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UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Nguyen Trang Kieu Diem THE PROBLEMS OF CONTROL ACCOUNT RECEIVABLES TURNOVER AND INEFFECTIVE FINANCE LEVERAGE OF MINH PHU SEAFO[.]
UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Nguyen Trang Kieu Diem THE PROBLEMS OF CONTROL ACCOUNT RECEIVABLES TURNOVER AND INEFFECTIVE FINANCE LEVERAGE OF MINH PHU SEAFOOD JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: Dr PHAM PHU QUOC Ho Chi Minh City – Year 2018 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS Executive Summary CHAPTER 1: INDUSTRIAL OVERVIEW AND COMPANY BACKGROUND 1.1 Industry overview 1.2 Company background CHAPTER 2: IDENTIFICATION AND DEFINITION OF THE PROBLEM 11 2.1 Problems finding process 11 2.2 Company’ symptoms 11 2.2.1 The significant decrement of profitability in 2015 11 2.2.2 The remarkable much lower of profitability compared with average industry’s ratio in 2015 13 2.3 Possible reasons behind the circumstance 14 2.4 Actual reasons behind the circumstance 16 2.4.1 Bad management of gross margin, operating expense, interest and taxes resulted in the lower profit margin 16 2.4.2 Ineffective control accounts receivable days, inventory days and fixed-asset turnover resulted in the lower asset turnover 18 2.4.3 Ineffective financial leverage 21 CHAPTER 3: DESIGN SOLUTIONS AND SUGGESTIONS 26 3.1 Possible solution to improve efficiency in asset turnover and use effective finance leverage 26 3.2 Suitable solutions to improve efficiency in asset turnover and use effective finance leverage in Company’s circumstance 28 3.2.1 Revise credit collections 29 3.2.2 Increase collect efficiency 30 3.2.3 Manage inventory effectively 30 3.2.4 Using finance leverage in appropriate time 31 CHAPTER 4: ACTION PLAN 32 Reference 35 Appendix 37 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure Minh Phu Seafood Join Stock Company structure Figure Minh Phu’s profitability ratios in the period 2013-2015 Figure Minh Phu’s ROA, ROE compared with industry’s ratio over the period 2013-2015 Figure Financial ratios linked to return on equity Figure Possible solutions of Minh Phu’s case Figure Minh Phu Seafood Joint Stock Company Action Plan LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table Minh Phu’s profitability ratios in the period 2013-2015 Table Minh Phu’s ROA, ROE compared with industry’s ratio over the period 2013-2015 Table Minh Phu’s gross profit from 2013 to 2015 Table Minh Phu’s portion of each components in income statement from 2013 to 2015 Table Minh Phu’s account receivable and account payable turnover over the period 2013 – 2015 Table Minh Phu’s inventory day over the period 2013 - 2015 Table Indicators reflecting the asset structure of Minh Phu over the period 2013 - 2015 Table Minh Phu’s indicators reflecting the resource structure Table Effects of some factors to Return on equity of the Company Table 10 Analysis the possible solutions of Minh Phu Table 11 Minh Phu Seafood Joint Stock Company Action Plan LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Executive Summary Minh Phu Seafood Joint Stock Company (Minh Phu), the largest shrimp processor in Vietnam and was known as the shrimp king of Vietnam had always operated at high profit since 2012 However, the Company’s performance faced a significant down trend, even made loss in 2015 After a thorough investigation on the case, the circumstance was found there are two main problems related to control over account receivables turnover and ineffective finance leverage of the Company In detail, the accounts receivable turnover in 2013 was 13.27 and 13.02 in 2014, while the figure decrease 10.28 in 2015 which show that management of account receivable has the problem About the using finance leverage, the debt ratio in the period from 2013 to 2015 always high and maintain at 74% - 75% while the aquatic economic face many challenges and difficulties in 2015 In the bad economic times, the high financial leverage made the profitability worse In addition, the interest rate is higher than the return on equity before tax and interest means that the Company use the loan will decline return on equity Financial leverage to amplify reduce return on equity and financial risk of the company in 2015 increased As for solution, the author recommends on improving the problems through improve account receivable turnover and the efficiency of finance leverage Firstly, Minh Phu can improve account receivables turnover through revise credit term, tight control the account receivables and increase collection efficiency Secondly, Minh Phu can use the finance leverage effectively by reduce financing the debt, increase equity and use finance leverage in appropriate time based on the economic status LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INDUSTRIAL OVERVIEW AND COMPANY BACKGROUND 1.1 Industry overview Even Vietnam has a great potential for marine aquaculture, the sector also faces many challenges According to some reports, the country is blessed with nearly 250,000 hectares of total area of marine and island aquaculture, of which the aquaculture area is over 150,000 hectares, the lagoon, hinterlands and islands are nearly 80,000 hectares, and the rest is open sea This area can be used to develop marine aquaculture including bays, coastal tidal areas and parts of islands and open seas Additionally, Vietnamese sea houses many species of fish that can be naturally distributed into the sea such as grouper, snapper, orange fish, sea bass, cobia, sea bass In fact, in a brief report presenting in Norway in August 2016, the emerging East Asia economy was stated to have an estimated seafood production of 6.55 million tons, making the country the 4th largest seafood producer, the 8th largest fishing nations, and 