaboutt h e fallintheprofitabilitybecauseofthedelayinpaymentfromthecustomerinHP Company.Latebillposeasignificantproblemforsmallandmediumbusinesses,whileb i g firmsare nottooworryabouttheuncommonunpaidinvoice.Latepaymentwillaffectc a s h flowofacompan yandmayeventuallyleadtocompany’sinsolvency 9Agreed withthat,Wongetalstatesthatlateordela yedpaymentfromclientscanbecategorizedasf i n a n c i a l riskswhichinvolvehighlevelofuncertai ntyanditmaycauseanegativeimpacto n thecashflowandendangeraproject’sviabilityandlimitpro fitability.

Ms.Ngocsharedthat“Mostofthecustomerpaythedebtsafter4to6months.Somedelaysmoretha nayear.Someevengetdefaultinpayment”eventhey“trytocallthemm a n y timesbutitseemsnotver yeffectivelyandalwayshastovisiteachcustomerinpersontoclaimthedebt”but“thedebtsarefrequ entlypaidpartlyandlessthanmy expectation”.Disruptionsofcashflowcausedbylatepaymentdependingontheextentandduration ofdelayedpaymentcansignificantlyaffectthedailyoperationsofsmallb u s i n e s s e s 10

Evenextendingcreditcanallowyoutocombatwiththeotherrivalsbutitisnotalwaysg o o d foryourbu sinesswhenyouhavetroublewithcollectthemoneyfromyourclient.Asanalyzedabove,nowHPCo mpanynotdoingwellwiththeinvoicecollectionwhenr eceivablesturnoverratiokeeparound1.8andth enumberofday’ssalesoutstandingwasar ou nd 202daysandwhilecomparetotheindustryofcable manufactureandacompetitor

18 meansthecompanyishavingtroublesincollectingmoneyfromthecustomersanda c c o u n t receiv ableholdalargenumberofworkingcapitalintoolongperiod.Inotherwo r d s , thereweremoredelin quentcustomersandanincreaseinthecostsofholdingr e c e iv ab l es foralongerperiodoftime.

Theliquidityofaccountsreceivableandthespeedthatreceivablesareconvertedintocashislowanditt ookmoretimetoturnaccountreceivableintocash.Asaresultofdelayedpayments,financialstressc anoccurduetoinaccuratecashforecastsand/ordeficienciesincashflowmanagement 11

New and small rivals use low price strategy to win the contract

State own and FDI enterprises Intense Competition

Low ROA, ROE Trade credit policy

Poor financial management Late payment from customer

Material price volatility High account receivable

Fromtheaboveanalysis,literaturereviewsandtheinterviewresult,thereare3mainproblemsareanal yzedandidentifiedasthebarriersleadtothebadperformanceinHPC o m p a n y fromtheperiod201 2-

2015.Pricewarandthevolatilityinmaterialpriceyettoe x i s t asobstaclespreventcompanyfroma chievingabetteroutcome,butthep re d o mi n an tl y reasonseffecttheseproblemcomefromtheex ternalandmarketelements,w h i c h canhardlyhandleandmanageefficientlyandeasilywithintheir limitedresources.

The primary challenge facing HP Company is the unpaid payments from clients, particularly those with revenue retention in accounts receivable When a significant portion of a company's operational cash flow is tied up by customers, it hampers the ability to manage business effectively and retrieve outcomes This situation leads to uncertainty regarding revenue generation, as poor payment practices diminish overall corporate earnings, hinder expansion, and stifle business growth Late payments severely impact HP and small to medium-sized enterprises (SMEs) that operate with limited cash flow, putting their survival at risk Furthermore, the current competitive landscape prevents companies from raising prices, resulting in a decline in HP's cash balance In summary, addressing the issue of late invoice payments is crucial for HP Company, necessitating a thorough investigation into the underlying causes and the development of viable solutions within the company's capabilities and resources.

Thethirdtentativeproblem:Latepaymentfromcustomer

Oneofthebusinessstrategiestoexpandsalesandprofitandtocompetewithotherrivalsisallowingcr editsalestocustomer.Tradecredithasplayedanimportantroleinourg l o b a l growthtoboosttheg oodflow.However,theissueoflatepaymenthasbeeni d e n t i f i e d asaurgentproblem,whichreduc ethesupplierfinancialperformance.

ConductinginterviewswithmembersofHPCompany,accordingtoMrs.Ngoc,thed i r e c t o r ofH PCompany,“OurCompanyhastodealwithabigamountofcashstuckintheaccountreceivables”.T hisisasignalofthefactthatthecompanyishavingd i f f i c u l t i e s collectingsalesoncredit.Intheinte rviewwithMissTuyen,whoworksinfinancial – accountingdepartment,shesharedthat“customersdelayedtheirdebtsforlongertime”anditmakes

“anamountofworkingcapitallockedupinthisaccountforlongtime”.Thiscouldbeunderstandwhy HPholdsabigamountofaccountreceivable,becausetheircustomer- thecontractorusuallydelaythepaymentaslongaspossible.

Zainudinetal 8stated thatthepracticeoflatepaymentandnon- paymentcan,anddoes,underminecompanies’cashflow,profitabilityandcompetitiveness.Itistru ewhennowH P Companyissufferingthecashflowproblem,insufficientprofitabilitycausedbythe w o r k isnotpaidinthestipulatedtimeframestuckinaccountreceivable.

AccordingtoMs.Tuyen“Ourprofitmarginisquitesmallandvariouswithinanorder,ifthecustomer delaytopay10%-

30%ofthecontractfrommorethan3months,itbecomeap r o b l e m affectourcompanyadversely”.C ablemanufacturerhaveasmallprofitmargina n d ifacustomerdelaytofulfilltheinvoice,theystill“h avetopay100%forthesupplierw h e n purchaseformaterial”.Thiscanbeunderstoodthereasonwh yacompanylikeHP

– TAYA Vietnam, there was a significant gap between HP’s turnover and TAYA that

Itisobviousaboutt h e fallintheprofitabilitybecauseofthedelayinpaymentfromthecustomerinHP Company.Latebillposeasignificantproblemforsmallandmediumbusinesses,whileb i g firmsare nottooworryabouttheuncommonunpaidinvoice.Latepaymentwillaffectc a s h flowofacompan yandmayeventuallyleadtocompany’sinsolvency 9Agreed withthat,Wongetalstatesthatlateordela yedpaymentfromclientscanbecategorizedasf i n a n c i a l riskswhichinvolvehighlevelofuncertai ntyanditmaycauseanegativeimpacto n thecashflowandendangeraproject’sviabilityandlimitpro fitability.

Ms.Ngocsharedthat“Mostofthecustomerpaythedebtsafter4to6months.Somedelaysmoretha nayear.Someevengetdefaultinpayment”eventhey“trytocallthemm a n y timesbutitseemsnotver yeffectivelyandalwayshastovisiteachcustomerinpersontoclaimthedebt”but“thedebtsarefrequ entlypaidpartlyandlessthanmy expectation”.Disruptionsofcashflowcausedbylatepaymentdependingontheextentandduration ofdelayedpaymentcansignificantlyaffectthedailyoperationsofsmallb u s i n e s s e s 10

Evenextendingcreditcanallowyoutocombatwiththeotherrivalsbutitisnotalwaysg o o d foryourbu sinesswhenyouhavetroublewithcollectthemoneyfromyourclient.Asanalyzedabove,nowHPCo mpanynotdoingwellwiththeinvoicecollectionwhenr eceivablesturnoverratiokeeparound1.8andth enumberofday’ssalesoutstandingwasar ou nd 202daysandwhilecomparetotheindustryofcable manufactureandacompetitor

18 meansthecompanyishavingtroublesincollectingmoneyfromthecustomersanda c c o u n t receiv ableholdalargenumberofworkingcapitalintoolongperiod.Inotherwo r d s , thereweremoredelin quentcustomersandanincreaseinthecostsofholdingr e c e iv ab l es foralongerperiodoftime.

