CompanyBackground
THMtradingandconstructionlimitedcompanyisthe1 stlevel agencyofAkzoNobelVietnam.Th eydistributethepaintingproductstotheconstructionprojectsandthe2 ndlevel agenciesinVietnam.
Establishedin1996,THMwasaretailstoresupplyingconstructionmaterialslikeb r i c k , iron,ste el,paint,roller…
THMhasdevelopedstronglyandsteadily.In2002,theT H M retailstorewasdevelopedintoTHMtr adingandconstructionlimitedcompanyw i t h thebusinessfocusbeingpaintingproducts.
Untilnow,theirsupplychaincoversalmostallprovincesintheSouthofVietnam.Theyachievethe highestrevenueinSouthernVietnamformanyyears.In2011,thec o m p a n y reachedthehighestr evenueinbothprojectsandagenciessegmentsinthew h o l e Vietnammarket.Belowissomebasi cinformationofthecompany.
Office:299TanKyTanQuyStreet,TanSonNhiWard,TanPhuDistrict,HCMC
Accounting department Warehouse department Sales department
Warehouse:259TanKyTanQuyStreet,TanSonNhiWard,TanPhuDistrict,HCM C
Companystructure:1generaldirector,1chefaccountant,1warehousemanager,1saleleadera nd20staffs.
Situationalanalysis
BeforeconductinginterviewswithTHM’smembers,Company’sannualreportsarep r o v i d e d Havingaglanceatfinancialdocumentsrevealsthebasicsofthecompany’ssituationatthattime.Themostnoticeableinformationisthesignificantdecreaseintotalrevenueandtheprofitdurin gtheperiodof4years.Thecompanyevenmadelossesin2013and2014.
In2011,thereturnratesofTHMCwereveryhighincomparisontotheratesofconstructionmat erialsindustry.Especially,returnonequity(ROE)wasover45%.H o w e v e r , inthenext3years, ROAandROEofthefirmwasdecreaseddramatically.I n 2014,althoughtheindustryROAandR OEratiorecoveredandincreasedto3%and10%,respectively,THM’sratioscontinuedfalling.
IncomparisontoNamPhongCompanywhichisanothersupplierofAkzoNobel’sproducts,th edataalsoindicatesthepooroutcomefromTHM.Duringtheperiodof3yearsfrom2012to2014,N amPhong’sreturnratesincreasedtotheveryhighpoint.
ThecomparisonswiththeindustryandNamPhong,itcanbeeasilynoticedpointouttheineffectiv einworkingofTHMinthelast4years.Thefiguresbelowwillshowthed e t a i l s
ConductinginterviewswithmembersofTHM,theyrevealmanyissueswhichhavei n f l u e n c e s onthecompany’sperformanceandaccountsreceivableisoneofthemostchallengingtroublesin recentyears.AccordingtoMrs.Nguyet,thedirectorofTHM,“ t h e r e istoomuchcapitaltiedup intheaccountreceivables”.
Throughthefinancialstatement,itcanbenoticedthattherewereconsiderabledropsina c c o u n t s receivableamountduringtheperiodfrom2011to2014.However,thisdecreaseswerenotduetot heefficientaccountsreceivablemanagementbutthelarger e d u c t i o n ofrevenue.Thedecreases peedofaccountsreceivableisevenlowerthansaleswhichindicatesthatthecredittermsaremorel enient(Cheng&Pike,2003).In4years,thesalesfeltdownover68%whileamountofaccountsrece ivableonlyd e c r e a s e s lessthanahalf.
Therearemanyfactorsaffectingthelevelofreceivable,buttheamountofcreditsalesh a v e directinf luenceonthisaccounts(Subramanyam&Wild,2009).Thetablebelowshowsthevolumeofcredits alesandpercentageofaccountsreceivableonthecreditsales.
During4years,althoughthevolumeofsalesoncreditdecreasesharply,thepercentageo f accounts receivableontotalsalesoncreditclimbedupfrom23%andremainatas i g n i f i c a n t highlevelof 47%in2014.Thedecreasespeedofaccountsreceivableisalsoslowerthancreditsales.
Over4years,bothtwoaccountsreceivableratiostendedtodeteriorate.Receivablesturnoverratiod ecreasedsubstantiallyfrom4.32to2.1andthenumberofdayssaleso u t s t a n d i n g increasedt oover5monthsin2014.Themeaningofreceivablesturnoverratioismeasurethenumberoftimesa ccountsreceivablewerecollectedduringtheyeara n d howefficientlyacompanyusestheworking capital(Subramanyam&Wild,2011).T h e decreaseinaccountreceivableturnovershowsthatthec ompanywasnotsuccessfulinmanagingtheaccountandittookmoretimetoturnaccountreceivabl eintocash.Thisisasignalofthefactthatthecompanyishavingdifficultiesincollectingsalesmad eoncredit.ThenumberconfirmstheperspectiveofMs.Nhi,whow o r k s inFinance– accountingdepartment.Shesaidthat“thespeedofcollectingreceivablesinTHMkeptdeclining”;
“customersdelayedtheirdebtsforlongertime”a n d itmakes“anamountofworkingcapitallocke dupinthisaccountforlongtime”.Inotherwords,thereweremoredelinquentcustomersandalsothe costsofholdingreceivablesforalongerperiodoftime.
NamPhong,T H M ’ s ratiosareworst.WhileNamPhonghadratiosbeingnearbytheindustry,th erew a s asignificantgapbetweenTHM’sturnoverandtheothers.Thatisasignaloftheineffecti veaccountsreceivablemanagement.Thatmeansthecompanyishavingtroublesincollectingacc ountsreceivableandthecustomersholdalargenumberofw o r k i n g capitalintoolongperiod. TheliquidityofTHMaccountsreceivableandthespeedthatreceivablesareconvertedintocashisl ow.
Intheinterview,MissNhi,whoworksinfinancial– accountingdepartment,revealedthat“manycustomersdelaytheirpaymentforlongtime.Itisabo ut4-
6months,even1y e a r Moreover,someofthemdefaultinpayment”.Fromtheprovidedaccountsr eceivablelegersattheendof2014,theaccountsreceivableofTHMcanbedividedinto6levels.Thepiechartbelowindicatespercentageofeachelementinaccountsr e c e i v a b l e in2014.
0-45days 45days-3months 3months-6months 6months-12months 1year-2years over2year-considerasdefault
Itcanbeeasilyseethatdatafromaccountingdocumentsreflectsproperlytheresultsofd i r e c t inte rviews.Attheendof2014,themostpercentageoftotalreceivablesconcentrat es in3to6months accountsreceivablewhichisoverduefor1.5-
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 lastedmorethan45daysareoverduedebts.In2014,thereisonly18%ofr eceiv ab le beingin maturityandoverduedebtoccupied82%ofaccountsreceivableamount.Thislargenumberindicat esthataccountsreceivablemanagementofTHMisn o t effective.
