(Luận văn) inefficiency receivable management case of hight account receivable in thmc

1 UNIVERSITY OF ECONOMICS HO CHI MINH CITY t to ng International School of Business hi ep w n lo ad ju y th yi NGUYEN THI THU THUY pl n ua al n va ll fu INEFFICIENCY RECEIVABLE MANAGEMENT CASE OF HIGH ACCOUNT RECEIVABLE IN THMC oi m at nh z ID: 22130077 z k jm ht vb SUPERVISOR: PhD PHAM PHU QUOC om l.c gm MASTER OF BUSINESS ADMINISTRATION an Lu n va ey t re th Ho Chi Minh City – Year 2016 t to ng hi ACKNOWLEDGEMENT ep This thesis becomes a reality with the kind support and help of many individuals I w would like to extend my truthful thanks to all of them n lo ad Foremost, I would like to express my gratitude and sincere thanks to my advisor, PhD y th ju Pham Phu Quoc for his guidance, imparting his knowledge and expertise my study yi pl ua al Special thanks to members of THM Company for cooperating, supporting and n providing necessary information regarding this thesis n va ll fu My thanks and appreciations also go to my group mates who have cooperated with me m oi to complete this thesis and classmates who have willingly helped me out with their at nh abilities z z k jm encourage me in completion of this thesis ht vb Last but not least, warmest thanks to my family and my fiancé who always support and om l.c gm an Lu n va ey t re th t to ng hi TABLE OF CONTENT ep ACKNOWLEDGEMENT w n TABLE OF CONTENT lo ad CHAPTER – EXECUTIVE SUMMARY ju y th CHAPTER - PROBLEM IDENTIFICATION yi pl n ua al 2.1 Company Background n va 2.2 Situational analysis ll fu 2.3 The first tentative problem: Trade credit policy 16 m oi 2.4 The second tentative problem: Ineffective coordination 18 at nh 2.5 The third tentative problem: External effects 20 z z vb 2.6 The real core problem: Trace credit policy 21 jm ht k CHAPTER – SOLUTIONS 23 gm om l.c 3.1 Alternative - Change trade credit policy 24 3.2 Alternative - Bank guarantee 28 an Lu 3.3 Alternative - Factoring accounts receivable 29 n va 3.4 Selection of solutions 31 ey t re CHAPTER - IMPLEMENTATION 33 th CHAPTER - CONCLUSION 39 t to ng hi CHAPTER – SUPPORTING INFORMATION 40 ep 6.1 Methodology 40 w n 6.2 Definition of theoretical frameworks 41 lo ad ju y th 6.3 Consequences of ineffective accounts receivable management 45 yi 6.4 Transcript 50 pl n ua al REFERENCES 57 n va APPENDIX 63 ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re th t to ng hi List of figures ep Figure 2.1 Return on assets of THM, Nam Phong and the industry w n lo ad Figure 2.2 Return on equity of THM, Nam Phong and the industry y th ju Figure 2.3 Decrease in sales and accounts receivable yi pl n ua al Figure 2.4 Receivable turnover ratio of THM, Nam Phong and the industry n va Figure 2.5 Days sales outstanding of THM, Nam Phong and the industry fu ll Figure 2.6 Aging of THM’s accounts receivable in 2014 oi m nh Figure 2.7 Factors cause the inefficiency in accounts receivable at z z Figure 6.2 Consequences of high accounts receivable k jm ht vb Figure 6.1 Cash conversion cycle an Lu n va Table 2.1 Revenue and profit after tax of THM om l.c gm List of tables ey t re Table 2.2 Percentage of accounts receivable on credit sales th Table 2.3 Receivables’ ratios of THMC t to ng hi CHAPTER – EXECUTIVE SUMMARY ep Working capital management is paramount for an enterprise, especially for w n lo manufacturing, trading and distribution firms, because of its significant effects on the ad y th profitability and liquidity of the firm (Lazaridis & Tryfonidis, 2006) As one of three ju primary elements of working capital, accounts receivable also have impact on the yi pl operating result of the firm It is the most important source of external finance of ua al n enterprises (Petersen & Rajan, 1997) and also a supporting source for buyers (Cheng & va n Pike, 2003) Thus, the managers can use accounts receivable as a tool to increase fu ll company’s revenue, profit as well as the relationship with customers Too high amount oi m at nh of receivables, though, can lead to many consequences that make decreases on z company’s performance (Gill, Biger & Mathur, 2010) Thus, keeping accounts z jm ht vb receivable at an optimal amount is an important financial issue k The