Theliquidityofaccountsreceivableandthespeedthatreceivablesareconvertedintocashislowanditt ookmoretimetoturnaccountreceivableintocash.Asaresultofdelayedpayments,financialstressc anoccurduetoinaccuratecashforecastsand/ordeficienciesincashflowmanagement 11

New and small rivals use low price strategy to win the contract

State own and FDI enterprises Intense Competition

Low ROA, ROE Trade credit policy

Poor financial management Late payment from customer

Material price volatility High account receivable

Thecentralproblem:Latepaymentfromcustomer

Fromtheaboveanalysis,literaturereviewsandtheinterviewresult,thereare3mainproblemsareanal yzedandidentifiedasthebarriersleadtothebadperformanceinHPC o m p a n y fromtheperiod201 2-

2015.Pricewarandthevolatilityinmaterialpriceyettoe x i s t asobstaclespreventcompanyfroma chievingabetteroutcome,butthep re d o mi n an tl y reasonseffecttheseproblemcomefromtheex ternalandmarketelements,w h i c h canhardlyhandleandmanageefficientlyandeasilywithintheir limitedresources.

The unpaid payments from clients, particularly those with revenue retention in accounts receivable, significantly impact HP Company When a large portion of cash flow is tied up by customers, it limits the company's ability to operate effectively, making it difficult to focus on retrieving outcomes This situation raises concerns about revenue generation, as poor payment practices can diminish overall corporate earnings, hinder expansion, and stifle business growth Late payments also pose a serious threat to HP and small to medium-sized enterprises (SMEs) that operate with limited cash flow, jeopardizing their survival Furthermore, the current competitive landscape prevents companies from raising prices, contributing to a decline in HP's cash balance In summary, late invoice payments are a critical issue that HP must address by investigating underlying causes and proposing viable solutions within its capabilities and resources.

LEMJUSTIFICATION

Problemdefinition

Payments,whichimpliesamajorproblemasmonies,isneededtopayformaterials,labor,plant,su bcontractors’accountrendered,preliminariesandgeneraloverheadse x p e n d e d duringthepr ogressofthework, 12an d tradecreditistheseparationbetweend e l i v e r y ofgoodsandservicesandt heirpaymentstosuppliers 13Late paymentoftradec r e d i t isanextensionofthedemandfortradecr edit.Mostfirmstrytodelaytheirpaymentstosupplierstoalleviatecreditconstraintsinashortperiod.

Late paymentoftradedebts isoftenassociatedwith therelativepower positions ofsuppliersandcustomers(especiallywherethecustomeris in a monopolisticoroligopolisticposition),the competitivenessof markets, disruption associated withchangesi n paymenttechnologiesandcustomerconcentration.

Latepaymentproblemisendemicinconstructionandneedstobeexplicitlyrecognizedasthisproble mrecursfromprojectafterproject.Whentheflowofmoneyintoabusinessisdelayed,thenetcashflo wwillbecomenegative.Therefore,latepaymentaffectstime,c o s t andqualityasgoodqualityconstr uctionrequirespromptpayment,sothatprogressw o u l d notbeaffected 9

Justifythe existenceofproblem

AccordingtoMrs.Ngoc,“becauseofthecompanyfocusedonlyonconstructionprojects,a n d witht hestateownedEPC,theyalwaysrequiretokeep10-15%inthecontractafter

22 deliveryasaruleforinspection”.Withoutacreditstandardorcheckingontheirfinancialcapacity,the company“setthecreditlimitbasedontheprojectsinformation,relationshipb e t w e e n 2com panies,historypurchaseanditusuallyrangefrom10-

15%ofthecontract”.Companywillstopsupplyingtothecustomerwhohasnotaccomplishedtheirpa ymentduewhentheirdebtexceedsthecreditlimit.InHPcreditpolicy,thereisnoc r e d i t termtoass essthecustomers.Theyoffercreditlimitmainlybasedonthei n fo r m a t io n ofprojectandtherelatio nship.Thislenientcreditpolicycanattractcustomerbutalsoleadstotheoverduepaymentsduetothe weakfinanceofcustomers.

Thelengthofcreditperiodisequivalenttotheproductprice 16That alsomeansthelongercustomersh oldingtheirpayment,thelowerpriceofproductis.Therefore,acustomerwhohasabilitytopaytheir debtsoonoftenhastendencytowaituntilthelastd a y ofcreditperiod.Moreover,itisriskywhencom panyallowsallcustomerstoholdthepaymentinalongtime.Financialcapabilityofthecustomerma ychangeduringthatp e r i o d , especiallywhoownabigamountofcreditsalesmaynotaffordthedeb t 17Ms

Tuyenalsorevealedthat“companydoesn’tofferanydiscountforimmediatepaymentp u r ch a s e s” and“thereisnodiscountforearlypaymentforsalesoncredit”.Thediscountnotonlyattractscustome rswhoconsiderittobeapricedeductionbutalsoluresthemtor e p a y soonertogetprice 18 Therefore, nodiscountmeansthatthereisnotanye n c o u r a g e m e n t forcustomerstorepayearly,sotheyoft endelaythepaymentuntilthelastd a y ofcreditperiod.

HPhas ineffective debt collection strategies, primarily relying on standard methods such as calls and emails, which often fail to prompt timely payments Mrs Ngoc notes that debts are frequently paid only partially and not as expected, leading to prolonged delays in receivables Despite having legal collection policies and penalty interest rates outlined in contracts, the company seldom utilizes these measures Mrs Ngoc expresses concern that pursuing legal action could damage client relationships and the company's future reputation Ultimately, the challenge lies in balancing the need for timely payments with the risk of alienating customers.

Inmostofthecases,itisobservedthatinformationrelatingtocreditdecisionmakingisn o t availablef romthecreditapplicant.Hencethecompaniesaretakingdecisionontheb a si s ofpastexperienceorth egeneralimpressionofthecustomerregardingtheirpromptpaymentofdues.Therefore,properevalu ationofriskregardingcreditgrantingdecisionbecomesveryimportantbeforethecommencementofs alesbecauseoncethecreditisa c c e p t e d bycreditororganizationofitscreditapplicant,servicingan dlossmitigationtechniquecancontrolthefuturelossesonlytoalimitedextent 19

In HP's financial statements, accounts receivable represented 25% of total assets in 2012, but this figure significantly declined from 2012 to 2015 This decrease was primarily due to a larger reduction in total assets rather than inefficient accounts receivable management According to Dunn (2009), accounts receivable is one of a business's largest assets, typically comprising 15% to 20% of total assets in a manufacturing company Consequently, while HP maintains a safety margin with its accounts receivable levels, they remain relatively high.

(HP’sIncomeStatement,2012-2015)Over4years,bothtwoaccountsreceivableratiostendedtoremainthesamewithlittlec h a n g e s Re ceivablesturnoverratiokeeparound1.8andthenumberofday’ssales

0.000 outstandingwasaround202days.Themeaningofreceivablesturnoverratioismeasurethenumbero ftimesaccountsreceivablewerecollectedduringtheyearandhowe f f i c i e n t l y acompanyusesthe workingcapital 20Although thenumbershowtherewasn o t anychangesbutthisisnotagoodresultwhil ecomparisontotheindustryofcablem a n u f a c t u r e andacompetitor–

TAYAVietnam,HP’sratiosstilltheworst.TherewasasignificantgapbetweenHP’sturnoverand TAYA.Thatmeansthecompanyishavingtroublesincollectingmoneyfromthecustomersandacc ountreceivableholdalargenumberofworkingcapitalintoolongperiod.Theliquidityofaccountsrec eivableandthespeedthatreceivablesareconvertedintocashislowandittook moretimetoturnaccountr e c e i v a b l e intocash.Inotherwords,thereweremoredelinquentcusto mersandalsothecostsofholdingreceivablesforalongerperiodoftime.