Fromthesymptomof“highaccountsreceivable”,literatureaswellastheevidencefromthein-depthinterview,therearesometentativeproblemsthatthecompanyisf a c i n g
Thefirsttentativeproblem:Tradecreditpolicy
OneofseriousreasonsforineffectiveaccountsreceivablemanagementinTHMcomesfro m thec ompanytradecreditpolicy.T r a d e creditisconsideredasareplacementtoo f f e r i n g aninterest- freeloantocustomerwhencomparingwithborrowingmoneyfroma financialinstitutiontomaketh epurchase(Cheng&Pike,2003).AsrecommendedbyBrighamandEhrhardt(2013),acreditpoli cyshouldincludethecreditstandards,thec r e d i t period,thediscountforearlypaymentandthecoll ectionpolicy.Thedecreasespeedofaccountsreceivableislowerthansaleswhichindicatesthatth ecreditpolicyofT H M istoolenient(Cheng&Pike,2003).Theadvantagesofthisapproachareth eattractionforcustomersandtheincreaseinsalesduetohighaccountsreceivables.
However,ithasseveraldrawbacks,whicharehighercostsandriskofdefaultpaymentduetousin glargeamountoftradecredit(Garcia-TernuelandMartinez-Solano,2008).
Thus,THMgrantsdifferentcreditsalesamountfordifferentcustomer”.Withoutac r e d i t stan dardorcheckingontheirfinancialcapacity,“thecompanymainlybasedon thedesignplansoftheprojectsthatthecustomersprovidetoofferthelimitofsalesonc r e d i t Thelimitisabout10%ofthetotalamountthatcustomersaregoingtospendforp a i n t i n g produc tsinthewholeprojects”.Thecompanywillstopsupplyingtothecustomerwhohavenotpaytheiro nduedebtsorwhentheirdebtsexceedsthecreditlimit.InTHMcreditpolicy,thereisnocredittermt oassessthecustomers.Theyofferc r e d i t limitmainlybasedontheinformationofproject.Thisle nientcreditpolicycana t t r a c t customerbutalsoleadstothedelinquencyinpaymentsduetothe weakfinanceo f customers.
Ms Nhisa stated that "THM applies a credit period of 45 days for all customers without differentiating the size of contracts." Once all products in a contract are delivered, customers have 45 days to make the full payment, indicating a rigid credit policy The duration of the credit period is directly linked to the product price (Cheng & Pike, 2003), meaning that the longer customers delay payment, the lower the product price becomes Consequently, customers with the ability to pay often wait until the last day of the credit period Additionally, allowing customers to hold payments for an extended time poses risks, as their financial situation may change, particularly for those with significant credit sales who may struggle to meet their obligations (Teng & Lou, 2012).
Ms.Nhialsorevealthattoenhancerevenueoncash,thecompany“offers2%discountforimmedi atepaymentpurchases”.However,“thereisnodiscountforearlypayment forsalesoncredit”.Thediscountnotonlyattractscustomerswhoconsiderittobeap r i c e deduct ionbutalsoluresthemtorepaysoonertogetpricededuction(Brigham&E h r h a r d t , 2013).The refore,nodiscountmeansthereisnoencouragementforcustomerstorepayearlysotheyoftendela ythepaymentuntilthelastdayofcreditp e r i o d
THM struggles with effective debt collection, as evidenced by their reliance on calls and payment request letters, which often result in only partial payments Mrs Nguyen notes that these methods lack the necessary pressure to prompt immediate repayment, leading to delayed receivables Although the company’s purchasing contracts outline collection policies and penalties for late payments, they are seldom enforced Mrs Nguyen believes that strict enforcement could harm customer relationships and satisfaction, which is why they reserve these measures for customers who are consistently unwilling to pay or significantly delay payments This leniency in their collection policy ultimately encourages customers to postpone payments, contributing to prolonged days sales outstanding.
Thesecondtentativeproblem:Ineffectivecoordination
Ms.Nhiwhocurrentlyworksatfinance– accountingdepartmentsaidthat“thereisac o n f l i ct betweenfinancedepartmentandsalesdepar tment.Thesalesmen’sdonot botherthecustomer’screditworthywhensellingproducts.Attheend,we–thefinance
– accountingdepartmenthavetodealwiththelargeamountofbaddebt”.Mr.Haialsor e v e a l e d t hatinTHMC,“themainincomeofsalesmeniscomefromthecommissionoftheirrevenuesoldin thatmonth.Thereforeweoftenaremotivatedtosellasmanyp r o d u c t s aspossible”.Generall yspeaking,theconflictincommunicationandworkingp e r s p e c t i v e betweensalesdepartment andfinancedepartmentisoneofthereasonsforineffectiveaccountsreceivablemanagement.
Theoretically,BurezandVandenpoel(2008)indicatedthatthecreditandfinancedepartmentconsi dercustomer’screditworthyasthemostimportantconditionwheno f f e r creditcontract.Theydo notwantthecompany’sworkingcapitaltiedupintheo v e r d u e debtsorloosemoneyforuncollect abledebts.Incontrast,thesalesdepartmentw a n t s thetotalrevenuebeingashighaspossiblewheth erthecustomeriscreditworthyo rnot.InTHMC,thisproblemwashappeningduringtheperiodof4 recentyears.
Moreover,thetotalrevenueofthecompanywasdropconsiderablywhichputmorep r e s s u r e onthesalesdepartment.Inordertomeetthegoalsofsales,thesalespeopletriedtosignmorecontra ctsandsellmoreproductswithoutcarefullyconsideringcustomer’sinformationorcreditworthy. Consequently,thefinancedepartmenthastod e a l withthehighamountofdelinquencyandbaddebt s.
&Vandenpoel,2008).However,becauseoftheineffectivecredit policyofthecompany,salesmenprimarilyfocusonincreasingrevenueandaccomplishtheirtasks.Therefore,thesalesdepartmentmightmeettheirgoals,theriskandcostsa l s o increasedandtheacc ountsreceivableratiowasdeterioratingduringtheperiod.
Thethirdtentativeproblem:Externaleffects
In 2012, Mrs Nguyet noted that AkzoNobel Vietnam designated THM as a specialized project distributor, leading to a halt in supply for second-level agencies to focus solely on construction projects This strategic shift resulted in a significant decline in revenue and profit over the next three years Ms Nhi explained that the decision to stop supplying second agencies left many customers unwilling to settle previous orders, creating substantial accounts receivable that turned into doubtful debts.
