Late payment from customer problem in HP company

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business - NGUYEN DIEP PHUOC HOA ID: 22140016 LATE PAYMENT FROM CUSTOMER PROBLEM IN HP COMPANY MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR NGUYEN PHONG NGUYEN Ho Chi Minh City – December 2016 ACKNOWLEDGEMENT First, this thesis cannot be finished without the kind support of many people I would like to express my deepest gratitude to all of them; especially, my parent, for their love and unconditional encouragement Furthermore, I give my appreciation to my advisor, Dr Nguyen Phong Nguyen, for his guidance, imparting his knowledge and expertise my study Special thanks to members of HP Company for cooperating, supporting and providing necessary information to contribute to my thesis Last but not least, warmest thanks to all my classmates who always support and help me to complete this thesis EXECUTIVE SUMMARY Late payment of bill remains a concern for many small and medium enterprises and can put a strain condition on the company’s cash flow, which lead to the inefficiency revenue and profit Late payment was seen as a major contributory factor to small businesses financial distress and failure, which hamper growth and innovation Poor payment practices will reduce company’s overall corporate earnings, hinder abilities to expand and lessen business growth Late payment also has a serious effect on all the small and medium firms, which tend to operate with limited cash flow and put their company survival at risk It is evident that one of the main factors in late payment is the mismanagement of financial activities and passive role assigned to trade credit in organizations This thesis is conducted to indicate the consequences on performance of HP Company from late payment as well as the main reasons caused the late payment Besides that, the thesis aims at finding and advising the possible solutions and practices for effective trade credit policy to prevent this issue in the future CONTENTS CHAPTER 1: INTRODUCTION 1.1 COMPANY BACKGROUND .5 1.2 SITUATION & SYMPTOMS ANALYSIS CHAPTER 2: PROBLEM IDENTIFICATION 11 2.1 SIBLE PROBLEMS 11 2.1.1 The first tentative problem: Intense Competition 11 2.1.2 The second tentative problem: Matetial price fluctuation 13 2.1.3 The third tentative problem: Late payment from customer 16 2.1.4 The central problem: Late payment from customer .20 2.2 LEM JUSTIFICATION 21 2.2.1 Problem definition 21 2.2.2 Justify the existence of problem 21 2.2.3 Justify the importance of problem .27 CHAPTER 3: CAUSE VALIDATION 29 3.1 POTENTIAL CAUSES 29 3.1.1 Potential Cause 1: Credit Policy 29 3.1.2 Potential cause 2: Poor financial management 30 3.1.3 Potential cause 3: Economic situation 31 3.1.4 Potential cause 4: Legal and Regulatory Framework 32 3.2 CAUSE VALIDATION 32 3.2.1 Justify the links between the potential causes and central problem 32 3.3 FINAL CAUSE EFFECT MAP 35 CHAPTER 4: SOLUTION ANALYSIS .36 4.1 SOLUTION - IMPROVE TRADE CREDIT POLICY 36 4.1.2 Setting credit standard 37 4.1.3 Varying credit terms .38 4.1.4 Applying penalties for late payment 39 4.1.5 Put more effort on credit collection 39 4.2 SOLUTION - BANK GUARANTEE .40 4.3 SOLUTION COMPARISON 40 4.4 DESIGNED PLAN 43 4.4.1 Setting credit standard 43 4.4.2 Varying credit terms .44 4.4.3 Applying penalties for late payment 45 4.4.4 Put more effort on credit collection 45 CHAPTER 5: CONCLUSION 47 CHAPTER 6: SUPPORTING INFORMATION 48 6.1 TRANSCRIPT 48 REFERENCES 70 LIST OF TABLES Table 1.2.1 Revenue and profit after tax of HP Table 1.2.2 Cash and current liabilities of HP Table 2.2.2.1 Account Receivable and Total Asset of HP 24 Table 2.2.2.2 Receivables’ ratios of HP 24 LIST OF FIGURES Figure 2.1.2.1 Copper price trend from 2011-2015 15 Figure 2.2.2.1 Receivable turnover ratio of HP and TAYA 25 Figure 2.2.2.2 Day’s sales outstanding of HP and TAYA 26 Figure 2.2.2.3 Aging of HP’s accounts receivable in 2015 26 CHAPTER 1: INTRODUCTION Nowadays, the issue about late payment has been concerned as an important disturbance for small and medium enterprises all over the world Payments, which implies a major problem as monies, is needed to pay for materials, labor… and general overheads expended during the progress of the work Late payment is defined as a payment made to the seller after the due date has passed Howorth et al 3(p308) also addressed the high risk consequences of slow payment that: The impact of slow or no payment can be devastating Slow payment erodes the profitability of the sale or, where profit margins are tight, eliminates it together Uncertainties over the timing of payment make cash-flow management and banking relationships even more difficult Where slow payment progresses to protracted default and bad debt the whole viability and survival of the business can be risk This paper is about the problem of late payment of HP Company and its impacts on the company The first section consider some symptoms and bad outcomes can be observed from different angles in HP Company- a manufacturer of electric wire and cable This is followed by the argument to identify the real core problem and all the debates supported to the issue- late payment from customer Next chapter are the determinants that make the inefficiency in collecting money from the customers of HPC In drawing conclusions the author consider all possible solutions will be suggested for improving the efficiency of company management 1.1 COMPANY BACKGROUND Established in 2006, Hoang Phat Wire & Cable (HP Company) is a trusted company specializes in the manufacturing of wire and cable with different kinds of