3months-6months 6months-12months 1year- 2years over2year-considerasdefault

Itcanbeeasilyseethatdatafromaccountingdocumentsreflectsproperlytheresultsofd i r e c t interv iews.Attheendof2015,themostpercentageoftotalreceivablesc o n c e n t r a t e s in3to6monthsac countsreceivablewhichisoverduefor1.5-

4.5months.T h e r e iseven8%ofdebtisover2yearsandthecompanyconsidersitasuncollectabled e b t Inreality,thecompanyoffer45daysofcreditperiodforallcustomers,accountr e c e i v a b l e s las tedmorethan45daysareoverduedebts.In2015,thereisonly18%ofreceivab l e beinginmaturity andoverduedebtoccupied82%ofaccountsreceivableamount.Thislargenumberindicatesthatacc ountsreceivablemanagementofHPisnote f f e ct i v e

Justifythe importanceofproblem

During a recession, small businesses are particularly vulnerable to credit squeezes, leading to a clear link between late payments and increased insolvency rates Unpaid client invoices significantly impact a company's cash flow, hindering its ability to operate effectively When cash flow is tied up in accounts receivable, businesses struggle to ensure sufficient revenue, which can stifle growth and reduce overall earnings Late payments pose a serious threat to small and medium enterprises, often operating with limited cash reserves, putting their survival at risk As highlighted by HP member Mrs Ngo, late payments are a primary issue for entrepreneurs, necessitating urgent action to address the problem Mr Hoan echoed this sentiment, stressing the importance of on-time payments and the need for effective strategies to improve cash collection Both managers recognize the critical nature of timely payments but are challenged in finding solutions to enhance their collection processes.

POTENTIALCAUSES

PotentialCause1:CreditPolicy

AccordingtoBrigham, 18credit policyisdefinedbythecreditperiod,creditstandards,thefirm’scollecti onpolicyandanydiscountgivenforearlypaymentsinanorganization.

CreditPolicycanbeviewedaswrittenguidelinesthatsetthetermsandconditionsforsupplyinggoods oncredit,customerqualificationcriteria,procedureformakingcollections,andstepstobetakenincas eofcustomerdelinquency 21Unless acompanystandardizestheircompanycreditpolicy,theycould notbepaidontimeandalwaysnotinthetopofcustomer’sprioritylist.Atoo- lenientcreditpolicywillcertainlymakethep r o c e s s ofcollectingmoneyintroubleandcashprobl emlater.Moreover,theprovisionoftradecreditentailsnegativeimpactsuchasdefaultriskorlatepay ment,whichmaydamagefirmprofitability 22

Ngetal 23stated thateventhoughtradecreditisashort- termfinancingmethod,itisc o n s i d e r e d aspartoflong- termstrategybysupplierstomaintaincustomerrelationship.T o besummarized,suppliersmakeuseo ftradecredittoestablishcustomerloyaltyandcustomerscanalsogetattractivebenefitsfromtradedeb t 23

Inreality,HPhaspoorcollectionefforts.Whenthereisamaturedebt,thecompany“justa p p l i e s t henormalmethodlikecalls,email,andcometotheiroffice… towhoareu nwil li ng topayanddelaythepaymentintoolongtime”.“Thedebtsarefrequentlypaid p a r t l y andlessthanmyexpectation”,Mrs.Ngocsaid.Thosemethodsarenotenough pressuretoobligatethedebtorstorepayimmediatelysothatthereceivableareoften

Acustomer,whohasabilitytopaytheirdebtsoon,oftenhastendencytowaituntilthel a s t dayofcredi tperiod.Moreover,itisriskywhencompanyallowsallcustomerstoholdt h e paymentinalongtime.Fi nancialcapabilityofthecustomermaychangeduringthatperi od , especiallywhoownabigamount ofcreditsalesmaynotaffordthedebt 17Ms

Tuyenalsorevealedthat“companydoesn’tofferanydiscountforimmediatepaymentp u r c h a s e s” and“thereisnodiscountforearlypaymentforsalesoncredit”.Thediscountnotonlyattractscustome rswhoconsiderittobeapricedeductionbutalsoluresthemtor e p a y soonertogetpricededuction 18 Th erefore, nodiscountmeansthatthereisnotanye n c o u r a g e m e n t forcustomerstorepayearly,s otheyoftendelaythepaymentuntilthelastd a y ofcreditperiod.

Potentialcause2: Poorfinancialmanagement

reless’financialmanagementisamajorcauseofbusinessfailure.Wilsoneta l24identifiedpoorcredit managementpracticesasoneoftheunderlyingcausesoflatepayment.Indeed,Peeletal25rep o rtedther esultsofresearchwhichindicatedthat81%ofsmallbusinessfailuresinNorfolkandWaveneywerel inkedtopoorfinancialm a n a g e m e n t , andthat,inresponse,amajorUKclearingbankwasofferi ngdiscountedfinan ce tosmallbusinessownersinthelocalitywhoattendedfinancialmanagementt rainingcourses.Reasonspurportedincludethelackoftime,resourcesandskillsofsmall businessmanagerswhoappeartoprefertoexpendtheireffortsinsatisfyingther e q u i r e m en t s ofex ternalparties.

Manyfirmsfailbecauseofpoorcreditmanagement 2 In reality,HPs h o u l d not“justa p p l i e s t henormalmethodlikecalls,email,andcometotheiroffice… towhoareu nwil li ng topayanddelaythepaymentintoolongtime”.Insteadofthat,theyshouldpla ncarefullyandremindsthecustomerabouttheunpaidinvoicemaybeseveralweeksb e f o r e thed uedate.Thatwillhelpthecustomertogetreadyforabetterpaymentplan.

Potentialcause3:Economic situation

isinfluencedbydevelopmentoffinancingsystems,andlegalinfrastructureo f acountryandtheeconom iccondition.Intimeofrecession,Wilson 1states thatthereisa clearrelationshipbetweenlatepaymenta ndtherateofinsolvencyandbankruptcy.Inthecurrentperiodoffinancialhardship;companies,espe ciallysmallones,mayhavetoo f f e r evenmoremagnanimouscredittermstobethewinnerofbusine ss,thusfurtherrisingtheirrisk.

Ms.Ngocrevealedthat“Ourtargetcustomeristhecontractororconstructioncompanywithbigproj ect.Theyonlypaytheirdebtwhentheyhavealreadysoldtheirpropertyandinthetimeofrecession,it isquitehardtoselltheapartmentorrealestatestotheenduser.Ithinkthatthemarketisrebounding butnotverystronglysoitimpactonthefinancialcapabilityofourcustomer.”Underdeterioratingec onomicconditions,firms’c a p a c i t y ofgeneratecashfromtheiroperationsreduceandthereismor eriskyinsellingf o r construction.Theyoftenholdtheirpayableamountlongerbecausetheircashflo ws

Potentialcause4:Legaland RegulatoryFramework

nedisabouttheregulationinVietnamtotacklethelatepayment.Shesaidthat“WethinkthatinVietna m,thelawandregulatoryaboutlatepaymenthavenotp r a c t i c e intherightway.Infact,althoughthe remanycaseaboutdelayedinvoicesfora b o ve 2or3yearswithseveralbillions,thecreditoralsosue thedebtorbutitisaverylongandcomplicatedprocess.Itwillcostalotoftimeandmoneytotakethem oneyback.N o t mentionthatthecontractandalltheevidencesduringthetransactionarea p p r o p r i a t e Thisisthesamewithourcases,wedon’twanttomakeitmorecomplexandca use difficultiesfort hecustomer”.

Pauletal 26p ro ved thefailureofthestatutoryinterestlegislationapproachhasfailedtoc h a n g e payme ntbehaviorandthepossibleadverseeffectoncustomerrelationsasthemainreasonforthesupplierno tcharginginterest.S u p p l i e r s mayfearlosingsalesiftheyc h a r g e statutoryinterestmorethanl atepayment 1In deed , Wetherhilletal 27found thatsupplierswerelesslikelytochargepenaltyinteresto nlatepaymentwhererelationshipsw i t h customerswereconsideredimportant.

