INTRODUCTION Every business regardless of type or size, it needs a certain amount of capital to sustain its business.Capital is an indispensable prerequisite for the formation and development of a business. Inside, working capital is regarded as an essential component of every business, playing a particular important role, directly affecting the business process as well as the business performance of the business, especially enterprises in the field of trading of goods and services.Currently, in the context of globalization, the competition in the market is getting more intense. Therefore, the demand for working capital for business activities becomes larger. While the ability to generate and mobilize capital of businesses is still limited, this requires businesses to use working capital in the most efficient manner based on respect for financial principles, credit principles and obey the law. Being aware of the importance of working capital management in a company, with the support of my supervisor, MBA. Bui Thu Ha, and the help of Accounting Finance Department of Hoang Son JSC, I choose the topic “Working capital management – A case study of Hoang Son Joint Stock Company” for my graduation thesis.
ACADEMY OF FINANCE CORPORATE FINANCE DO LAM PHUONG GRADUATION THESIS TOPIC: WORKING CAPITAL MANAGEMENT – A CASE STUDY OF HOANG SON JOINT STOCK AND TRANSPORT SERVICE CONTAINER COMPANY Major: Corporate Finance Code: 11 Supervisor: MBA Bui Thu Ha HaNoi – 2020 DECLARATION I hereby declare that this is a study done by myself with the support of the supervisor The figures and the results stated in the thesis are honest from the actual situation of the internship company In case any information given in this thesis proves to be false or incorrect, I shall be responsible for consequences Signature of thesis’s author Do Lam Phuong ACKNOWLEDGEMENT First of all, I would like to express my deep gratitude to my supervisor, MBA Bui Thu Ha, for her precious advices and close instructions that guide me through this study I also want to send my thanks to Mr Tran Van Son , Director of Hoang Son Joint Stock & Transport Service Container Company, and staff of Finace & Accounting Department of Company for his support during my internship Thanks to them, I had chance to access all necessary documents and financial statements and opportunity to work with the Company Additionally, I would like to thank to all my lectures at Academy of Finance, who give me valuable lessons and basic background throughout years of study Ultimately, I owe my sincere thanks to my family and friends Their continuous assistance and encouragement helped me a lot during time of internship and attempt to finish this study ABSTRACT In the context of the develooment of global economic, transport industry is considered as one of the most important industry Vietnam is located at the intersection of many international road, maritime and aviation routes as well as in the developed economic region of the region, creating many business conditions for Hoang Son JSC Hoang Son JSC, as many other companies, has to face many opportunities and threats In this study, author aimed to assess the company’s efficiency and effectiveness by analyzing its working capital management From the results, author showed the current situation of working capital management, advantages and disadvantages The last part of the study is some suggestions that can be applied to the company to improve the efficiency of working capital management TABLE OF CONTENT DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii TABLE OF CONTENT .iv LIST OF ABBREVIATIONS .vii LIST OF TABLES .viii LIST OF DIAGRAMS, FIGURES AND CHARTS ix INTRODUCTION 1 Rationale of the study .1 The objectives of the study .1 Data & methodology The structure of thesis .2 CHAPTER I: THEORETICAL BACKGROUND OF WORKING MANAGEMENT OF A COMPANY 1.1 Working capital and financing working capital .3 1.1.1 Definition and features of working capital 1.1.1.1 Definition and of working capital 1.1.1.2 Features of working capital circulation in an entity: 1.1.2 Classification of working capital 1.1.3 Sources of finance for working capital .6 1.2 Working capital management 1.2.1 Definition and objectives of working capital management 1.2.1.1 Definition of working capital 1.2.1.2 Objectives of workig capital 1.2.2 Contents of working capital management 1.2.2.1 Determination of working capital needs and working capital financing 1.2.2.2 Components of working capital .14 1.2.2.3 Cash management 15 1.2.2.4 Account recevivable management 17 1.2.2.5 Inventory management 18 1.2.3 Indicators to evaluate working capital management 21 1.2.3.1 Indicators evaluating working capital financing management .21 1.2.3.2 Indicators evaluatig structure of working capital 21 1.2.3.3 Indicators evaluating cash management 22 1.2.3.4 Indicators evaluating accounts receivable management 24 1.2.3.5 Indicatiors evaluating inventory mangement 25 1.2.3.6 Indicators evaluating working