Solano,2008).Underdeterioratingeconomicconditions,firms’capacityo f generatecashfromt heiroperationsreduce.Theremayraiseanalternativeind e b t o r s ’ financialpositionaftercreditis granted.Consequently,somecustomerswereu n a b l e torepaytheirdebtsontimeandtheydela yedtheirpaymentmakesthenumbero fdaysreceivableofthecompanyincrease.Besides,thereis moreriskyinsellingforc o n s t r u c t i o n projects.Theyoftenholdtheirpayableamountlonger becausetheircash flowsdependonthemarketandeconomicsituation.“Theyonlypaytheirdebtwhentheyhavealr eadysoldtheirproperty”,Mrs.Nguyetsaid.
Therealcoreproblem: Tracecreditpolicy
Fromtheaboveanalysis,literaturereviewsandtheinterviewresult,thecoreproblemf o r theineffici encyinaccountsreceivablecomesfromthetradecreditpolicy.Thetradecreditpolicyisaguideline forcompanytograntorrejectcredittoacustomer.Ita f f e c t s directlyontheaccountsreceivable managementincompany(Gupta&Gupta,2 0 1 5 ) Thus,anineffectivepolicybringsmanymistak esinmakingdecisioningrantingc r e d i t
Becauseofthelessstringentpolicy,therewasnoclearruleforalldepartmentstofollowingrantin gandsolvingtradecredit.Thisisalsothecausefortheinconsistencya m o n g departments.Besides,theexternalfactorscannotbecontrolledbythecompany.Therefore,themostimportantissuefor receivablesmanagementisthetradecreditpolicy.
Economic fluctuation Inefficiency accountsrec eivable discount creditperiod standard
Accountsreceivableareassetsthathavetobefinancedatsomecapitalcosts.Therearealsoexisted someriskandcostsfortheformofcreditandcollectionefforts.Fromthatp o i n t ofview,reducing volumeofaccountsreceivableanddayssalesoutstandingmakethedeductioninthesecosts.Asstr ongsignificantrelationshipbetweenworkingcapitala n d profitability,thecompanycanimpro vetheirperformancebyfocusingonreducinginvestmentinworkingcapitalandimprovingworking capitalefficiency.THMCcanc r e a t e positiveprofitbytightenmanagementofaccountsreceivabl eandreducingthenumberofdayssalesoutstandingandamountofaccountsreceivables(Knauer& Wửhrmann,2013).
Itshouldbenoted,however,thatminimizingthisaccountisnotalwaysthemostr a t i on a l option; insteaditshouldbeactivelyoptimizedandmanagedaccordingtocontextualfactors.Theoptimal amountofaccountreceivablesisthepointatthetrade- o f f betweenthesecuringofsalesandprofitsandtheamountofalthecostsoftheincreasingaccou ntreceivables(Berry&Jarvis,2006,Nazir&Afza,2009;Hill,Wayne
&Highfield,2010).Whendetermineaccountsreceivablemanagement,companyhastoconsider bothsidesandtrytofindtherightbalancebetweenriskandreturn.However,b e c a u s e ofthelimite dofinformationanddata,findingtheaccurateoptimallevelforT H M caseisrequiredafurtherdee presearch.Thereasonablelevelofworkingcapital mayalsodependontheratiosofconstructionmaterialindustryinwhichthecompanyo p e r a t e s Therefore,THMshouldkeepthereceivableturnoverratioandthedayssaleso u t s t a n d i n g att hesamelevelwiththeindustry.
Alternative1-Changetradecreditpolicy
A trade credit policy serves as a guideline for companies to determine whether to grant or reject credit to customers, significantly impacting accounts receivable management (Gupta & Gupta, 2015) Changes in credit policy can affect the volume of credit sales invested in receivables (Omolumo, 2003) For THM, the primary issue in accounts receivable management stems from a lenient and unclear trade credit policy To address this, revising the credit policy is essential A clear and efficient credit policy can limit bad debt costs and enhance cash flow (Ojeka, 2011) Additionally, it fosters consistency across departments, mitigating biases in offering trade credit to customers Establishing a clear policy ensures a standardized approach to customer interactions and decision-making, promoting fairness and improving customer relations Therefore, developing a clear trade credit policy is crucial for THM, presenting an opportunity to enhance accounts receivable management and overall organizational efficiency As suggested by Brigham and Ehrhardt (2013), an effective credit policy should outline credit standards, credit periods, early payment discounts, and collection procedures.
Setting creditstandard :Thecreditstandardisascaleforcompanytocategorizetheircustomersto offerthecreditlimitandthecreditterm.Thelimitsofcreditgranttocustomersdirectlyrelatetothe amountofinvestmentinreceivables.Agenerouscreditstandardcanattractmorebuyersandpush upsales.However,investmentinr e c e i v a b l e s willbeexpandedalongwithmanycosts.Con trary,thestrictcreditstandardscanreduceinvestmentinaccountsreceivable,savecompanyfro mbaddebtlossesandtheassociatedcosts.Butitalsoresultsindepressingsalesandprofit.
Setting credit terms involves establishing a discount percentage on the selling price for early payments, the number of days qualifying for early payment, and the overall credit period Companies can differentiate their selling prices through credit periods and payment discounts, which can be perceived as price reductions (Brennan, Maksimovic & Zechner, 1998) Offering discounts encourages customers to settle their debts before the credit period expires, benefiting buyers with payment incentives and sellers through quicker debt collection Discounts not only attract customers who view them as price reductions but also reduce the days accounts receivable remain outstanding (Brigham & Ehrhardt, 2013) To take advantage of these benefits, customers are likely to repay within the discount terms Therefore, instead of a flat discount, THM should implement a discount rate for early payments, enhancing customer attraction and accelerating cash flow.
Inaddition,varyingthecreditperiodcanmakethedifferenceandtheflexibilityinthep r o d u c t price(Cheng&Pike,2003).Inthecreditpolicy,THMonlyofferaperiodof4 5 daysforallcustom ers.Itisnotflexibleandefficient.ThereforeTHMshouldoffertheperiodbasedonthesizeofthep urchasecontract.
Setting penalties for late payment: The penaltyisoneofthepressuresforthecustomert o paytheir debtsontime.Withnolate- paymentpenalty,thecustomersofTHMaree n c o u r a g e d todelaytheirpayment.Thus,THM Cshouldfixthepenaltyrateinp u r c h a s e contractsandalsoclaimforthatfinewheneverthecusto mergetlateinpayment.