CAUSEVALIDATION

Justifythe linksbetweenthepotentialcausesandcentralproblem

Mismanagement of trade credit significantly contributes to late payments, impacting an organization's cash flow Poor credit and collection policies can lead to cash shortages, necessitating careful control to avoid financial repercussions Long payment terms create liquidity risks for weaker suppliers, often pushing them into financial distress While extending trade credit can boost sales, it also carries the risk of late payments and non-payments, straining supplier resources and threatening business survival Late payments increase collection costs and can result in bad debt expenses, undermining cash flow and profitability Additionally, trade credit imposes administrative costs and opportunity costs associated with carrying receivables, limiting funds for expansion Conversely, prompt collections can enhance reinvestment opportunities and increase business volume without a proportional rise in accounts receivable However, trade credit periods can vary significantly among customers, complicating the management of credit terms.

Foramanufacturingbusinessorganizationtoachieveitscriticalobjectivesofliquidityasitallowscre dittocustomers,concernshouldbegiventoitscreditpolicy,itshouldbea d e q u a t e l y planne danditsadherencemustbestrictlyemphasized 21

Giventhesecharacteristics,itisperhapsunsurprisingthattheefficientmanagementofworking capi tal,andmorerecentlygoodcreditmanagementpractice,havebeenstressedasbeingpivotaltotheheal thandperformanceofthesmallfirmsector.25In d e editisa c k n o w l e d g e d tobecrucialfortheirsurv ivalandprosperity,33particularlywheresmallfirmsaregrowingandthereforeneedtofinanceincreasin gamountsofdebtors.Dodgeeta l 34reported thatcashflowmanagementwasstated,byowners,tobeon eofthemost

No discount for early payment Unclear credit policy importantinternalproblems.Workingcapitalmanagementhasbeenshowntobeamajorp r o b l e m bothatstartupandforgrowingfirms 34

Nilsenalso 35stated thattradecreditisdeterminedatthetimearoundthesaleofgoodsbothbysuppliersa ndcustomers,andinfluencedbytherelationshipbetweenthem.

FINALCAUSE EFFECT MAP

Late payments are a significant concern for managers and business owners globally, as they often face lengthy payment terms and delayed invoices These issues can lead to risks and costs associated with late payment collection To improve cash flow, it is essential to reduce accounts receivable and days sales outstanding, which are key indicators of a company's efficiency in collecting payments Effective management of these metrics can enhance profitability for businesses However, it is crucial to optimize accounts receivable management based on external factors rather than simply minimizing them Companies must strike a balance between risk and return, and further research is needed to determine the optimal levels for effective cash flow management HP should aim to maintain its receivable turnover ratio and days sales outstanding in line with industry standards by implementing targeted solutions.

SOLUTION1 -IMPROVETRADECREDITPOLICY

Settingcreditstandard

oofferthecreditlimit.Thelimitsofcreditallowcustomerstoownanamounto f investmentinreceiva bles.Creditlimitshelpstheproducertospeedsupthesalesp r o c e s s , buteitherreducesriskandimpro vescollectionefforts.Atoogenerouscreditstandardcanattractmorebuyersandpushupsalesgoalon gwithcostsexpansioninr e c e i v a b l e s Inthecontrary,atoostrictcreditstandardscansavecompa nyfrombaddebtlossesandtheassociatedcostsbutdepressingsalesandprofitdefinitely.Therefore,s ettingclearandeffectivecreditstandardsisessentialforHPC.Grantingtradecredit needstodependonthecreditworthinessofthecustomeranditsfinancialcapacity 38It shouldbeused asaguidetoenhancingprofitablesalesandcanbereviseddependonthef i n a n c i a l strength,pay mentperformanceoftheircustomer.However,itmustbewellcontrolledandrestricttooffermorethan maximumamount,basedoncompanypolicy.

Varyingcreditterms

n t percentageonsellingpriceifthebuyerpaysearly.Anorganization’scredittermareoftensubjected toindustrystandard,orbyitscompetition.Longerthecredittermsis,thelongercashinflowtoyourpock et.Varyingthecreditperiodcanmakethed i f f e r e n c e andtheflexibilityintheproductprice 16In t hecreditpolicy,HPonlyofferap e r i o d of30-

Moreover,thatrequiresomeincentiveforthecustomertopayanddiscriminatethesellingp r i c e iso neofthebestoption.HPCcanofferthecreditperiodandgivingadiscountinpromptpayment,whichc anbeseenasapricereduction.13Gran tingdiscountcaninducecustomertorepaytheirdebtsearlierthant heexpiredcreditperiod.Itprovidesbenefitforbuyerbypremiumonpaymentandthesellerbypromptc ollectingdebts.Thediscountnotonlyattractscustomerswhoconsiderittobeapricedeductionbutalso makesreductionintheday’ssaleoutstanding 37I n ordertogetthededuction,thecustomerswillrepayi nthediscountterm.Hence,insteadofnodiscount,HPshouldofferadiscountrateforearlypaymentt othebuyers.Thesediscountpoliciesattractcustomersanditisfasterincollectionofmoney.

Applyingpenaltiesforlatepayment

aytheirdebtsontime.Withnolate- paymentpenalty,thecustomersofHPa r e encouragedtodelaytheirpayment.Thus,HPCshouldfi xthepenaltyrateinpurchasec o n t r a c t s andalsoclaimforthatfinewheneverthecustomergetlatein payment.However,thisisnotalwayshelpfulforthecompanybecauseasmentionedabove,thist e r m isjusttotiethepurchaserwiththeirobligation.Inreality,thesellerrarelyusethelegalactiontosueth embecauseofdelayedpaymentwhetheritisalargeamountofm o n e y andHPCisthesame.

Put moreeffortoncreditcollection

Thereisafactthatcallingandsendinglettersarenotenoughpressureforcustomertopaytheirdebt.HPs houldputmoreconcentrationoncollectingthereceivable.E m p h a s i z i n g promptnessandsyste matizationincollectionpolicywillhaveap s y c h o l o g i c a l effectonthecustomersandmaketh emremembertheirobligation.Ifallthecollectioneffortsfail,thecollectionagenciesandlegalactionar ethelefttothecreditor.C o l l e c t i o n agencieshavesuperiorknowledgeofpersuasivecollectionte chniquestoc o l l e c t moneywithhighfeerangesfrom10-

50%dependsonthedebt.Thismethodoftenw o r k associatedwithexpensivecost.Otherlegalactions shouldbeusedwhenthereisad e b t o r whodelaysthedebtfortoolongperiodwithlargeamount.Thisb othcostlyandtimeconsumingstep.However,changingpolicyalsobringssomeconsequencestothec ompany.Ifwechoosetotightenthecreditpolicythatwegranttothecustomers,atsomep o i n t therewi llbedecreaseinsalesanditmayharmthecustomerrelation 39

SOLUTION2 -BANK GUARANTEE

To mitigate the risk of default, HP will require bank guarantee contracts from customers alongside commercial contracts A bank guarantee ensures that if the buyer defaults on payment, the debt will be covered by the bank, making it a more secure option than other financial instruments This arrangement allows HP to transfer the default risk to the bank, which provides full protection against contract performance failures Given the substantial value of purchasing contracts in construction projects, HP should consider implementing bank guarantees as a viable solution Additionally, when issuing a guarantee, the bank will establish a credit limit based on the customer's creditworthiness, streamlining the process and saving time for HP in granting trade credit.

Inreality,thebankguaranteeisaformallegalactivityanditisdemonstratedinwrittenform.Itincludes theclearobligationsandrightsofthethreeparties.Thebankwillrequiret h e buyerandsellertofulfillt heformwithallimportantelementsagreeduponwhenconcludingtheprimarycontract 40It canbringt heinconveniencetothecustomerandleadtothediscomfortanddispleasure.Theymaythinkthatthe yarenottrustedanditcanh a r m thecustomerrelations.