thesis is about the problem of inefficient receivable management of THM It gm l.c causes the inefficient in cash conversion cycle and working capital management which om have bad influence on the profitability of the company The study will point out the an Lu factors that make this inefficiency as well as its financial outcomes After considering n va all the aspects leading to the problem, the thesis then aims at finding and advising the ey th receivables management t re possible alternatives and practices for improving the efficiency of company’s t to ng hi CHAPTER - PROBLEM IDENTIFICATION ep 2.1 Company Background w n lo THM trading and construction limited company is the 1st level agency of Akzo Nobel ad ju y th Vietnam They distribute the painting products to the construction projects and the 2nd yi level agencies in Vietnam pl al n ua Established in 1996, THM was a retail store supplying construction materials like n va brick, iron, steel, paint, roller… THM has developed strongly and steadily In 2002, the fu ll THM retail store was developed into THM trading and construction limited company oi m with the business focus being painting products at nh z Until now, their supply chain covers almost all provinces in the South of Vietnam z vb jm ht They achieve the highest revenue in Southern Vietnam for many years In 2011, the company reached the highest revenue in both projects and agencies segments in the k gm whole Vietnam market Below is some basic information of the company om l.c  Company name: Công ty trách nhiệm hữu hạn thương mại xây dựng Thế Hệ an Lu Mới n ey t re  Office: 299 Tan Ky Tan Quy Street, Tan Son Nhi Ward, Tan Phu District, HCMC va  English name: The He Moi trading and construction limited company (THMC) th t to ng hi  Warehouse: 259 Tan Ky Tan Quy Street, Tan Son Nhi Ward, Tan Phu District, ep HCMC w  Tel/fax: (08) 35367276/8472838 n lo ad  Capacity: 4.000.000.000 VND y th ju  Company structure: general director, chef accountant, warehouse manager, yi pl sale leader and 20 staffs ua al n Directorate n va ll fu m Warehouse department Accountants Warehouse staffs Sales department oi Accounting department at nh z z k jm ht vb Salesman om l.c gm 2.2 Situational analysis an Lu Before conducting interviews with THM’s members, Company’s annual reports are n va provided Having a glance at financial documents reveals the basics of the company’s th losses in 2013 and 2014 ey total revenue and the profit during the period of years The company even made t re situation at that time The most noticeable information is the significant decrease in t to ng hi Table 2.1 Revenue and profit after tax of THM ep w 2011 2012 2013 2014 n lo ad Revenue ju y th Profit after tax 83,873,256,871 50,348,740,377 1,185,546,709 26,389,069 34,229,467,210 26,441,898,754 - - 252,311,429 45,377,948 yi pl n ua al (THM’s Income statement, 2011-2014) n va In 2011, the return rates of THMC were very high in comparison to the rates of ll fu construction materials industry Especially, return on equity (ROE) was over 45% m oi However, in the next years, ROA and ROE of the firm was decreased dramatically nh at In 2014, although the industry ROA and ROE ratio recovered and increased to 3% and z z 10%, respectively, THM’s ratios continued falling ht vb k jm In comparison to Nam Phong Company which is another supplier of Akzo Nobel’s l.c gm products, the data also indicates the poor outcome from THM During the period of years from 2012 to 2014, Nam Phong’s return rates increased to the very high point om an Lu The comparisons with the industry and Nam Phong, it can be easily noticed point out n va the ineffective in working of THM in the last years The figures below will show the ey t re details th t to ng hi ROA ep 16.00% w 14.00% n 12.00% lo 10.00% yi 2.00% ju 4.00% y th 6.00% ad 8.00% pl 0.00% n 2011 ua al -2.00% 2012 va THM 2013 Nam Phong 2014 Industry n ll fu m oi Figure 2.1 Return on assets of THM, Nam Phong and the industry at nh z ROE z ht vb 50.00% jm 40.00% k 30.00% gm 20.00% l.c 10.00% om 0.00% an Lu -10.00% -20.00% 2012 Industry ey t re Nam Phong 2014 n THM 2013 va 2011 th Figure 2.2 Return on equity of THM, Nam Phong and the industry 53 t