capital management .26 1.3 Factors determining the working capital management of enterprises 27 1.3.1 Internal factors 27 1.3.2 External factors 28 CHAPTER 2: SITUATION OF WORKING CAPITAL MANAGEMENT OF HOANG SON JOINT STOCK COMPANY 29 2.1 Overview of the company: 29 2.1.1 Establishment and development of Hoang Son JSC 29 2.1.1.1 Basic information of Hoang Son JSC .29 2.1.1.2 The establishment and development of Hoang Son JSC: 29 2.1.2 Business characteristics of the Company 30 2.1.2.1 Firm’s organizational structure 30 2.1.2.2 Functions, business lines, and main products: .31 2.1.2.3 Other characteristics: 31 2.1.3 General information on financial situation of Hoang Son JSC 33 2.1.3.1 Avantages and disadvantages of Hoang Son JSC 33 2.1.3.2 General financial information of the company .33 2.1.3.3 Ratio analysis: 40 2.2 The situation of working capital management at Hoang Son JSC: 42 2.2.1 Determining the needs for working capital and working capital financing at Hoang Son JSC 42 2.2.1.1 Determining the needs for WC .42 2.2.2.2 Working capital financing management: .44 2.2 Components of working capital at Hoang Son JSC .48 2.2.3 Cash management: .51 2.2.4 Inventory management of Hoang Son JSC: 54 2.2.5 Account receivable management: 55 2.2.6 Evaluation indicators of working capital management: .60 2.3 Assesment of working capital management: 61 2.3.1 The achievements: 61 2.3.2 Shortcomings: .62 CHAPTER 3: SOLUTIONS TO IMPROVE WORKING MANAGEMENT OF HOANG SON JOINT STOCK COMPANY 63 3.1 Objectives and targeted performance of Hoang Son JSC: 63 3.1.1 Socio – economic situation .63 3.1.2 The targeted performance of Hoang Son JSC: 64 3.2 Solutions to improve working capital management of Hoang Son JSC: 65 3.2.1 Determine the proper working capital needs .65 3.2.2 Improving the management of cash 67 3.2.3 Improving the management of inventories 67 3.2.4 Reducing risk of account receivables 68 3.2.5 Check the liquidity status of the business 71 3.3 Conditions to for implementing solution .71 CONCLUSION 73 REFERENCES 75 APPENDICIES 78 LIST OF ABBREVIATIONS Full meaning Abbreviatio n Working capital WC Net working capital NWC Economic Order Quantity EOQ Information technology IT Gross domestic product GDP Return on assets ROA Return on equity ROE Return on sales ROS Basic earning power BEP Vietnam Dong VND LIST OF TABLES Table 2.1 The assets of the company in 2018 and 2019 34 Table 2.2 The liabilities and equity of the company 37 Table 2.3 The company’s fluctuation in revenue expenses, and profits 39 Table 2.4 The company’s profitability ratios in 2018 and 2019 40 Table 2.5 The appropriated in 2017 and 2018 of Hoang Son JSC 42 Table 2.6 The constitution of working capital needs 43 Table 2.7 The company’s current liabilities in from 2017 to 2019 44 Table 2.8 Components of working capital at Hoang Son JSC 48 Table 2.9 Hoang Son JSC’s cash and cash equivalents 2018 – 2019 51 Table 2.10 Hoang Son JSC’s cash flow of 2018 – 2019 52 Table 2.11: Hoang Son JSC’s liquidity in 2018 and 2019 52 Table 2.12 The inventory of the company .54 Table 2.13 Situation of inventory management of Hoang Son JSC 55 in 2018 and 2019 .55 Table 2.14 Current receivables of Hoang Son JSC in 2017 -2019 56 Table 2.15 Receivable management of Hoang Son JSC 2017 -2019: 57 Table 2.16 Situation of reaceivables and payables of Hoang Son JSC in 2018 and 2019 58 Table 2.17 Indicators of woking capital management in 2018 and 2019 60 LIST OF DIAGRAMS, FIGURES AND CHARTS Firgue 1 The cash and operating for a firm .4 Figure 1.2 WC classification by the role of working capital .5 in business cycle Firgue Under matching plan .13 Firgue Under Conservative Strategy 13 Firgue Under highly aggressive strategy 14 Firgue 6: EOQ model 19 Firgue 7: EOQ model with uniform demand 20 Figure 1.8 Asset structure of Hoang Son JSC in 2018 and 2019 .34 Figure 1.9 Capital structure of Hoang Son JSC in 2018 and 2019 38 Diagram 2.1 : Hoang Son JSC’s structure of funds at 31/12/2017 46 Diagram 2.2 : Hoang Son JSC’s structure of funds at 31/12/2018 46 Diagram 2.3 : Hoang Son JSC’s structure of funds at 31/12/2019 47 Figure 1.10 Components of working capital of Hoang Son JSC .49 from 2017 to 2019 .49 Academy of Finance Graduation Thesis INTRODUCTION Rationale of the study Every business regardless of type or size, it needs a certain amount of capital to sustain its business Capital is an indispensable prerequisite for the formation and development of a business Inside, working capital is regarded as an essential component of every business, playing a particular important role, directly affecting the business process as well as the business performance of the business, especially enterprises in the field of trading of goods and services Currently, in the context of globalization, the competition in the market is getting more intense Therefore, the demand for working capital for business activities becomes larger While the ability to generate and mobilize capital of businesses is still limited, this requires