SOLUTION COMPARISON

BasedontheoryandinformationcollectedintheinterviewwithHPboardofdirectorabo u t twosolu tionsabove,allofthemwouldaffecttheamountandratioofaccounts receivable.However,notallofthemcanbeapplyandfitwiththerealityoftheHPCompany.Thoseopin ionandcommentsarelistedinthetablebelow:

- Mrs.Ngocassuredthat“Tighteningcr ed it policywillmakethereductioninlev elsofaccountreceivables,alongwitht hedecreaseintherelatedcosts.Therisks takenbyafirmisalsolessen”

- Mr.Turecommended:“Itcanalsoim provetheefficiencyandconsistencyin coordinationamongdepartments.

- Ms.Tuyensuggested“Itbringsthecon sistencyinapproachingcustomersa ndmakingdecisioniseasier,basedon acreditstandard.Flexiblecreditperi odanddiscountratebringsthepriced i sc ri mi n a ti o n ”.

- Mr.Hoanhsaid:“Thisisaprote ctionforthecompanybutnotalw ays100%effectively,insomecase wecouldloseour money”

- Mr.Hoanhaddedthat“Thedisad vantagesofthisapproacharem ainlythereductionofsales,goodw illandprofitduetothelackoftrade extensiontocustomers”and“tigh tencreditpolicymayharmtherelat ionshipswithcustomers”

- Mrs.Ngocadmittedthatbankguara nteegivesfullprotectionforaccount sreceivable,reduceriskofdelinquen cyanddefault.

- Mr.Turevealedthat“Processof bankguaranteecausestheinconv enientforbuyers.Thusitmakesth ecustomerfeel

- Mr.Hoangtotallyagreed“itisconve nientandsavemoretimeforHPinthe processgrantingthetradecredit” uncomfortableandunpleasan t” - MsTuyenadded“Beingrequire dtosignbankguarantee contra ct,customerwillfeelnotbeingtru sted.Itwillharmcustomer’srela tion.”

The primary focus for HP should be on establishing an effective trade credit policy, as it is crucial for managing accounts receivable A well-defined credit policy enhances the efficiency of receivables management and overall company operations, fostering better interdepartmental collaboration Additionally, implementing a protective measure for accounts receivable can significantly reduce the risks of delinquency and default HP has already experienced notable improvements in receivable management by utilizing this approach in recent months Therefore, both solutions are relevant for HP, but prioritizing the establishment of a robust credit policy is essential for optimal results.

DESIGNEDPLAN

Settingcreditstandard

Determining the appropriate credit limit is essential for granting trade credit, which relies on the customer's creditworthiness and financial capacity Credit history is a key factor in credit scoring, and imperfect information can create uncertainty regarding the buyer's default risk The accounting department at HPC is responsible for reviewing past transactions and accounts receivable to assess creditworthiness For new customers, the sales team must diligently gather information, potentially contacting suppliers to understand payment habits Following this, the accounting department evaluates financial reports and bank credit scores Additionally, sales teams can request mortgages, collateral, or deposits during contract signing Utilizing the 5Cs—character, capacity, collateral, capital, and condition—can enhance loan performance by fostering a better understanding of customers Both the accounting and sales departments should collaborate to apply the 5Cs model in evaluating customers as potential borrowers.

Varyingcreditterms

Offering a discount for early payment can encourage customers to settle their debts before the end of the standard credit period For example, HP could implement a 1.5% discount for payments made within 15 days of delivery, while allowing payments to be made anytime within 45 days without a discount Customers may view the first 15 days as a free credit period, with the subsequent 30 days being more costly This early payment discount effectively translates to an interest rate on the credit received, equating to an annual interest rate of approximately 18%, which exceeds typical bank loan rates As a result, customers may be incentivized to pay early to take advantage of the discount, leading to a reduction in the average collection period and a decrease in the investment required for receivables.

Applyingpenaltiesforlatepayment

tmentshouldconsultwithHP’sManagerstomakesureithasclearlystipulatedtheduedate,methodo fpaymentandlate- paymentpenaltiestoconfirmthatallthestepsmustbefollowedcompany’spolicy.BesidesthatHPCshouldfixthepenaltyr a t e inpurchasecontractsandalsoclaimforthatfine.Thepenaltyrateshoul dbehigherthanthemarketratetoforcethecustomertobepunctual.Forinstance,HPcanapply10-15%/yearonthelateamount.

Put moreeffortoncreditcollection

Theotherenforceabilityfromsuppliersisthattheycanthreatentostopsupplyinggoodstotheircusto mers.Findinganewsupplieriscostlysothatcustomershavetopaybacktheirdebtsbeforetheyrecei vecontinuingsupply 43It comestothefactthatitisdifficultf o r buyerswhodefaultonpaymenttofi ndanothersupplier.HPcanputapressureonthosecustomersandstopsupplyinguntilreceivetheirac countsreceivable.

AccordingtoOjeka,21effectivecreditpolicybenefitsbothaccountreceivablesandsalesa n d improvet hecorporationbetweenconcerneddepartments(salesandcredit).Thec o m p a n y shouldholdregularl yscheduledmeetingsbetweendepartmentstopromote understandingofpoliciesandmaketheeditsincreditpolicy.Regularlyrevisitingandadjustingthepol icywillmaketheimprovementinaccountsreceivablemanagementasw e l l astheentirecompany’s activities 21

Poorpaymentpracticescanharmcompany’soverallcorporateearnings,hinderabilitiestoe x p a n d an dlessenbusinessgrowth.Latepaymentalsohasaseriouseffectonallthesmalla n d mediumfirms,wh ichtendtooperatewithlimitedcashflowandputtheircompanysurvivalatrisk.

InthecaseofHPCompany,thisthesisisconductedtoindicatetheconsequencesonperformanceofco mpanyfromlatepaymentaswellasthemainreasonscausedthelatepayment.Throughthetheoryass ociatedwithinterviewdatafromthecompany,creditp o l i c y hasbeenthemainreasonleadtolatepa ymentprobleminHPCompany.

Thethesisthenaimsatfindingandadvisingthepossiblesolutionsandpracticesforeffectivetradecre ditpolicytopreventthisissueinthefuture.Thereforesettinganeffectiv e andreasonablecreditpolic ycanenhancetheefficiencyofaccountsreceivableasw e l l astheentirecompany’sactivities.Besides settingapolicy,bankguaranteeisp ro vided togivefullprotectionforaccountsreceivable,reduceris kofdelinquencyandd e f a u l t AdesignedplanwasmadebaseonthereviewandcommentfromHPCmanagerandstaff,toinstructalldepartmentstocomplywiththerevisedcreditpolicy.

Aqualitativestudywaschosetoperformintheresearch.First,thefinancialstatementoft h e company wasprovidedbytheAccountingDepartmentforadepthanalysis.Afterthat,f o u r qualitativeresear cheshavebeenconductedwithin- depthinterviews.Attheb e g i n n i n g ofinterview,authorspenttwominutestoexplainforthe intervieweraboutthemeaningandpurposeoftheinterviewthatistosupportforathesisr e s e a r c h Alltheinformationprovidedformthemwillbekeptconfidential,onlyforr e s ea r ch purposes.

Thefirstqualitativeresearchwasdonewithtwoowner- managerandtwoaccountantsbydirectinterviewinMay2016.Theauthorselectedtwoowner- managerandtwoaccountantstaffswhohavelong- timeworkingexperience.Askaboutcurrentsituationint h e company,thereasonofunstablerevenu eandprofit,lowROA,lowcashandcashr a t i o

Andthelastqualitativeresearchwasdonewithtwoowner- managersbydirectlyinterviewandonecustomerbyphonecall.Thepurposesoftheseinterviewswe reto indicatethatlatepaymentisthemainprobleminHP.Theaimofthisqualitativeresearchtoexplorepo ssiblethereasonleadtocausethelatepaymentproblemandadvisingthep o s s i b l e solutionsforeffe ctivetradecreditpolicytopreventthisissueinthefuture.