market such as household uses, professional uses, and other electrical needs All products bearing HP brand must go through extensive and qualified management process to ensure quality and durability Under motto "Take trust - Give quality", HP aims to make sure the products are higher quality than requests to satisfy customer After nearly 10 years operating in the electrical materials market, HP always tries to upgrade the latest technology in order to improve company performance • Full name: Cơng ty TNHH Sản xuất Dây Cáp điện Xây lắp Hồng Phát • English name: HP-Petrocable • Head office: 53 Street 19, Tran Nao, Binh An Ward, District 2, HCMC • Factory: Street No 1, Tan Dong Hiep B Ward, Di An, Binh Duong • Tel/fax: (08) 08 6676 3385 As any other companies, employees or labor force is the top-priority in HP To operating in industrial sector, it requires a labor force with skills so the worker is the primary labor source in HP They applied ISO 9001-2008 QMS, the Quality Management System that authorized by Australia to ensure all the steps from the beginning of the sale contract to the production to minimize the risks Those employees mostly were employed from 2009 Factory Department Number of employee Head of the Factory – Manager Of Manufacturing Vice Manager of Factory – Manager of Product Designing and Inspection Quality Inspection Manager (KCS) HR-Factory Manager Production Accountant Team leader Workers 12 Office Department Number of employee General Director - Owner Vice Director – Sales Manager – Owner Salesman Accountant Office Administrative Office Cable Association, customer will afraid to buy your product However it is still better than losing total of that debt and we rarely use that way Which are the main reasons leads to the late payment from the customer, how you think about this? - Ms Ngoc: Base on my experiences, I think there are many reason make the customer don’t want to pay us on time We think that because in Vietnam, the law and regulatory about late payment have not practice in the right way In fact, although there many case about delayed invoices for or years above with a big amount of payment, the creditor also sue the debtor but it is a very long and complicated process It will cost a lot of time and money to take the money back Not mention that the contract and all the evidences during the transaction are appropriate This is the same with our cases, we don’t want to make it more complex and cause difficulties for the customer With the profit margin, your company will keep the same for all customers or it depends? Which and who will be in charge of calculate the price and decide the profit margin, I think this is quite important and difficult process if the copper price change time to time like this Ms Tuyen: Of course, this is one of the most important processes to win a contract Win here mean you got the contract at an acceptable price but with the profit back In my company, the Sales department will decide the price to offer for the customer In my opinion, the sales department work not very effectively This is not because they are lazy or they don’t try, but the way they is not high efficiency They still use the traditional way like pen, paper and the calculator to compute the price, it takes a lot of with time and effort By the way, the copper price is not constant, it make the pricing process more and more complicated Mr Hoang, as a salesman, can you know how to calculate the price? - Mr Hoang: No, I don’t There are only my bossed, Ms Ngoc and Mr Hoanh who can know how to calculate the price, he understand about the structure of the cable, how much for each material include in a unit of product and he will decide the profit margin for different kinds of product differently With the big project about more than billion, it takes him 2-3 days to consider the price Sometimes the customers call many times to ask when the price is available Moreover, when we have some more order request, it stuck and he could not handle everything one time How you appraise your company pricing process? Could you give me some difficulties when calculating price base on your experiences? - Mr Hoang: I have been work here for years from now but my duty is finding new customer, make sure the product standard specification, contact with customer to delivery I also know how to calculate the price, but just some kinds of simple product and it have to be approved by my bosses again My bosses will be mainly in charge of deciding which price for each item is, bases on the quantity and product standard specification, copper price up or down, predicting competitor price, profit margin… Although there are many things to consider, but my bosses just use only the calculator to compute the unit price, it takes fluently of time Imagine if a project requires 61 30 different kinds of wire cable and with a very small negligence, he will make mistake The mistake will lead to some unexpected lost occurs, and the truth is he used to mistaken in some items, but Ms Ngoc recognized it and she fixed it I found out that our company pricing process is too meager with manual calculator This result in mistakes and really influence the company image, we unluckily lost a few customers because of mistaken in the price I not want it happen again Why don’t you ask him to teach you and for the next time, you can it for yourself - Mr Hoang: I want to help him but he did not teach me how to calculate the price, he just helped me with the product standard specification with different uses In this industry, you don’t need to consult very details to customer which kinds of product