to ng hi - Ms Nhi: One another reason is because the Sales department The salesmen ep not bother the customer’s creditworthy when selling products They just focus on w increasing the revenue At the end, we – the finance – accounting department have to n lo ad deal with the large amount of bad dept I think there is a serious conflict between sales y th department and accounting department ju yi Mr Hai: Actually the main income of a salesman is come from the commission pl - al n ua of his revenue sold in that month Therefore we often are motivated to sell as many n va products as possible Moreover, the sales decreased recent years; selling products is ll fu harder So that we all have to try more to attract customers and increase the revenue oi m at nh How does the company grant credit to a customer? Mrs Nguyet: Most of customers of THM are contractors of construction z z - vb jm ht projects They buy in bulk and value of purchasing contracts are large and various k Thus, THM grants different credit sales amount for different customer We mainly gm l.c based on the design plans of the projects that the customers provide to offer the limit of om sales on credit The limit is about 10% of the total amount that customers are going to an Lu spend for painting products in the projects We will stop supplying to the customer who n va have not pay their on due debts or their debts exceeds the credit limit ey t re So there is no credit standard for customer assessment? th - Mrs Nguyet: No We set the credit limit based on the projects information 54 t to ng hi How about other terms? ep - Ms Nhi: We apply the credit period of 45 days for all customers and offer 2% w n lo cash discount for immediate payment purchases ad y th And how much discount rate you offer for early payment? ju yi Ms Nhi: There is no discount for early payment for sales on credit After the pl - al n ua first day, customer has to pay all the value of the contract va n How you collect the due accounts receivable? ll fu m Ms Nguyet: When there is a mature debt, the company often makes calls and oi - nh at sends request payment letters to customers The debts are frequently paid partly and z z less than my expectation jm ht vb Do you apply a fine for late payment or use any legal actions to collect the debts? k gm Ms Nguyet: When setting a purchasing contract, we always write down the l.c - om penalty interest rate for late-payment However, we have never required for that fine I an Lu think it will affect the relationship and the pleasure of the customers So that we just n va apply the law collection policy to the customers who are unwilling to pay and delay the ey t re payment in too long time th Do you any other way to collect the overdue debt, especially the bad debts? 55 t to ng hi - Ms Nguyet: When there is a debt held in to long period and that customer is not ep willing to pay, we have to take legal action And we once had to sell a bad quality w receivable for a collecting company It was very expensive Those companies often n lo ad take from 20% to 40% of the amount of accounts receivable that they buy However it y th is still better than losing total of that debt ju yi pl Interview with a customer who visit THM to buy products: n ua al n va How long have you worked with THM company? fu ll I have worked with THM for a long time This is a qualified and reputation firm oi m nh What are your standard to choose a supplier? at z z ht vb It is depended so much on each project Big project requires the financial conditions of k jm the supplier It has to be strong enough to supply products in a long time with a high competitive om l.c gm amount of credit sales The qualification and the price of products also have to be an Lu How about your company’s order amount? Is there any change recently? Why? ey t re down recent years So it is harder to sell a real estate, a house or an apartment And I n va Volume of orders now is lower than before The real estate market has been going th 56 t to ng hi have to be honest that, there are a lot of suppliers who provide products with very ep competitive prices, promotion policies, and better credit term for customers w n lo Some of the companies