Put more effort oncollectingcredit: There isafactthatcallingandsendinglettersaren o t enoughpr essureforcustomertopaytheirdebt.THMshouldputmorec o n c e n t r a t i o n oncollectingthere ceivable.Emphasizingpromptnessand systematizationincollectionpolicywillhaveapsychologicaleffectonthecustomersa n d maket hemremembertheirobligation.
However,changingpolicyalsobringssomeimpactstothecompany.Ifwechoosetotightenthecre ditpolicythatwegranttothecustomers,atsomepointtherewillbed e c r e a s e insalesanditma yharmthecustomerrelation.(Molina&Preve,2009).
- Tighteningcreditpolicymakesthereduction inlevelsofaccountreceivables,alongwiththe decreaseintherelatedco sts Theriskstakenb yafirmisalsolow.
- Itcanalsoimprovetheefficiencyandcons istencyincoordinationamongd ep art m en t s.
- Itbringstheconsistencyinapproachingcusto mersandmakingdecisioniseasier,b as e d on acreditstandard.
- Thedisadvantagesofthisapproacharemai nlythereductionofsales,goodwillandpro fitduetothelackoftradeextensiontocustom ers.
Alternative2 -Bankguarantee
To reduce the risk of default, THM should require customers to sign bank guarantee contracts, which serve as a commitment from lending institutions to meet the debtor's obligations In cases where the debtor is unable to pay, the bank will cover the debt, effectively transferring the default risk to the bank (Knezević & Lukić, 2012) This method is legally and economically more secure than other security instruments, offering full protection for accounts receivable against contract performance failures Given the high value of purchasing contracts in construction projects, THM can manage risks more effectively through bank guarantees compared to conventional credit financing Additionally, banks will establish credit limits based on customer information and creditworthiness, streamlining the trade credit process for THM (Vlasák, 2013).
Inreality,thebankguaranteeisaformallegalactivityanditisdemonstratedinwrittenform.Itinclu destheclearobligationsandrightsofthethreeparties.Thebankwillr e q u i r e thebuyerandsellert ofulfilltheformwithallimportantelementsagreeduponw h en concludingtheprimarycontract(K nezević&Lukić,2012).Itcanbringthe inconveniencetothecustomerandleadtothediscomfortanddispleasure.Theymaythinkthatth eyarenottrustedanditcanharmthecustomerrelations.
- Beingrequiredtosignbankguaranteecontr act,customerwillfeelnotbeingtrusted.Itwil lharmcustomer’srelation.
Alternative3-Factoringaccountsreceivable
Factoringisafinancialserviceenablingenterprisestoraiseshort- termcapitalbysellingtheiraccountsreceivabletoafactoringcompanyinexchangeforcashatad i s c o u n t (James,1989).Whencompanyfaceswithadistressinfinance,itmayseekf i n a n c i n g f romathirdparty,forinstanceabank.Factoringcanbringsuitablesolutionf o r shorttermfinancing incashflowandalsodecreasetheamountofaccountsr ec ei v ab l e (Summers&Wilson,2000).
Therearetwotypeoffactoring:recoursefactoringandnonrecoursefactoring.Theformerprovide short- termfinancingtocompanyandusetheiraccountsreceivableascollateral.Itallowsthefactoringco mpanytoclaimpaymentdirectlyfromtheclientifthecustomerdefaultsonpayment(Soufani,2 002).Ontheotherhand,thenonrecoursef a c t o r i n g providesfullinsuranceofpotentialba ddebts.Thefactoringcompanywillco v e r alltheamountofreceivableifthecustomerisunablet orepaytheirdebts(Hartmann-
Wendels&Stửter,n.d.).Withthismethod,thecompanycannotonlyt r a n s f e r risksandcosts associatedwithreceivablesbutitalsoincreasesfreecashforth ecompanytoinvestinotherbetter assets.
However,thissolutionalsomakesdeductionintheprofitabilityduetothecostsofcommission sorinterestrate.Factoringisapossibleoptiontoreduceamountofaccountsreceivable.Howeve r,beforemakingdecisiontopurchaseanaccountsr e c e i v a b l e , thebankwillconsiderscareful lyalltheelementswhichinfluencetheq u a l i t y ofaccountsreceivablesuchascompany'ssize,typ eofproductitoffers,f i n a n c i a l statement,industry,age,typeofcustomers,themanagement,coll ectabilitya n d creditnotes(Soufani,2002).Thus,onlyhighqualityaccountsreceivableamountc a n befactoredbyabankandthelowqualityoneisstillexistintheaccount.Thissolutioncanonlys olvethecashshortage.
Inreality,therearesomefactoringcompanieswhichallowbuyinglowqualityaccountsr e c e i v a b l e s Evenso,thefeeforthisserviceisquitehigh.Mrs.Nguyetrevealsthat
“theyoftentakefrom20%to40%oftheamountofaccountsreceivable”.Thisoptionc a n beexpe nsive.However,thecompanyatleastcanreducetheamountofaccountsreceivableandespecia llyminimizetheoutrightlosses(Brigham&Ehrhardt,2013).
- Thissolutionmakesdeductioninthepro fit ability duetothehighcostsoffacto ringprice.
Selectionofsolutions
Basedo n t h e o r y a n d i n f o r m a t i o n c o l l e c t e d i n t h e i n t e r v i e w , t h e r e a r e l i s t e d t h r e e possiblea l t e r n a t i v e s A l l o f t h e m w o u l d a f f e c t t h e amounta n d r a t i o o f a c c o u n t s receivable.However,notallofthemcanbeapplya ndfitwiththerealityoftheTHMCompany.Thosealternativesare:
Thealternative1isthemostprioritybecausethetradecreditpolicyisthemaincorep r o b l e m inac countsreceivablemanagementofTHM.Creditpolicyisthemostimportantinstrumentofmanagi ngandregulatingreceivables(Ojeka,2011).Thereforesettinganeffectiveandreasonablecreditpo licycanenhancetheefficiencyofaccountsr e c e i v a b l e aswellastheentirecompany’sactivitie s.Workingunderaclearrulealsoimprovestheworkingeffectivenessandthecorporationamongt hedepartment.Besidessettingapolicy,thealternative2isapossiblesolutiontosecuretheaccount sr e c e i v a b l e Itwillgivefullprotectionforaccountsreceivable,reduceriskofdelinquencya nddefault.Infact,THMhaveusedthismethodinthisyearanditbringsas i g n i f i c a n t improvem entinthereceivablemanagement.
Forthealternative3,thehighqualityaccountsreceivableamountcanbefactorede a s i l y butthelo wqualityoneisstillexistintheaccount.Thissolutioncanonlysolvethecashshortageandshort- termfinancialissue.Besides,inTHMaccountsreceivable,only18%ofamountishighqualityacco unt.Ifthecompanychosetoselllowqualitya c c o u n t , itwillbereallycostlyandharmtheprofitab ilityandperformance.Therefore,inthesituationofTHM,thealternative1and2issuitableandap propriate.