they should you, the customer know exactly what they need without your advice The truth is I either feel it quite stress if he assign that duty for me (Laugh) I don’t believe that I will not make any errors Why you think he still in that pricing method, without the support from computer or some modern way? - Mr Hoang: I also observe when he calculating price and asked him the same question I assume that both of my boss in the older generation They refer to use the traditional way than the computer, he afraid to change and learn new thing, they can use the computer but they are not skillful enough to professional use it Why don’t you set up a price list for the entire product? Maybe it will take a long time to finish it but it will easier for the later orders, it will safe your time a lot - Mr Hoanh: Absolutely it will be the best and most convenient way for us, but with our product, we cannot apply that way I repeat again, copper material accounts for 8090% of the cable components so it plays a very vital role in the product and affects the product price primarily You see the considerable increase in gold price and it affects copper in the same direction The copper price fluctuation makes us more difficult to calculate the cable quotation and predict the competitor price In fact, the copper price change every single day, how can you create a fixed price list in that case? So, I found that I have to use the old way to compute the price So you still the manual way to compute the price, it will take a lot of time when the customer need a range of product? - Mr Hoanh: That method is simple to me, and I already use it for many years When a customer request for a list of product, I have to consider many elements like how is the quantity and product standard specification they require, copper price, plastic price, transportation price, package methods, labor cost, predicting competitor price, profit margin,… With the order with the complex and many items, it always takes me 12 or more days to deal with it It seems to me that this method is need more time, highly concentrated, more efforts but still easy to mistaken Why you still you this way? - Mr Hoanh: I’m not professional with excel I can edit and format a word file, but with excel, there are too many formulas I’m afraid if I that way I will make a lot of mistake I accustomed the old way, it is still better and easier for me but require more time and the highly precision 79 Why don’t you instruct your salesmen how to compute the price for each product? - Mr Hoanh: You know that the salesmen change their job quite often and we don’t want them to reveal to our competitors; it can affect our company when we join a bid to win a contract I’m in charge of training about the structure of the product and compute price of some simple product, after that I will check the price again; everything must under my control and my approval Based on the research, the 42% of employees are not really follow the step on QMS very well Some of them just only finished 9th Grade on Vietnam Education Sytem They came to the company from nothing and the company trained them to become the people who operate machine to make the actual products They are less likely to follow all the Quality Management System In 2015, there are 03 cases that reported from the customer because of the fraud products The fees to cover all the maintenance and replace the fraud products costed the company too much It also effected to the profit of each Sale Contract In my opinion, HP company doesn’t have really good workforce When 42% of the total employees in company are low-educated It will cost them every year to train them and help them to gain the experience In Vietnam Universities or Colleges, there are no major in producing wire and cable products To train the employees, the company need to hire some Specialists from the outsource company Because of the technology, every year the new machines and higher standard will come and the fee is huge with the Small Industrial Enterprise as HP As you know, Vietnam is the developing country Every year there are a lot of project is building They require a huge amount of wire and cable products and many of the investors are foreigner companies All the documents required are in English With the 99% of the Employees in HP don’t fluently at English are their very bad disadvantages in the modern business nowadays In every company, the Sale Office is very important But in HP, I see them just have 03 officers With the market of nearly 100 million people like Vietnam and thousands of Projects are coming, the amount is not enough They need more well-trained Sale officers With all of that, I can conclude the quality of employees at HP Company affects to the profit and the development of the company with those reason listed below Interview with representatives from companies, which is HP’s customers: How long have you worked with HP company? What you use HP product for trading or direct use for construction project? Company 1: We have been in the business for around years I found that this product is quality and go along with reasonable price We need the lower price for trading purposes Company 2: I started to buy HP product years ago We use HP cable products for our project construction Why your Company choose this brand? Company 1: As I mentioned that this brand has a very competitive price, which is the key component for my business I have a variety range of product portfolio in electrical equipment, my customer don’t require too much on the famous brand name, they buy in small quantity for the fixing or replacing the