somehow delay their payment Our bad debt rate keeps ad ju y th increasing recent years Would you tell me some reasons for that delay? yi Actually, our company sometimes still has to delay our payment I not know how pl al n ua the other companies are, but we not want to delay the debt The real estate market n va affects a lot in our cash flow For example when an investor put his money in a ll fu building, he expects to sell that building and use that inflow cash to pay his debt m oi However, if he cannot sell the building, he has to delay the debt at nh z Thank you for your sharing We really appreciate that z k jm ht vb om l.c gm an Lu n va ey t re th 57 t to ng hi REFERENCES ep Aggarwal, K., & Tyagi, A (2014) Inventory and Credit Decisions under Day-Terms w Credit Linked Demand and Allowance for Bad Debts Advances In Decision n lo Sciences, 2014, 1-11 ad ju y th Berry, A & Jarvis, R (2006) Accounting in a Business Context (4th ed) London, yi UK: Thomson pl ua al Brennan, M., Maksimovic, V & Zechner, J (1988) Vendor Financing Journal of n Finance, 43,1127-1141 n va ll fu Brigham, E., & Ehrhardt, M (2013) Financial Management: Theory & Practice (14th oi m ed) South-Western: Nelson Education, Ltd Retrieved from nh http://www.swlearning.com/finance/brigham/theory11e/web_chapters/bri59689 at z z _ch27_web.pdf vb jm ht Burez, J., & Vandenpoel, D (2008) Separating financial from commercial customer k churn: A modeling step towards resolving the conflict between the sales and gm l.c credit department Expert Systems With Applications, 35(1-2), 497-514 om Cheng, N., & Pike, R (2003) The trade credit decision: evidence of UK firms n va Construction material financial statement (2015) Retrieved from an Lu Managerial And Decision Economics, 24(6-7), 419-438 ey th Cuñat, V (2007) Trade Credit: Suppliers as Debt Collectors and Insurance t re http://www.cophieu68.vn/incomestatementq.php?id=^vlxd 58 t to ng hi Providers The Review of Financial Studies,20(2), 491–527 ep Deakins, D., Logan, D & Steele, L (2001) The Financial Management of the Small w n Enterprise ACCA Research Report No 64 lo ad Deloof, M & Jeger, M (1996) Trade Credit, Product Quality, and Intragroup Trade: y th Some European Evidence Financial Management, 25(3), 945-968 ju yi pl Deloof, M (2003) Does Working Capital Management Affect Profitability of Belgian al n ua Firms? 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the factoring option Trends in International an Lu n va ey t re th 63 t to ng hi APPENDIX ep Appendix 1: Income statement of THM Unit: VND w n Items 2014 2013 2012 2011 lo ad Revenue from sales and 26,441,898,754 34,229,467,209 50,348,740,377 services y th 11,771,663 ju Depreciations 83,873,256,871 64,704,160 yi pl Net revenue from sales and 26,441,898,754 34,217,695,546 50,284,036,217 services ua al 25,605,589,897 32,742,950,564 48,110,417,764 Cost of goods sold 83,873,256,871 79,584,299,862 n n va Net income from sales and services 836,308,857 1,474,744,982 2,173,618,453 4,288,957,009 financial 4,691,687 6,353,922 nh 99,534,130 299,831,043 Selling expenses 492,249,759 786,082,349 Administrative expenses 501,528,084 440,563,460 -252,311,429 -45,377,948 Financial expenses 13,643,320 oi m from ll fu Revenue activities 584,626,898 1,129,376,456 1,177,971,708 514,300,083 1,089,332,090 at 449,712,166 z z k 93,873,068 1,437,026,313 gm l.c 61,886,318 12 Other expenses om 0 -61,886,318 -252,311,429 -45,377,948 31,986,750 1,437,026,313 5,597,681 251,479,604 26,389,069 1,185,546,709 n va 15 Tax an Lu 14 Net income before taxes jm ht 11 Other revenues 13 Other net income vb 10 Net income from business activities -252,311,429 -45,377,948 ey t re 16 Net income after taxes th 64 t to ng hi Appendix 2: Balance sheet of THMC ep Unit: VND w n 2014 2013 28,399,207,109 31,104,656,317 6,680,845,994 9,143,524,331 - - 6,310,737,088 lo ASSETS ad ju y th A -Current assets I Cash and cash equivalents 2012 2011 43,465,677,887 1,333,853,168 4,914,810,672 - - 8,624,257,077 9,228,399,034 12,156,451,169 8,624,257,077 9,228,399,034 12,156,451,169 - - 24,176,924,545 24,448,027,341 yi 36,331,973,260 pl n III Accounts receivable ua al II Short-term investment 6,300,090,088 ll fu customers n