businesses to use working capital in the most efficient manner based on respect for financial principles, credit principles and obey the law Being aware of the importance of working capital management in a company, with the support of my supervisor, MBA Bui Thu Ha, and the help of Accounting & Finance Department of Hoang Son JSC, I choose the topic “Working capital management – A case study of Hoang Son Joint Stock Company” for my graduation thesis The objectives of the study The thesis has main objectives, including: To generalize the theory of working capital and working capital management; To examine the situation of working capital management of Hoang Son JSC; indicating the achivements and drawbacks of working capital management of Hoang Son JSC; To propose some solutions to improve working capital managemet of Hoang Son JSC The scope of the study Subject of the study: Working capital management of a company Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis Space: The study was conducted at Hoang Son JSC Time period: 2018 and 2019 Data & methodology Data: Primary data were collected during the internship at Accounting & Finance Department of Hoang Son JSC Secondary data were extracted from financial statements and other official sources of information Methodology: Research method Comparison method The structure of thesis Chapter 1: Overview of working capital and WC management Chapter 2: Working capital management of Hoang Son JSC Chapter 3: Solutions to improve working capital management of Hoang Son JSC Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis CHAPTER I: THEORETICAL BACKGROUND OF WORKING MANAGEMENT OF A COMPANY 1.1 Working capital and financing working capital 1.1.1 Definition and features of working capital 1.1.1.1 Definition and of working capital To carry out the business activities, every compay needs cash to invest to form the required assets Besides the initial investment I fixed assets, the company needs a necessary working capital to keep the business activities operating continuously This working capital used to purchase materials or goods, labor cost, etc At the end of an operating cycle, the initial investment in working capital is completely collected when a company collects all sales from goods and services Therefore, working capital is related to the use of current assets such as cash, inventory to ensure the company’s business activities take place continuously From this viewpoint, working capital is defined as “initial investment in current assets to maintain the smooth operations of a company in a particular period” This is the gross definition of working capital In other words, working capital is the difference between current assets and current libilities This is net definition of working capital That means Net workig capital (NWC) is equal to (Current Assets – Current Liabilities) This definition considers not only the current assets but also is liquidity to cover the short-term obligations of a company Working capital in this thesis is defined according to the first way, the gross definition That means, the amount of money put into curret assets to make the business activities of a company smooth and continuous Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis Firgue 1 The cash and operating for a firm The firm’s operating cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling products The longer a firm’s cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations 1.1.1.2 Features of working capital circulation in an entity: In business process, working capital cycle continuously and exist under many forms in each period of business Firstly, in a particular period, if working capital can rotation more it will create more “money” without increasing investment As a result, profit of that period is higher Therefore, in business activities, managers always concentrate on increasing rotation of working capital to increase effectiveness of invested capital Secondly, if in any periods the circulation of capital is stuck, this will lead to delay of the whole capital circulation of the entity Features of working capital in capital circulation: Liquid assets take part in every periods of production and not keep original morphology In capital circulation, working capital has below characteristics: - Working capital always changes its morphology Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis - Working capital’s value is converted all into products in one circulation and is refund after each circulation 1.1.2 Classification of working capital In order to use and manage working capital effectively, the enterprise needs to classify working capital according to particular criteria Basically, working capital can be classified by the role in operating cycle, by form, and by usig time Following presents more details of working capital classification: By the role of working capital in operating process: The classification is generally illustrate by the following figures: STORAGE Materials Equipments Fuels Tools PRODUCTION Work in progress Half-finished goods Prepaid expense CIRCULATION Short-term investment Mortages Finished products Receivable Figure 1.2 WC classification by the role of working capital in business cycle According to the figure, working capital is defined into three stages: storage, production, and circulation In storage, working capital refers to the investment in materials, equipments, fuels, and tools necessary for production Then movig to the production, this amount becomes the value of work in progress, half-finished goods, or prepaid expenses When the finished products are ready to sell, a company can recover the initial investment in storage through sales collections This classification shows the role of each type of working capital in the production and business process, thereby choosing a reasonable investment Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis capital structure, ensuring the balance of production capacity between stages in the course of business operations of the enterprise By form of working capital: Based on the form of expression, working capital can be classified into: - Capital of supplies and goods: including inventory capital, work I progress, raw materials or fuels, finished products, semi-finished products, etc - Capital in cash: working capital is montery capital such as cash in bank, cash on hand, investments in securities, etc By the role of usage: Another way of classification is based on the basis of time, by which working capital is divided into prenament and temporary one: - Temporary working capital: is the difference between actual level of investment in current assets and the permanent workig capital investment Temporary working capital is needed for shorter period Two types of temporary working capital are seasonal working capital and specific working capital - Pernament capital: minimum level of working capital required to circulate from one form to another: from cash to inventory, inventory to receivables, receivables to cash, and so on 1.1.3 Sources of finance for working capital A company that wants to use working capital effectively must organize capital sources for working capital well The capital sources must be large enough to form the working capital needed for the production and business process Therefore, the sources of working capital is an extremely important factor, businesses need to carefully consider and maximize the efficiency of the sources of finance for working capital of a company Based on the ownership Capital sources for working capital divided into two categories: Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis - Owner’s equity: is the number of working capital owned by the enterprise and the enterprise has the full rights to possess, use, dominate and dispose of, including: Equity capital in a joint stock company, capital due to private business owners spend, additional capital from profits -Liabilities: As capital owned by other economic entities, the enterprise has the right to use and control for a certain period of time, including: borrowings from commercial banks and credit institutions, borrowing through the issuance of bonds, appropriated debts are those that the enterprise can legally use before the due date, etc Based on the time of raising and using of capital sources - Permanent capital: is long-term sources used to finance the needs for working capital Permanent working capital is the sum of stable and long-term capital sources that businesses can use to form their working assets -Permanent working capital = Non-current liabilities + Shareholders’ Equity Permanent working capital allows businesses to proactively provide timely investment, ensuring normal and continuous production and business process In order to ensure a smooth and successful production and business process, enterprises need to have a strategy to raise necessary permanent capital -Temporary capital: Temporary capital is sources of less than one year mainly to meet the temporary needs of working capital arising in the course of production and business activities of a company, which usually includes: shortterm loans, short-term debts, trade payables to suppliers, other payables, etc The above-mentioned classification of working capital helps managers consider mobilizing the sources of working capital appropriately for using time to improve the efficiency of organization and use of working capital in their enterprises In addition, it also helps managers to make financial plans to formulate plans for organizing working capital in the future, based on determining the scope and amount of working capital needed Do Lam Phuong CQ55/11.CL02 Academy of Finance 1.2 Graduation Thesis Working capital management 1.2.1 Definition and objectives of working capital management 1.2.1.1 Definition of working capital Working capital management is the process os managing and monitoring activites related to working capital Thus the main