3rd world largest exporter of fish and fisheries products Furthermore, Vietnam is also the 3rd largest in the world in breeding, raising, and selling Tiger Prawns, and Shrimps Most recently, in 2017, with export growth of more than 10% in the second quarter, total seafood export value of Vietnam in the first half of 2017 was about USD 3.6 billion, up 14.6 percent over the same period last year Such explosive growth and potential has made marine aquaculture a key industry in the development of Vietnam economy Beside the geographical advantages mentioned above, Vietnam also faces many challenges and difficulties Most companies in the country remains small scale both in capital and modern technologies The lack in capital and technologies hinder the sector’s ability to enter into the developed market with high requirement in quality For instance, the Europe is the largest importer of agricultural, forest and food products in the world But the European market LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com requires high quality of goods to ensure the safety for local consumers In an interview with Ms Miriam Garcia - Ferrer, First Counselor, Delegation of the European Union in Vietnam, the lady representative of the Europe has expressed great concern on the capability to ascertain marine products’ quality of Vietnam She even presented the case of Vietnam's bivalve molluscs has been approved by the EU on the list of Vietnamese exporters, but now banned by the European Union because of the problematic inspection by the EU as an example In another example, Vietnamese pangasius have also been stopped recently by some French super markets not because of food safety but also environment problems Nonetheless, with such geographical and weather advantages, Vietnam marine aquaculture has great future and potential to be tapped into 1.2 Company background Minh Phu’s precursor was a private enterprise It was established on 14th December 1992 After over 20 years of continuous development, so far Minh Phu has become one of leading seafood corporations with largest seafood export revenue nationwide as well as in the region and all over the world The principal activities of the Company are to process and trade in aquatic products, aquatic breeds and aquatic foods, machinery and equipment for aquaculture The structure of Group was showed in the charge below: LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Figure 1: Minh Phu Seafood Join Stock Company structure LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Principal targets of the corporation: - Focus on its main business production lines in 2011, which are producing disease-free and clean baby shrimp, expanding areas for raising commercial shrimp, producing biological products for the aquaculture industry, producing and processing shrimp for export - Make best efforts to maintain its role as one of Vietnam’s leading seafood exporters - Maintain current export markets, continuously develop new export market and especially build Minh Phu as strong brand - Continuously expand areas for disease-free and industrial shrimp and associate with forestry and fishery farms in Ca Mau to raise shrimp in large scale in other to provide raw materials of clean shrimp to Minh Phu’s processing factories - Enhance the tasks of business administration, personnel organization and payment policy, consistently give training, attract excellent employees, have good incentive policies to the company’s leading officers, management personal and workers Medium and long-term development strategy: - Associate with Vietnam’s leading producers of shrimp feed to invest in building factories producing feed for shrimp to supply the feed to Minh Phu’ shrimp raising enterprises, forming a full circle process from producing feed and disease-free shrimp babies, raising clean shrimp to processing for export Our target is for Minh Phu to feed 5.000ha of industrial shrimp and make improvement to over 70% of whole shrimp needs of the Corporation by 2015 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - Invest strongly in science and technology to study and select the line of chemical treatments of shrimp Breeding white leg shrimp for desirable general characteristics such as fast growth and adaptability to changes in climate and weather - Research and build a modern model, which achieves high rates, low prices and ensures safety in the biological work to foster sustainable and profitable shrimp production - Associate with manufacturers of carton packaging, coated PA/PE, plastic trays, tray soap, flour production as well as the leading manufacturers of sauce in Vietnam and the world to build packaging, supplies, materials, etc factories to create a system of surrounding factories around Minh Phu – Hau Giang factory to provide for factories of Minh Phu Seafood Joint Stock Company - Join with local and foreign partners to build the Container Port on Hau Giang - Establish shrimp distribution companies in EU, Russia and China, etc in order to increase export profits and enhance the efficiency of producing, processing, exporting and distributing shrimp globally 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... solutions of Minh Phu Table 11 Minh Phu Seafood Joint Stock Company Action Plan LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Executive Summary Minh Phu Seafood Joint Stock Company (Minh Phu) ,... investigation on the case, the circumstance was found there are two main problems related to control over account receivables turnover and ineffective finance leverage of the Company In detail, the accounts... receivable turnover and the efficiency of finance leverage Firstly, Minh Phu can improve account receivables turnover through revise credit term, tight control the account receivables and increase