Asthealternative1,thecreditpolicyofTHMhastobemadeclearerandtighter.However,ifwere ducereceivablestoomuchwithanoverlyrestrictivecreditpolicy,thereductionadverselyimpacts salesandprofitability.Receivablesmust,therefore,bee f f e c t i v e l y managed.Asrecom mendedbyBrighamandEhrhardt(2013),aclearcreditp o l i c y shouldincludethecreditstandards ,thecreditperiod,thediscountforearlypaymentandthecollectionpolicy.
Acreditstandardhelpsthecompanytocategorizethecustomeranddeterminetheappropriatecredi tlimit.Grantingtradecreditneedstodependonthecreditworthinesso f thecustomeranditsfinanci alcapacitytoestablishlimitsintermsofamountandtime(MianandSmith,1992).Somol,Baessen s,PudilandVanthienen(2005)namedc r e d i t historyasoneofthemostimportantvariablesforcla ssificationofcreditscoring.
Theimperfectinformationleadstotheuncertaintyaboutthebuyerdefaultrisk.THMc a n checkthe customer’stransactionswiththecompanyinthepastandtheagingreceivableofeachcustomerto evaluatethecreditworthiness.Forthenewcustomer,
THM should prioritize careful collection of customer information to enhance credit assessment This can involve contacting suppliers to gather insights on customer payment behavior and reviewing financial reports alongside inquiries to banks regarding credit lines Additionally, requesting mortgages, collateral, or deposits from new customers during contract signing can further evaluate their creditworthiness Utilizing the 5Cs model of credit—character, capacity, collateral, capital, and condition—will allow THM to better understand potential borrowers and improve loan performance (Edward, 1997).
Offering a discount for early payment, such as a "1/15 net 45" term, can encourage customers to settle their debts sooner This arrangement allows customers to receive a 1% discount if they pay within 15 days, while providing a 45-day window for full payment From the customer's viewpoint, the first 15 days act as a free credit period, with subsequent days becoming more costly The early payment discount effectively represents a 1% interest rate for 30 days, translating to an annual equivalent rate of approximately 12%, which is higher than typical bank loan rates Consequently, customers are incentivized to pay early to take advantage of the discount, leading to a reduction in the average collection period and decreased investment in receivables.
Whengrantingcredit,THMonlyappliesaperiodof45daysforallcustomers.Itisnotf l ex i b l e an defficient.THMshouldoffertheperiodbasedonthesizeofthepurchaseco ntr act Forexample, theycanuse30dayscreditperiodforthelowquantitycontractsa n d 45daysforhighones.Besides, thecompanyalsoshouldapply10-15daysforthee a r l y paymentdiscount.
Inthisthesis,Igiveout2examplesofcreditterm:1/10net30and1.5/15net45.According toFerri s(1981),whengrantingtradecredit,netpresentvalueoftherevenuewith tradecredithavetobeisgr eaterthanthenetpresentvaluewithoutit.Iassumethattheaverageinterestratefrombanksisappro ximately7.5%andthecustomerswillp a y allthedebtattheendofdiscountperiodorthecreditperi od.Thenthepresentvalueofreceivableis:
Asindicatedinthetables,bothcredittermshavethenetpresentvalueoftherevenuew it h tradecredi thigherthanthecashpayment.Hence,bothofthemaresuitablefor
Whensigningatradecreditcontract,thecompanyshouldmakesureithasclearlystipulatedthedue date,methodofpaymentandlate-paymentpenalties.Withnolate- paymentpenalty,thecustomersareencouragedtodelaytheirpayment.Thus,THMC shouldfixthepenaltyrateinpurchasecontractsandalsoclaimforthatfine.Thep e n a l t y rates houldbehigherthanthemarketratetoforcethecustomertobepunctual.F o r instance,THMcana pply10-15%/yearonthelateamount.
Put more effort on collectingcredit
THMshouldkeepthecustomersalertintheirobligationofpromptpaymentsbysendingpolitelett erswhenduedateisnear,makingphonecallsorevenapersonalvisittocustomersaroundduedat e.Iftheaccountsareremainedunpaid,legalactionsshouldb e inprocess.However,companysh ouldconsiderfinancialpositionofdebtorsbeforeu s i n g legalactions.Becauseitmaycausebankr uptcytocustomerswhoarefacingseriousfinancialproblemsanditalsoreducesthechanceofcoll ectingpayment(Gupta
Theotherenforceabilityfromsuppliersisthattheycanthreatentostopsupplyinggoodst otheircust omers.Findinganewsupplieriscostlysothatcustomershavetopaybacktheirdebtsbeforetheyrec eivecontinuingsupply(Cuủat,2007).Inreality,althoughAkzoNobelVietnamhasanumerousofa gencies,THMCisoneofonlythreecompanieswhoareauthorizedtodistributetheirpaintingproduc tstolargeconstructionp r o j e c t s inHCMC.Moreover,thereisacloseconnectionbetweenAkzo Nobelanditsag en cies Itcomestothefactthatitisdifficultforbuyerswhodefaultonpaymenttof i n d anothersupplier.THMcanputapressureonthosecustomersandstopsupplyinguntilreceivet heiraccountsreceivable.
Accordingto(Ojeka,2011)effectivecreditpolicybenefitsbothaccountreceivablesa n d salesa ndimprovethecorporationbetweenconcerneddepartments(salesandcredit) Thecompanysh ouldholdregularlyscheduledmeetingsamongdepartmentstopromoteunderstandingofpolicies andmaketheeditsincreditpolicy.Regularlyrevisitingandadjustingthepolicywillmaketheimpr ovementinaccountsreceivablem a n a g e m e n t aswellastheentirecompany’sactivities(Oj eka,2011).
Besides,whenofferingatradecredit,THMshouldaskthecustomertousebankg u a r a n t e e servi ce,especialforthelargequalitycontracts.Thismayhurtcustomerr e l a t i o n butitisthemostsecur eforaccountsreceivable.Infact,THMhaveusedthismethodinthisyearanditbringsasignificanti mprovementinthe receivableman ag ement.