Afteranalyzingthefinancialstatementfrom2012to2015andrecognizedsomenegativenumber,thea uthorconductedsomein- depthinterviewswiththeHP’sDirectorandsomes t a f f s asfollowstodescribetheoverallpicture:

- Mr.Hoanh–SalesManagerandCo-ownerhaveworkedinSalesdepartmentfor7years.

- Ms.Tuyen–ChiefAccountant,haveworkedinAccountingdepartmentfor5years.

- Mr.Hoang–Salesman,haveworkedinSalesdepartmentfor5years.

LookingatFinancialstatement,wecanseethatthesalesdroppedtoomuchinthef o u r recent years.Wouldyoupleasetellusthereasonsofthisdrop?

- Mrs Ngoc: There aremanyreasonscanexplainourcompany’ssaledropinthese recentyears.Itwashardtointroduceandsalesproductrecentyearsbecauseoftheintensecompet it ion.Intensecompetitionintheconstructionindustryreducedourmarketsharea n d profits.Withthew ireandcableproduct,thereare2kindsofuse:householduseand

In the construction industry, builders often prefer well-known brands like CADIVI due to customer trust and the demand for high-quality cable products for safety reasons When alternative cable brands are proposed, customers typically reject them in favor of established names like CADIVI For smaller household projects, which may require tens of millions of cables, contractors usually purchase through dealers who distribute various brands, making it challenging for lesser-known products to compete Although there are occasional small orders under a hundred million from household projects or dealers, these are not consistent In contrast, the large construction segment remains our primary focus; however, the emergence of new brands offering lower prices poses a challenge, as contractors are likely to choose suppliers that help reduce material costs.

Moreover,therewasexistenceoffake,lowqualityproductsinthemarket.Ourcompany’smaximis keepingourmoralityandreputationsothatwedon’tusethatwaytomakegoodprofit.

Inmyopinionthatisaseriousissue,butIthinkthisislikethecommonissueforallfirmsinthisin dustry.AsMrs.Ngocmentionedthateverybodywantstousethehighq u a l i t y cableproductf ortheirsafetysohowcanthelowpricebrandcanaffectourcompanydirectlyinthiscase?

Mr Hoanh highlights that fluctuations in copper prices, which constitute 70-75% of cable components, significantly impact product pricing and sales The recent sharp increase in gold prices has similarly affected copper, complicating cable quotations and competitor pricing predictions Unlike household projects, which are not targeted by the company, large projects often see EPC contractors opting for lower-priced suppliers to reduce material costs, leading to competitive pricing pressure Smaller companies may resort to lowering product quality to survive against larger enterprises that focus on brand investment Additionally, the real estate market's instability, particularly following the 2008 financial crisis, has further diminished demand in the construction sector, contributing to a sharp decline in revenue over the next three years.

Althoughalotofnegativeaffectoftherealestatemarket,thedemandofbuildingapartmentinVietnamhavebeenrising,wecanseeseveralofnewapartmentprojectinbigcitiesinHanoiorHoChiMinhCityandthefigureofnewprojectscontinueto

- Mrs Ngoc : Besides thedropinsales,westillhadtosuffermanykindsofcoststo maintaintheoperationofthecompany.Therearemanycostsforoperatingactivitieslikelaborexpen ditures,depreciation,interestexpenses,wastetheworkingcapitalsininventorygoods,anditishar dertocollectdebts.Ourprofitmarginisquitesmallandv a r i o u s withinanorder,ifthecustomerd elaytopay10%ofthecontract,itbecomeap r o b l e m affectourcompanyadversely.Wehavetopayf orthematerialsupplieralmost1 0 0 % , nowweevendon’thaveenoughmoneytobuymaterialtopro ducefornewc o n t r a c t Wearefacingaverychallengingtrouble,theshortageincashmakeourco m p a n y situationmoreandmoredifficult.

- Ms Tuyen :Mostly,wesupplyproductsforbigprojectssothatwehavetokeepthe competitivepricetocompetewiththeotherbrands.Withthemanufacturerenterprise,therearemany kindofexpensesto maintainthatleadstothecostofgoodssoldishigha n d wemustsellinlargequantitytokeepourprofi tmarginpercentagearound6-

8%,d e s p i t e ofthesmallprofitmarginrate.Whenthesalesfalldown,thenetincomefromsalesal sodeclinebutwiththesamehighamountofoperatingcosts,thenetincomeof2 0 1 3 wasnotenough tocoverallthecosts.Asaresult,thecompanygotlostinthatyear.I n 2014and2015,alsowegainsome profitbutitseemsnotenoughtoreviveourco mp an y situationrightnow.

- Ms Tuyen :Yes,insomecasethatistrue.Althoughwealwaysrequire70% percentdepositforanorder,westilllackofmoneytobuythecoppermaterial.Wetriedtoincreaseca shbythedebtfrombank,itcansavetheshorttermproblembutbythewayr a i s e theinterestratehigh er,thisadditionalcostmakeourprofitmarginalittlelessen.

Sometimes,weexpectwegetsomeprofitafteraproject,butweforgotthatinterestcostisthereanditre movedtheremainedreturn.Weusedtorefusesomeordersbecauseoftheshortageincashtobuyfort hematerial.Occasionally,wehadtodelaypaymentofsalariestoemployee.Furthermore,thesupplie rusedtorequireabout70-

80%depositfora n order,duetothelatepaymentwithsupplier,soforthenextpurchasestheyrequireu stodeposit100%.

In 2007, HP Company was established in a small 600-square-meter factory in Nha Be, Ho Chi Minh City, equipped with outdated machinery and low efficiency In 2008, the company secured a loan of 30 billion VND at a 15% interest rate from Techcombank to invest in a new manufacturing facility As a new entrant in the market, HP Company struggled to attract customers and faced significant sales challenges compared to established brands, leading to a decision to lower prices with profit margins not exceeding 8% Despite efforts, the company's revenue and post-tax profit in 2008 were insufficient to cover manufacturing costs and interest payments, exacerbated by high interest rates that affected the Vietnamese economy Between 2008 and 2013, interest rates occasionally soared to 22% annually, making profitability elusive for many businesses, and resulting in over 20% of companies closing their doors by 2010.

2012,wecontinuedtogrowandin2012,theco m p a n y launchedthenewfacilityinBinhDuongprov ince,TanDongHiepBindustrialz o n e Thevalueofnewfactorycostmorethan60.000.000.000V NĐ.30%oftotalamountisfromHPcompanyand70%isfromDaiTinBankwiththeinterestrateis 22%.W h y didyoudecidetoexpandthefactoryevenitneedsabigamountofmoneytoinvestin

Mrs Ngoc emphasized the critical importance of the new factory plan for the company's survival, as the old facility failed to meet construction standards The manufacturing sector faced a staggering interest rate of 22%, which led to a financial crisis in 2014, preventing the company from making bank payments Despite being in the market for seven years and having key customers and projects, they could not halt production during this tumultuous period, especially as many companies declared bankruptcy In response, the government implemented a debt moratorium for businesses, from which HP benefited, and they are currently negotiating to reduce their debt and lower the interest rate to 10% annually The period from 2008 to 2014 was particularly challenging for Vietnam's banking industry, with numerous banks closing or merging with larger institutions.

Baseonthefinancialstatement,itcanbeseenthatthecashlevelofourcompanyisv e r y low,a lthoughwestillearnedprofitinthelast2years,canyouexplainforthisissue?

Ms Tuyen highlighted that our company's cash flow is significantly impacted by high accounts receivable, which is a critical issue we need to address The correlation between high accounts receivable and low cash flow is evident, and small profit margins further exacerbate our financial situation We often struggle to cover risks associated with payment delays and unexpected emergencies, leading to instances of negative profit Additionally, we lack sufficient funds to purchase copper materials for our warehouse Our supplier requires advance payment before delivery, so we rely on customer deposits, typically 70% of the contract, to finance these purchases This lack of inventory places us in a vulnerable position, especially when copper prices fluctuate dramatically.