broken electrical system HP factory allow us to order in small and medium quantity Company 2: It is depended on each requirement of project’s investors: brand name, price and financial conditions of the supplier We always offer from 3-4 different brand names for the same product in the bidding process HP cable will be chosen when they have the best price and ensure the requirement by the project’s investor How was your business these years? How about your company’s order amount? Any changes? Company A: With the retail electrical market, there is nothing changes too much My company sale is quite good and electrical cable is one of our trading products Company B: Volume of orders now is improving than 1-2 years before The real estate market has been hit up recent years, but it not very stable at all And I have to be honest that, we need a supplier to provide products with very competitive prices and better credit term for us Some of the companies somehow delay their payment after the due date of credit sales Is there any late payment from your company to the suppliers? Would you tell me some reasons for that delay? Company A: I not know how the other companies are, but we not want to delay the debt When we collect the full money from the customer, we pay immediately for the supplier Company B: Of courses, sometimes we have to delay to pay for the suppliers cause the project need a very big amount to invest in The real estate market affects a lot in our budget and we have to be approved by the government to pay for the creditor For example when an investor put his money in a building, he expects to sell that building and use that inflow cash to pay his debt However, if he cannot sell the building, he has to delay the debt In our experiences, we prioritize for the important ones like stated own company, overdue debts… If the company can offer us some discount for early payment, we think that this will be an incentive for us to pay before the debt deadline How you think about the HP company credit sales and policy? Company A: Because our company refer to buy the product in small quantity for the resell purposes, it is OK if we have to pay in advance when delivery Company B: With a construction company like us, credit sale is a must for us to buy the product and it is written as a rule in the contract In comparison to the others company, the HP credit policy is a little not attractive like the others We need more credit sales and longer time period Thank you for your sharing We really appreciate that Income statement of HP Items 2012 Revenue from sales and services 2013 22,381,489,117 2014 2015 18,188,447,455 17,126,725,795 0 Net revenue from sales and services 22,381,489,117 18,188,447,455 17,126,725,795 19,837,389,350 Cost of goods sold 18,039,971,904 16,154,243,069 13,193,369,464 16,420,599,663 Net income from sales and services 4,341,517,213 2,034,204,386 3,933,356,331 3,416,789,687 Revenue from financial activities 2,006,087 841,439 606,746 696,376 1,566,758,056 1,292,800,528 124,000,000 42,406,384 668,701,037 771,669,691 582,896,649 362,044,842 849,621,379 1,110,316,056 1,099,707,181 1,443,156,270 1,258,442,828 -1,139,740,450 2,127,359,247 1,569,878,567 52,000,000 130,737,762 259,177,275 28,505,058 Depreciations Financial expenses Selling expenses Administrative expenses 10 Net income from business activities 11 Other revenues 12 Other expenses 13 Other net income 14 Net before taxes income 15 Tax 16 Net income after taxes - 61,638,434 - 19,837,389,350 - - 52,000,000 69,099,328 259,177,275 28,505,058 1,310,442,828 (1,070,641,122) 2,386,536,522 1,598,383,625 0 0 1,310,442,828 (1,070,641,122) 2,386,536,522 1,598,383,625 Appendix 2: Balance sheet of HP ASSETS A -Current assets I Cash and cash equivalents II Short-term investment III Accounts receivable Accounts receivable from customers Other accounts receivable Allowance for doubtful accounts IV Inventories V Other current assets B Long-term assets Fixed assets Other fixed assets TOTAL ASSETS 2012 29,464,229,289 2013 31,024,913,444 2014 37,275,737,935 2015 41,236,654,648 52,916,303 457,981,525 103,230,790 160,529,332 0 0 15,258,161,311 8,317,583,343 9,685,501,899 12,296,547,332 6,970,973,828 3,168,409,815 3,335,683,427 4,166,934,182 8,287,187,483 5,149,173,528 6,349,818,472 8,129,613,150 0 0 10,758,435,839 13,718,119,094 18,957,179,110 22,035,482,422 3,394,715,836 8,531,229,482 8,529,826,136 6,744,095,562 31,063,105,473 17,734,749,227 17,496,256,637 23,268,148,044 24,943,105,473 6,120,000,000 60,527,334,762 11,614,749,227 6,120,000,000 48,759,662,671 11,376,256,637 6,120,000,000 54,771,994,572 8,593,882,353 14,674,265,691 64,504,802,692 LIABILITIES AND EQUITY A Liabilities I Current liabilities Current liabilities Accounts payable Taxes and payable to state Other current liabilities II Long-term liabilities B - Equity Owner Equity Undistributed earnings TOTAL LIABILITIES 2012 62,028,954,149 2013 51,331,923,180 2014 55,747,781,123 2015 63,974,558,247 62,028,954,149 51,331,923,180 55,747,781,123 63,974,558,247 41,730,931,275 30,901,168,439 29,012,720,042 36,320,779,613 9,454,811,672 13,674,291,924 19,690,891,954 20,344,579,540 0 0 10,843,211,202 6,756,462,817 0 -1,501,619,387 -2,572,260,509 1,699,995,680 1,699,995,680 7,044,169,127 -975,786,551 1,699,995,680 7,309,199,094 530,244,445 1,699,995,680 (3,201,615,067) (4,272,256,189) (2,675,782,231) (1,169,751,235) 60,527,334,762 48,759,662,671 54,771,994,572 64,504,802,692 REFERENCES Wilson N An investigation into payment trends and behaviour in the UK:19972007 [document on the Internet] CMRC Centre; 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