va Accounts receivable from oi m 10,647,000 z accounts - z - at Allowance for doubtful nh Other accounts receivable 317,050,726 391,505,110 1,592,796,513 1,946,388,705 l.c 520,705,069 391,505,110 520,705,069 28,716,257,835 31,496,161,427 36,852,678,329 556,824,894 an Lu 317,050,726 556,824,894 om TOTAL ASSETS 224,806,167 gm Fixed assets 352,506,533 k B - Long-term assets 13,112,068,742 jm V Other current assets 15,055,117,494 ht vb IV Inventories 44,022,502,781 n va ey t re th 65 t to ng hi ep 2014 2013 25,203,378,910 27,730,971,074 33,040,742,551 40,967,034,059 25,203,378,910 27,730,971,074 31,490,742,551 40,967,034,059 1,400,000,000 1,851,864,235 5,383,846,256 1,550,000,000 25,528,383,192 23,916,561,891 38,341,448,660 350,723,647 390,334,404 75,585,399 1,800,000,000 1,000,000,000 1,550,000,000 - w LIABILITIES AND 2012 2011 n EQUITY lo ad A Liabilities ju y th I Current liabilities yi pl Current liabilities n va ll fu state budget 23,803,378,910 n Taxes and payable to ua al Accounts payable oi m Other current liabilities - at nh II Long-term liabilities - z z 3,512,878,925 3,765,190,353 3,811,935,778 3,055,469,722 Paid-in capital 2,600,000,000 2,600,000,000 jm ht vb B - Equity 912,878,925 1,165,190,353 1,211,935,778 28,716,257,835 31,496,161,427 36,852,678,329 2,600,000,000 2,600,000,000 k 44,022,503,781 om AND EQUITY 455,469,722 l.c TOTAL LIABILITIES gm Undistributed earnings an Lu n va ey t re th 66 t to ng Appendix 3: Income statement of Nam Phong hi ep unit: VND w n Items 2012 lo ad Revenue from sales and services 2013 13,799,545,230 13,218,935,488 17,885,479,784 0 13,799,545,230 13,218,935,488 17,885,479,784 10,720,783,418 9,296,967,642 10,997,929,036 3,078,761,812 3,921,967,846 6,887,550,748 267,111,994 60,317,724 112,639,012 16,229,450 3,770,753,374 5,863,858,632 ju y th Depreciations yi Net revenue from sales and services 2014 pl ua al Cost of goods sold n Net income from sales and services n va from financial fu 51,606,726 ll Revenue activities oi m 2,793,200 Financial expenses nh 3,072,798,738 business 54,776,600 0 l.c 0 gm Other net income k 54,776,600 305,687,454 1,067,780,390 9,585,906 61,137,490 213,556,078 45,190,694 244,549,964 854,224,312 om an Lu Net income after taxes 1,067,780,390 jm Other expenses ht Tax 305,687,454 vb Other revenues Net income before taxes z from z Net income activities at Selling expenses n va ey t re th 67 t to ng hi Appendix 4: Balance sheet of Nam Phong ep ASSETS 2012 2013 2014 7,800,321,856 8,243,825,542 11,362,651,418 5,739,273,550 5,607,976,834 6,739,952,128 0 1,539,515,336 1,871,418,598 2,664,897,076 1,092,561,410 1,403,390,170 1,478,813,752 Advance payment to supplier Other accounts receivable 446,953,926 468,028,428 978,083,324 0 208,000,000 al 0 195,797,852 496,496,734 1,628,953,280 325,735,118 267,933,376 328,848,934 300,838,588 632,938,366 185,475,842 49,640,018 11,923,566 101,469,092 101,469,092 101,469,092 -51,829,074 -89,545,526 -101,469,092 251,198,570 621,014,800 185,475,842 8,101,160,444 8,876,763,908 LIABILITIES AND EQUITY 11,548,127,260 Items w A -Current assets n II Cash and cash equivalents lo ad II Short-term investment y th III Accounts receivable ju Accounts receivable from customers yi pl ua Allowance for doubtful accounts n IV Inventories n va V Other current assets fu B - Long-term assets ll I Fixed assets - Tangible fixed assets costs oi m at z II Real estate investment TOTAL ASSETS nh - Depriciation z ht vb 2012 2013 2014 A Liabilities 5,358,731,532 5,889,785,032 I Current liabilities 4,357,922,564 4,888,976,064 6,706,115,104 Current liabilities gm jm Items 0 Accounts payable 3,917,781,108 4,209,762,490 4,999,290,844 93,045,308 320,817,766 330,116,148 250,934,978 338,638,700 k om l.c 861,712,342 an Lu Advance payment from customer Taxes and payable to state budget 7,706,924,072 16,980,000 107,460,830 506,473,218 1,000,808,968 1,000,808,968 1,000,808,968 B - Equity 2,742,428,912 2,986,978,876 3,841,203,188 2,000,000,000 2,000,000,000 2,000,000,000 742,428,912 986,978,876 1,841,203,188 8,101,160,444 8,876,763,908 11,548,127,260 ey th TOTAL LIABILITIES AND EQUITY t re Undistributed earnings n Paid-in capital va other current liabilities II Long-term liabilities