- Ms Tuyen: According toourcompanypolicy,withthesmallorderlessthan100 million,thepaymentmethodiscashondelivery;withtheorderbiggerthan100million,w e require7 0%percentofthecontractdepositand30%leftmustbepaidbeforedelivery.T h a t isonlytherule;be causeofthecompanyfocusedonlyonconstructionprojects,andw i t h thestateownedEPC,theyalw aysrequiretokeep10-

15%inthecontractafterd e l i v e r y asaruleforinspection.Mostofthempaythedebtsafter4to6mo nths.Somedelaysmorethanayear.Someevengetdefaultinpayment.Wetrytocallthemmanytime sbutitseemsnotveryeffectively.AttheendofeachyearorbeforeTetholidays,wealwayshavetovi siteachcustomerinpersontoclaimthedebt.Though,theamountwer e c e i v e isusuallynotasexpec ted.Thenlargeamountofaccountsreceivablebecamed o u b t f u l debts.

- Mrs Ngoc: The economicsituationalsoaffectstheaffordabilityofcustomer.The realestatewassodarkthoseyears;alotofcustomerswereunabletorepaytheirdebtsontime.Besides ,thereismoreriskyinsellingforconstructionprojects.Theyonlypaytheird e b t whentheyhavealrea dysoldtheirproperty.Anotherreason,thebigfirmslikeCADIVIorCADISUNhaveaveryattractiv ecreditsalesamountforbigproject,theya l l o w s thecustomerpaylaterupto20%amountoftheco ntract,whichwecouldnotofferf o r thecustomereventheychargethecustomeralittlebithigherprice thannormal.

Becausethisisalwaysbigvalueofcontractsowefoundthattherearemanyrisksinkindofpayment.I maginethecontractupto10billionandtheydelayanother2billionin1year,thatreallyaproblemwith ourcashflow.

- Ms Tuyen: One anotherreasonisbecausetheSalesdepartment.Theresomenew customer,whohavenotboughtourproductbeforeandwedonotknowhowreliabilitytheyareorsome entirecustomerssometimesdelayinpayment.TheSaleteamstillallowst h e m topay30%afterdeli veryalthoughtheyknowwemightbeinthebadsituationifwec a n n o t collectthemoney.Andforreal ,thereweresomecaseslikethatalreadyhappeneda n d wecannotcollectthefullamountofcontractsu ntilnow.

- Mr Hoanh:Of course,thesalesdecreasedrecentyears;sellingproductsisharder andharder.Thatmakespressureonussowehavetotrymoretoattractcustomersandincreasetherev enue.Wedon’thavechoiceandwecannotsay“No”withourcustomer.F o r surewealwayspropo seastherulethat70%depositand30%beforedelivery.

However,sometimesthecustomerwasverystronglyonnegotiationandwehavetobef l e x i b l e an dtrytodecreasetherisksasmuchaspossible.Nevertheless,theresomecaseo u t ofourexpectation,w ealsohelptheAccountingDepartmenttocollectthedebt,andsometimesitisverydifficult.

- Mrs Ngoc: No Wesetthecreditlimitbasedontheprojectsinformation, relationshipbetween2companyandhistorypurchase.Butinalmostcase,Iandmyh u s b a n d - Mr.Hoanhwilldecidethecreditstandardaswellasthetermforeachcontract.A n d howmuchdisco untratedoyouofferforearlypayment?

- Ms Tuyen: There isnodiscountforearlypaymentforsalesoncredit.Afterthe firstday,customerhastopayallthevalueofthecontract.

- Ms Ngoc: When thereisamaturedebt,IwillasktheAccountingDepartmentto makescallsandsendsrequestpaymentletterstocustomers.Thedebtsarefrequentlypaidp a r t l y and lessthanmyexpectation.

- Ms Ngoc: When settingapurchasingcontract,wealwayswritedownthepenalty interestrateforlate- payment.However,wehaveneverrequiredforthatfine.Itisquitecomplicatetosuesomecompanyan ditwillaffecttherelationship,thepleasureofthee n t i r e customersandalsothereputationofourco mpanyinthefuture.Wejustapplythenormalmethodlikecalls,email,andcometotheiroffice… towhoareunwillingtopaya n d delaythepaymentintoolongtime.Sometimesitisreallyhopelessw henyourcapitalw a s occupiedbyanother,butifyoudonotallowthemtodelay,theywillnotbuyyou rpr oduct.

- Ms Ngoc: When thereisadebtheldintolongperiodandthatcustomerisnot willingtopay,wehavetotakelegalaction.Andweoncehadtosellabadreceivableforacollectingc ompany.Itwasveryexpensive.Thosecompaniesoftentakefrom20%to4 0 % oftheamountofacc ountsreceivablethattheybuy.AsImentioned,thisisthelastc h o i c e becausewhenyoudothisway,yourreputationwillbeharmedintheWireand

- Ms Ngoc: Base onmyexperiences,Ithinktherearemanyreasonmakethe customerdon’twanttopayusontime.WethinkthatbecauseinVietnam,thelawandr e g u l a t o r y aboutlatepaymenthavenotpracticeintherightway.Infact,althoughtherem a n y caseaboutdelayed invoicesfor2or3yearsabovewithabigamountofpayment,thecreditoralsosuethedebtorbutitisav erylongandcomplicatedprocess.Itwillcostal o t oftimeandmoneytotakethemoneyback.Notm entionthatthecontractandallthee v i d e n c e s duringthetransactionareappropriate.Thisisthesa mewithourcases,wed o n ’ t wanttomakeitmorecomplexandcausedifficultiesforthecustomer.

Withtheprofitmargin,yourcompanywillkeepthesameforallcustomersoritd e p e n d s ? Whichandwhowillbeinchargeofcalculatethepriceanddecidethep ro fi t margin,Ithinkthi sisquiteimportantanddifficultprocessifthecopperpricec h a n g e timetotimelikethis.

Tuyen: Of course,thisisoneofthemostimportantprocessestowinacontract.Win heremeanyougotthecontractatanacceptablepricebutwiththeprofitback.Inmycompany,theSale sdepartmentwilldecidethepricetoofferforthecustomer.Inmyo p i n i o n , thesalesdepartmentw orknotveryeffectively.Thisisnotbecausetheyarelazyortheydon’ttry,butthewaytheydoisnothig hefficiency.Theystillusethetraditional

61 waylikepen,paperandthecalculatortocomputetheprice,ittakesalotofwithtimeande f f o r t Byt heway,thecopperpriceisnotconstant,itmakethepricingprocessmoreandmorecomplicated.

- Mr Hoang :No,Idon’t.Thereareonlymybossed,Ms.NgocandMr.Hoanhwho canknowhowtocalculatetheprice,heunderstandaboutthestructureofthecable,howmuchforeach materialincludeinaunitofproductandhewilldecidetheprofitmarginf o r differentkindsofproduct differently.Withthebigprojectaboutmorethan1billion,ittakeshim2-

3daystoconsidertheprice.Sometimesthecustomerscallmanytimestoaskw h e n thepriceisavailab le.Moreover,whenwehavesomemoreorderrequest,itstuckan d hecouldnothandleeverythingon etime

- Mr Hoang :Ihavebeenworkherefor5yearsfromnowbutmydutyisfinding newcustomer,makesuretheproductstandardspecification,contactwithcustomertodelivery.Ialso knowhowtocalculatetheprice,butjustsomekindsofsimpleproducta n d ithavetobeapprovedby mybossesagain.Mybosseswillbemainlyinchargeofdecidingwhichpriceforeachitemis,baseso nthequantityandproductstandards p e c i f i c a t i o n , copperpriceupordown,predictingcompetito rprice,profitm a r g i n …

A l t h o u g h therearemanythingstoconsider,butmybossesjustuseonlythecal cu lato r tocomput etheunitprice,ittakesfluentlyoftime.Imagineifaprojectrequires

30differentkindsofwirecableandwithaverysmallnegligence,hewillmakemistake.T h e mistake willleadtosomeunexpectedlostoccurs,andthetruthisheusedtomistakeni n someitems,butMs.Ng ocrecognizeditandshefixedit.Ifoundoutthatourcompanyp r i c i n g processistoomeagerwithma nualcalculator.Thisresultinmistakesandreallyi n f l u e n c e thecompanyimage,weunluckilylo stafewcustomersbecauseofmistakenintheprice.Idonotwantithappenagain.