According to Petersen and Rajan (1997), accounts receivable is a crucial source of external finance for businesses, enabling suppliers to set prices through credit terms, assuring buyers of product quality before payment, and improving customer relationships, ultimately enhancing sales and profitability However, high accounts receivable and extended days sales outstanding can negatively impact a company's profitability by tying up capital and incurring various costs THMC faces challenges in accounts receivable management due to internal and external factors that contribute to elevated receivables and prolonged collection periods Ineffective management of receivables is a significant reason for the decline in profitability To improve accounts receivable quality, THMC should consider alternatives in trade credit policy, such as implementing credit insurance with bank guarantees to mitigate default risks Additionally, transferring accounts receivable to factoring companies or credit-collection agencies can be an effective strategy for reducing both the amount of receivables and days sales outstanding.
Methodology
FinancedepartmentandSalesdepartment,directinterviewsareconductedfortheprimaryinform ation.Duringconductingtimeofthethesis,otherinterviewswillbescheduledifitisnecessaryfo rcollectingmorei n f o r m a t i o n forthethesis.Forsecondarydata,annualfinancialreportsfro m2011-
2014a r e provided.Referencepreviousresearches,papers,journalsandtextbooksarealso approachedfromProquestsiteandtheUniversity’slibrary.
Thethesiswouldhavebeenanalyzedbybothqualitativeandquantitativemethods.D at a fromco mpany’sbalancesheetsandincomestatementsisusedtocalculaterelatedratioswhichshowthep erformanceofreceivablemanagement.Thenhorizontalandv e r t i c a l analysisisappliedtodet erminethecompany’sefficiencythroughtablesandg r a p h s Theratioisalsocomparedtotheoth ercompaniesortheindustrytospecifycompany’sposition.Besides,throughoutthethesis,literatu rereviewsfromreliablesourceswillbegivenoutforjustifiableevidences.
Definitionoftheoreticalframeworks
Ineachenterprise,receivablesareoneofthethreeprimarycomponentsofworkingcapital.When afirmallowsitscustomertobuygoodsorservicesunderanagreementt o payatalaterdate,theamo untofunpaidsalesisrecordedasaccountsreceivable.Itc a n bedefinedasassetsownedtotheenter priseswhicharepresentedwhentheyallowsthecustomerstodelaytheirpaymentfortheirproduc ts(Mian&Smith,1992).Thesellerissaidtogranttradecredittoitscustomer.
AccordingtoBrighamandEhrhardt(2013),contentsoftradecreditpolicyshouldincludethecredi tstandards,thecreditperiod,thediscountandthecollectionpolicy.
- Thecreditstandardsrefertocreditworthinessandfinancialstrengthofthecustomer.Iti sappliedtospecifywhichcustomersqualifyfortheregularforcreditt e r m andhowmuchthe amountofcredittoofferthecustomers.
- Thediscountisthepricedeductiongiventhecustomerfortheirearlypayment.On thepur chasingcontracts,thediscountisoftenwrittenasapercentagerate.Thecustomerwillgetthedecrea seinpricewhentheypaywithinthestipulatedperiod.
Theenterprisesgenerallyoffertradecreditbytheircreditterm,whichincludethec r e d i t periodan dthediscount.Theformofacredittermcanbeasfollow:K%/DnetPI n which:
Oneofratioswhichreflecttheproductivityofaccountsreceivableisreceivableturnoverrate.Thisr atioshowstherelationshipbetweencreditsalesandaccountsr e c e i v a b l e ofafirm.Itshowsthel evelofsalesoncreditperVNDinvestedinthisaccountandhowoftenreceivablesarereceivedan dcollectedduringtheyear(Subramanyam&Wild,2011).Italsodisplaystheliquidityofaccountsre ceivable.
Therefore,thehigherturnoverrateisthebetter.AccordingtoSubramanyama n d Wild(2011),th ereceivableturnoverrateisdefinedasfollow:
AccountsreceivableturnoverWhere Averageaccountsreceivable6.2.4 Dayssalesoutstanding(DSO)
Anotherviewofaccountsreceivablemeasurementisdayssalesoutstandingwhichshowstheaver agenumberofdaysthatsalesistiedupinaccountsreceivable.Theaveragedaysincollectingrece ivablesillustrateshowefficientlycompanyisrunning.Thus,thequickerDSOreflectsthefastersp eedofcapitalreinvestmentbackintocompany.ToevaluatethepositionofcompanytheDSOisco mparedtoothercompaniesortheindustryDSO.
Days sales outstanding (DPO) Days sales inventory (DSI)
Days payable outstanding (DPO) Cash conversion cycle (CCC) salesofgoodstocustomers.Itreflectsthethreeworkingcapitalcomponents.
ThelengthofCCChasanegativecorrelationwiththeprofitabilityofthefirm(Deloof,2 0 0 3 ) The longerCCC,themorefundsstuckinworkingcapital.WhenCCCincreases,itleadstodecreasing profitabilityofthefirm.Thelongcyclerequiredlargew o r k i n g capitalandhighinvestmentsot hatfirmcancreateprofitbyshortentheCCCtoareasonableminimum.ShortenCCCnotonlyimpr ovesprofitabilitybutalsomakesp r o d u c t i v i t y andliquidityofthefirmbetter(Johnson&Templ er,2011).Therefore,managerscancreateapositivevaluefortheshareholdersbyreducingtheCCC toap o s s i b l e minimumlevel.AsoneofthethreecomponentsofCCC,highaccountsr eceivabl eandlongdayssalesoutstandingcausesprofitabilityreductionandinflowproblemsfortheenterpris e(Gilletal.,2010).
High accounts receivable Longer cash conversion cycle Decrease in profitability
Opportunity cost Administrated costDelinquency and default cost
GenerallycashmanagementbasedonCCCisconsideredasimportantfactorsenhancing theper formanceofcompanies(Muscettola,2014).Itshowshowefficientaf i r m isinitspaymentsofbills
,collectionofpayments,andsellingofinventory.T h e c a s h cycleisaverypowerfultoolforexa mininghowwellamanufacturingcompany’sworkingcapitalisbeingmanaged.
Consequences of ineffectiveaccountsreceivablemanagement
Accountsreceivableareatypeofinvestmentofcompanies.Byvaryingthecreditp e r i o d andthe discountforearlypayment,grantingtradecreditforcustomersmakes pricediscrimination.Enterprisescanselltheirproductsatdifferentpricesdependingonthecustome rs(Martínez-Sola,García-Teruel&Martínez-
Solano,2014).Accountsreceivablecanbeusedasatooltopromotesalesbecausecustomerscanasse ssproductq u a l i t y beforepaying(Deloof&Jeger,1996).Grantingtradecredit,hence,improvess alesoftheenterprises,andmaymakehigherprofitability.Ontheotherhand,over- investinginaccountsreceivableisalsocreatesomedrawbackswhicharecostlyandh a v e negative effectsoncompany’sperformance.