objectives related to working capital management invlove in improving the firm’s profitability and ensuring the firm has sufficient liquidity to meet its short-term obligations 1.2.1.2 Objectives of workig capital Each company has the different way to manage working capital efficiently but they must achieve the following basic goals: The first goal: making decisions that maximize the value of the stock or more generally, maximize the market value of the equity This goal is general goal of financial management and is also important goal of working captital management The second goal: mobilizing capital fully and timely for working capital requirement Working capital is like the flow of blood in the corporation so the goal working capital management is to ensure that a firm is able to continue its operations The third goal: ensuring organization and using working capital is saving and effective This will help the company saving amount of working capital and have capital for other investment opportunities 1.2.2 Contents of working capital management 1.2.2.1 Determination of working capital needs and working capital financing a Working capital needs Business and production activities of enterprises are conducted regularly and continuously In the process, it always requires the enterprise to have the amount of working capital needed to meet the requirements of procurement of reserve materials, to offset the difference between receivables and payables between the enterprise and the customer, to ensure the business process is Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis carried out normally and continuously That is the demand for regular and necessary working capital of businesses As a result, the constantly needed working capital demand is the minimum amount of working capital required to ensure the normal and continuous course of business and production activities of the enterprise Below this level, the enterprise's production and business will face difficulties and even be delayed or interrupted However, if it is above necessary level, it causes capital stasis, wasteful and inefficient use Therefore, in working capital management, businesses need to focus on properly determining the needs of regular working capital, in accordance with the size and specific business conditions of the business With the concept of working capital need is the minimum and often necessary capital, the working capital demand is determined by the following formula: Working capital needs = Inventory reserve level + Receivable from customers – Payabales to suppliers In particular, the demand for inventory capital is the minimum amount of capital needed to reserve raw materials, fuel, unfinished products, semi-finished products and finished products of enterprises The working capital demand of an enterprise is influenced by many factors such as the size of the enterprise, characteristics and nature of the business line (production cycle, seasonality); fluctuations of prices of supplies and goods on the market; organization, management and use of working capital of enterprises; technical level - production technology; policies of enterprises in the consumption of products and services The correct determination of influencing factors will help businesses to properly determine working capital needs and take measures to manage and use them in an economical and efficient manner To assess the needs of working capital of enterprises, we can use direct or indirect methods: Do Lam Phuong CQ55/11.CL02 Academy of Finance Graduation Thesis Direct methods The content of this method is to determine directly the capital needs for inventory, accounts receivable, payables to suppliers and then gather them into the total working capital needs of enterprises Determining the demand for inventory capital, including inventory capital, at the production reserve, production and circulation stages Working capital needs in production reserves: including capital requirements of main materials, auxiliary materials, fuels, spare parts The formula for determination is V m n i=¿ ∑ ∑ ¿ ¿¿¿ y=1 x=1 V i: Capital needs of inventory M xy : Average cost of goods per day in inventories X N xy : Inventory days number of inventory X n : Number of types of inventory to stock m: Number of stages to stock inventory Demand for working capital reserves in production, including the need for capital to form unfinished products, semi-finished products, and prepaid expenses + The need for capital to form unfinished products, semi-finished products are determined by: V sx =Pn CK sx H sp V sx : Working capital needs Pn: Average production cost of products per day CK sx : Production cycle length (days) H sp : Coefficient of work in progress, semi-finished product (%) + Prepaid expense: are expenses incurred but not yet allocated to the cost of products produced in the period but also allocated to subsequent periods V tt =P đk + P ps + P pb V tt : Prepaid expense Do Lam Phuong 10 CQ55/11.CL02