- Mr Hoang :Idowanttohelphimbuthedidnotteachmehowtocalculatethe price,hejusthelpedmewiththeproductstandardspecificationwithdifferentuses.Inthisindustry,you don’tneedtoconsultverydetailstocustomerwhichkindsofproducttheys h o u l d you,thecustomerk nowexactlywhattheyneedwithoutyouradvice.

- Mr Hoang :Ialsoobservewhenhecalculatingpriceandaskedhimthesame question.Iassumethatbothofmybossintheoldergeneration.Theyrefertousethetraditionalwayth anthecomputer,heafraidtochangeandlearnnewthing,theycanuset h e computerbuttheyarenots killfulenoughtoprofessionaluseit.

M a y b e itwilltakealongti me tofinishitbutitwilleasierforthelaterorders,itwillsafeyourti mealot.

- Mr Hoanh :Absolutelyitwillbethebestandmostconvenientwayforus,butwith ourproduct,wecannotapplythatway.Irepeatagain,coppermaterialaccountsfor80-

9 0 % ofthecablecomponentssoitplaysaveryvitalroleintheproductandaffectsthep r o d u c t pric eprimarily.Youseetheconsiderableincreaseingoldpriceanditaffectsc o p p e r inthesamedirection Thecopperpricefluctuationmakesusmoredifficulttoc a l c u l a t e thecablequotationandpredict thecompetitorprice.Infact,thecopperpricechang e everysingleday,howcanyoucreateafixedpr icelistinthatcase?So,IfoundthatIhavetousetheoldwaytocomputetheprice.

Whenacustomerrequestforalistofproduct,Ihavetoconsidermanyelementslikehowisthequantity andproductstandardspecificationtheyrequire,copperprice,plasticprice,transportationprice,pa ckagemethods,laborcost,predictingcompetitorprice,profitmargin,…

Itseemstomethatthismethodisneedmoretime,highlyconcentrated,moreeffortsb u t stille asytomistaken.Whydoyoustillyouthisway?

- Mr Hoanh :I’mnotprofessionalwithexcel.Icaneditandformatawordfile,but withexcel,therearetoomanyformulas.I’mafraidifIdothatwayIwillmakealotofmistake.Iaccust omedtheoldway,itisstillbetterandeasierformebutrequiremore timeandthehighlyprecision.

- Mr Hoanh :Youknowthatthesalesmenchangetheirjobquiteoftenandwedon’t wantthemtorevealtoourcompetitors;itcanaffectourcompanywhenwejoinabidtow i n acontra ct.I’minchargeoftrainingaboutthestructureoftheproductandcomputep rice ofsomesimpleprod uct,afterthatIwillcheckthepriceagain;everythingmustu n d e r mycontrolandmyapproval.

Basedontheresearch,the42%ofemployeesarenotreallyfollowthesteponQMSverywell Some ofthemjustonlyfinished9thGradeonVietnamEducationSytem.Theyc a m e tothecompanyfrom nothingandthecompanytrainedthemtobecomethepeoplew h o operatemachinetomaketheactua lproducts.TheyarelesslikelytofollowalltheQ u a l i t y ManagementSystem.

In2015,thereare03casesthatreportedfromthecustomerbecauseofthefraudproducts.T h e feesto coverallthemaintenanceandreplacethefraudproductscostedthecompanyt o o much.Italsoeffecte dtotheprofitofeachSaleContract.

Inmyopinion,HPcompanydoesn’thavereallygoodworkforce.When42%ofthetotalemployeesin companyarelow- educated.Itwillcostthemeveryyeartotrainthemandh e l p themtogaintheexperience.

InVietnamUniversitiesorColleges,therearenomajorinproducingwireandcableproducts.Totr aintheemployees,thecompanyneedtohiresomeSpecialistsfromtheo u t s o u r c e company.Becau seofthetechnology,everyyearthenewmachinesandhigherstandardwillcomeandthefeeishuge withtheSmallIndustrialEnterpriseasHP.

Asyouknow,Vietnamisthedevelopingcountry.Everyyeartherearealotofprojectisb u i l d i n g T heyrequireahugeamountofwireandcableproductsandmanyoftheinvestorsareforeignercompani es.AllthedocumentsrequiredareinEnglish.Withthe9 9 % oftheEmployeesinHPdon’tfluentlyat Englisharetheirverybaddisadvantagesinthemodernbusinessnowadays.

Ineverycompany,theSaleOfficeisveryimportant.ButinHP,Iseethemjusthave03o f f i c e r s Wit hthemarketofnearly100millionpeoplelikeVietnamandthousandsofP r o j e c t s arecoming,thea mountisnotenough.Theyneedmorewell- trainedSaleofficers.Withallofthat,IcanconcludethequalityofemployeesatHPCompanyaffectsto thep r o f i t andthedevelopmentofthecompanywiththosereasonlistedbelow.

Interview with 2representatives from 2 companies,which is HP’scustomers :

Company1:Wehavebeeninthebusinessforaround5years.Ifoundthatthisproductisq u a l i t y and goalongwithreasonableprice.Weneedthelowerpricefortradingpurposes.C o m p a n y 2:Istartedt obuyHPproduct3yearsago.WeuseHPcableproductsforourp r o j e c t construction.

Company1:AsImentionedthatthisbrandhasaverycompetitiveprice,whichisthekeycomponentf ormybusiness.Ihaveavarietyrangeofproductportfolioinelectricalequipment,mycustomerdon’tre quiretoomuchonthefamousbrandname,theybuyin smallquantityforthefixingorreplacingthebrokenelectricalsystem.HPfactoryallowu s toord erinsmallandmediumquantity.

Company2:Itisdependedoneachrequirementofproject’sinvestors:brandname,pricea n d financi alconditionsofthesupplier.Wealwaysofferfrom3-

4differentbrandnamesf o r thesameproductinthebiddingprocess.HPcablewillbechosenwhent heyhavethebestpriceandensuretherequirementbytheproject’sinvestor.

CompanyA:Withtheretailelectricalmarket,thereisnothingchangestoomuch.Myc o m p a n y sa leisquitegoodandelectricalcableisoneofourtradingproducts.

2yearsbefore.Therealestatemarkethasbeenhituprecentyears,butitnotverystableatall.AndIhave tobehonestthat,weneedasuppliertoprovideproductswithverycompetitivepricesandbettercred itt e r m forus.

CompanyA:Idonotknowhowtheothercompaniesare,butwedonotwanttodelaythed e b t Whe nwecollectthefullmoneyfromthecustomer,wepayimmediatelyforthesupplier

CompanyB:Ofcourses,sometimeswehavetodelaytopayforthesupplierscausethep r o j e c t need averybigamounttoinvestin.Therealestatemarketaffectsalotinour budgetandwehavetobeapprovedbythegovernmenttopayforthecreditor.Forexamplewhenaninv estorputhismoneyinabuilding,heexpectstosellthatbuildingandu s e thatinflowcashtopayhisdebt However,ifhecannotsellthebuilding,hehastodel ay thedebt.Inourexperiences,weprioritizefort heimportantoneslikestatedowncompany,overduedebts…

CompanyB:Withaconstructioncompanylikeus,creditsaleisamustforustobuythep r o d u c t and itiswrittenasaruleinthecontract.Incomparisontotheotherscompany,theHPcreditpolicyisalittle notattractiveliketheothers.Weneedmorecreditsalesandlongertimeperiod.

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