6.3.1 HighaccountsreceivablemakesineffectiveworkingcapitalmanagementWorkin gcapitalisoneofthemostimportantissuesforenterprises.Findingandr e a c h i n g theoptimalleve lsofthethreepartsofworkingcapitalisachallengeforthemanagersoffirms(Lamberson,1995).W orkingcapitaldirectlyaffectstheprofitabilitya n d liquidityoffirms(Raheman&Nasr,2007).Aut horssuchasDeloof(2003),Shina n d Soenen(1998),LazaridisandTryfonidis(2006)foundanega tiverelationbetweenW C M andfirmprofitability.Therefore,largeamountofaccountsreceivable makeshigheramountofworkingcapitalwhichcausesthedeteriorationofprofitabilityandliquid ityofTHM.
Likekeepinginventory,grantingtradecreditislockingupthemoneyinworkingcapi t al andincre asecostofcapitalwhichmakedeductionintheprofitabilityandliquidity.Gilletal.
Thecostsarenotonlycreatedbytiedupcapitalinaccountsreceivablebutalsofromaccou nts that arenotpaid.Thus,reducingcompany’sworkingcapitaltooptimalvaluec an enhancetheirprofitab ility.
The Cash Conversion Cycle (CCC) serves as a crucial indicator of working capital management (Deloof, 2003) In recent years, THM Company has seen its current assets dominate its total assets, making effective cash flow and CCC management essential for its financial health (Deakins, Logan & Steele, 2001) While extending credit can benefit the company, it also leads to increased accounts receivable and potential uncollectible debts, which may result in future cash flow issues Research indicates a significant negative relationship between a firm's profitability, liquidity levels, and CCC Dong and Su (2010) affirm that managers can boost profits by minimizing CCC to reasonable levels Additionally, days sales outstanding, a key component of CCC, negatively affects both liquidity and profitability; thus, longer collection periods from customers can diminish overall profitability.
Ferris(1981)considertradecreditasaparticulartypeofshort- termloan,whichtiedinb o t h timingandvaluewiththeexchangeofgoods.It’satypeofinvestmen tofcompany.Therefore,tradecreditplaysanimportantroleincorporatefinancingpolicy.G r a n t i n g credittothecustomerenhancessalesandbuyer- sellerrelationship,butitalsoc a r r i e s coststhroughtheseparationofdeliveryofgoodsandpay ment(Garcia-Teruel&Martínez-
AccordingtoOh(1976)andNadiri(1969),onecostoftradecreditisopportunitycost.Co mp an y
’ s resourcesarelimited.Thereisnodoubtthatthemaintenanceoflargeamountofaccountsrecei vablecausestheblockageofcapitalresources.Asaco n sequ en ce , lessoftheresourcescanbein vestinothercategories.Theexpectedreturnfromthoseresourceswhencompanyinvestsinanoth eraccountistheop port un it ycost.Withconsiderableamountofaccountsreceivable,THMarel osingalargeopportunitycosteveryyear.
Whenacompanygrantstradecreditforitscustomers,administratecostwillexistb e c a u s e ofcostl ycreditmanagementactivity(Gupta&Gupta,2015).Asaresultoftheincreasingintheamountofcre ditsalesandnumberofdebtors,thefirmhastoduewith theexpensesforcreditinformation,runningacreditdepartment,salaryforcreditstaffs,accountin grecords,collectingcostsandotherrelatedissues.Keepinglargeamountofa c c o u n t s receivable, THMChastoputgreateffortstomanageandadministrateandc o l l e c t theseaccounts.
Delinquencycostsemergeasaresultofadelayorafailureinpaymentofthecustomers.Thoseacco untsarecalleddoubtfuldebts.Whencustomerskeeptheirdebtso v e r theexpiryofcreditperiod,th ecapitalisblockedupforanextendedperiodoftimeinoverdueaccountsreceivable.Basedonacco untsreceivablelegers,only18%ofr e c e i v a b l e isinmaturityandtherestof82%accountsreceiv ableisoverduedebt.Atar esu lt, thereisalargeamountofmoneytiedupwhichleadstohighdelinq uencycostf o r overduedebts.
Highaccountsreceivablealsoincreaseabilityoflossesanddefaultriskswhichhaveconsiderableef fectsonprofitabilityandliquidityofthecompany.AccordingtoA g g a r w a l andTyagi(2014),th emostsignificantcostofgrantingcreditisuncollectableacco un t orbaddebt.T h i s costarisesas aresultofcompleteinabilitytopayforthedebto f buyer.Forinstance,whenacustomerdeclaresba nkruptcy,nopaymentfromthemw i l l becollected.Atthattime,suchdebtswhicharecalledbadd ebtshavetobewrittenoffintheaccountsreceivableanditcreatesapossibilityoffinancialdistress.I nreality,in2014,8%ofTHM’saccountsreceivableisover2years.Someofthose customersmovedtoanothercityanditistoodifficultandcostlytotraceandforcet h e m torepa ythedebt.
Transcript
Afterreceivingandhavingaglanceatthefinancialstatementfrom2011to2014,wec o n d u c t ani nterviewwiththeDirectorandsomestaffs.Theinterviewee:
- Ms.Nhi–ChefAccountant,haveworkedinAccountingdepartmentfor9years.
- Mr.Hai–Salesman,haveworkedinSalesdepartmentfor5years.
LookingatFinancialstatement,wecanseethatthesalesdroppedtoomuchinthef o u r re centyears.Wouldyoupleasetellusthereasonsofthisdrop?
- Mrs Nguyet: The reasonthatcausedthegreatestimpactonsalesisthepolicyc h a n g e s oft hesupplier–
AkzoNobelVietnam.Before2012,ourrevenueswereveryhi g h In2010,weachievedthehighest salesinSouthernmarket.In2011,wereachedthetoppositionofbothprojectsandsecondlevelage nciessegmentinVietnammarket.H o w e v e r , sincethebeginningof2012,AkzoNobelVietnam orientedTHMCasaspecializedprojectdistributer.Thus,theyrequiredTHMtostopsupplyfor2 n dlevel a g e n c i e s toconcentrateonconstructionprojects.Thatexplainsforthesharpdropinther e v en u e inthenext3years.Anotherreason,Ithink,isthefluctuationoftherealestatemarket.Asev eryoneknowstherewasafinancialcrisisin2008.Thewholemarkethas gonedownsincethereandbroughtalotnegativeeffectstherealestatemarket.Thedemandofthec onstructionmarketwasalsodecline.
- Mr Hai :Itwashardtointroduceandsalesproductrecentyearsbecauseoftheintenseco mpetitionofotherbrands.Therewerealotofnewproductsappearedinthemarketwhichhadlo werprices.Moreover,therewasexistenceoffake,lowqualityp r o d u c t s inthemarket.Withas amekindofproduct,thecustomerwouldcertainly choosethesupplierwhooffersalowerprice.Ourcompany’smaximiskeepingourm o r a l i t y andreputationsothatwedon’tusethatwaytomakegoodprofit.
Thecompanyexperiencedthedecreaseinprofitin4years,evengotlostin2lasty e ar s Besi dethedropofsales,whatotherreasonsforthat?
- Ms Nhi :Mostly,wesupplyproductsforbigprojectsandsecondlevelagencies.S o thatwe havetokeepthepricelowerthenthemarket.Thecostofgoodssoldishigha n d ourmarkuppercent ageisjustaround3-
5%.Whenthesalesfalldown,thenetincomefromsalesalsodecline.Withahighamountofoperati ngcosts,thenetincomeo f 2013and2014wasnotenoughtocoverallthecosts.Asaresult,thecomp anygotlostinthe2recent years.
- Mrs Nguyet Even: thesaleswaslow,westillhadtosuffermanykindsofcoststomain tainthe operationof thecompany.Therearemanycostsforoperatingactivitiesl i k e housingrentalforofficeandwar ehouses,laborexpenditures,depreciation,interest expenses,w a s t e t h e w o r k i n g c a p i t a l s i n i n v e n t o r y g o o d s , a n d i t i s h a r d e r t o c o l l e c t debt s sincethechangesinpolicyofAkzoNobel.
Ms Nhi reports that many customers delay their payments for extended periods, often settling debts after four to six months, with some delays exceeding a year A few even default on their payments, leading the company to personally visit each customer at the end of the year to reclaim debts, although the amounts received are typically lower than expected Since 2012, due to AkzoNobel's policy changes and market segment limitations, the company has concentrated solely on construction projects, resulting in previous customers from second agencies being reluctant to pay for past orders, as they find it costly to seek alternative suppliers Consequently, a significant portion of accounts receivable has turned into doubtful debts, tying up substantial capital.
- Mrs Nguyet: The economicsituationalsoaffectstheaffordabilityofcustomer.T h e reale statewassodarkthoseyears;alotofcustomerswereunabletorepaytheird e b t s ontimeandtheir delayedpayment.Besides,thereismoreriskyinsellingforc o n s t r u c t i o n projects.Theyonl ypaytheirdebtwhentheyhavealreadysoldtheirproperty.
- Ms Nhi: One anotherreasonisbecausetheSalesdepartment.Thesalesmendonot bothert hecustomer’screditworthywhensellingproducts.Theyjustfocusonincreasingtherevenue.Atth eend,we–thefinance– accountingdepartmenthavetod e a l withthelargeamountofbaddept.Ithinkthereisaseriouscon flictbetweensalesdepartmentandaccountingdepartment.
- Mr Hai: Actually themainincomeofasalesmaniscomefromthecommissiono f hisreven uesoldinthatmonth.Thereforeweoftenaremotivatedtosellasmanyproductsaspossible.Mor eover,thesalesdecreasedrecentyears;sellingproductsish a r d e r Sothatweallhavetotrymoreto attractcustomersandincreasetherevenue.
- Mrs Nguyet: Most ofcustomersofTHMarecontractorsofconstructionp ro j ect s Theyb uyinbulkandvalueofpurchasingcontractsarelargeandvarious.T h u s, THMgrantsdifferentcredi tsalesamountfordifferentcustomer.Wemainlyb a s e d onthedesignplansoftheprojectsthatthecu stomersprovidetoofferthelimitofsalesoncredit.Thelimitisabout10%ofthetotalamountthatcu stomersaregoingtos p e n d forpaintingproductsintheprojects.Wewillstopsupplyingtothecu stomerwhohavenotpaytheironduedebtsortheirdebtsexceedsthecreditlimit.
- Ms Nhi: We applythecreditperiodof45daysforallcustomersandoffer2%cashdiscou ntforimmediatepaymentpurchases.
- Ms Nhi:There isnodiscountforearlypaymentforsalesoncredit.Afterthef i r s t day,c ustomerhastopayallthevalueofthecontract.
- Ms Nguyet: When thereisamaturedebt,thecompanyoftenmakescallsandsendsrequ estpaymentletterstocustomers.Thedebtsarefrequentlypaidpartlyandlessthanmyexpecta tion.
- Ms Nguyet: When settingapurchasingcontract,wealwayswritedownthep e n a l t y intere strateforlate- payment.However,wehaveneverrequiredforthatfine.Ithinkitwillaffecttherelationshipandthep leasureofthecustomers.Sothatwejustapplythelawcollectionpolicytothecustomerswhoareun willingtopayanddelaythepaymentintoolongtime.
- Ms Nguyet: When thereisadebtheldintolongperiodandthatcustomerisnotwi lli ng top ay,wehavetotakelegalaction.Andweoncehadtosellabadqualityreceivableforacollectingco mpany.Itwasveryexpensive.Thosecompaniesoftent a k e from20%to40%oftheamountofacc ountsreceivablethattheybuy.Howeveritisstillbetterthanlosingtotalofthatdebt.
Interview withacustomer who visitTHMto buyproducts:
Itisdependedsomuchoneachproject.Bigprojectrequiresthefinancialconditionsofthesuppl ier.Ithastobestrongenoughtosupplyproductsinalongtimewithahighamounto f c r e d i t s a l e s T h e q u a l i f i c a t i o n a n d thep r i c e o f p r o d u c t s a l s o h a v e tob e c o m p e t it i v e.
Volumeo f o r d e r s n o w isl o w e r t h a n b e f o r e T h e r e a l e s t a t e marketh a s b e e n g o i n g d o w n recentyears.Soitishardertosellarealestate,ahouseoranapartment.AndI havetob e h o n e s t t h a t , therea r e a loto f suppliersw h o p r o v i d e p r o d u c t s w i t h very competitiveprices,promotionpolicies,andbettercredittermforcustomers.
Someofthecompanies somehowd e l a y theirpayment Ourbaddebtratekeep sincreasingrecentyears.Wouldyoutellmesomereasonsforthatdelay?
Actually,ourcompanysometimesstillhastodelayourpayment.Idonotknowhowthe othercompaniesare,butwedonotwanttodelaythedebt.Therealestatemarketa f f e c t s a lotino u r c a s h f l o w Fore x a m p l e w h e n a n i n v e s t o r p u t h i s m o n e y ina b u i l d i n g , h e e x p e c t s tosellthatb u i l d i n g a n d u s e thati n f l o w c a s h topayh i s d e b t H o w e v e r , ifhecannotsellthebuilding,hehastodelaythedebt.
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