THEORETICAL FRAMEWORK OF ACCOUNT RECEIVABLE MANAGEMENT
Account receivable
When assessing a company's financial health, investors, bankers, and business partners consider not only its performance but also its debts A crucial aspect of this evaluation is accounts receivable, which represents the money owed to the business by its debtors Accounts receivable are integral to the operational and financial landscape of any enterprise, serving as a key indicator of its financial status In the following sections, we will explore the concept of accounts receivable and their significance for businesses.
Accounts receivable represents an asset for a business, encompassing all debts that remain uncollected, regardless of their maturity status This includes unpaid transactions and any financial obligations owed to the enterprise by other companies or individuals.
Accounts receivable are recorded as assets on the balance sheet, representing future payments expected to be received Long-term receivables, which mature after an extended period, are classified as long-term assets, while short-term receivables are categorized as current assets In accounting, receivables due within one year or within a business cycle are classified as current assets, whereas those due after more than one year are considered long-term assets.
Receivables on a balance sheet are categorized into trade and non-trade receivables Trade receivables stem from the provision of goods or services during regular business operations and can be classified as either accounts receivable (short-term) or notes receivable (long-term) In contrast, non-trade receivables originate from transactions unrelated to the sale of goods or services, including promissory notes.
This report focuses on accounts receivable, encompassing various financial elements such as employee advance amounts, tax rebates, insurance indemnities, deposits, and financial receivables like interest and dividends For the sake of clarity, we will refer to these collectively as "accounts receivable."
Account receivables often include the following items:
Receivables from customers, or trade-account receivables, represent the debts owed to a business from sales of goods and services conducted in the normal course of operations When a company sells goods or services without immediate payment, it extends trade credit, resulting in accounts receivable that are expected to be collected in the future This practice, known as selling on credit, allows customers to access essential goods and raw materials for production through deferred-payment sales Such arrangements serve as a crucial short-term financing option for businesses, particularly for commercial enterprises.
In developing economies, consumers typically buy goods or services either through immediate cash payments or by deferring payments with the seller's consent Sellers may receive cash upfront or face delays in payment collection, often extending credit more readily than financial institutions This practice results in the creation of accounts receivable when businesses provide credit to their customers.
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In a market economy, the appropriation of capital among businesses is a common commercial practice, often seen as a strategic tactic for enterprises lacking sufficient funds As a result, effective management of accounts receivable becomes crucial for companies that rely heavily on capital appropriation rather than venture capital.
Advanced payments to suppliers refer to the funds that a business pays upfront to vendors for acquiring raw materials, finished goods, or services that have not yet been delivered These payments are crucial for managing supply chain operations and ensuring timely procurement.
Intercompany receivables arise between companies with independent accounting system and its subsidiary companies with separate accounting system or between subsidiary companies.
Employee advances refer to funds or materials provided by a company to its officials or employees for the purpose of completing assigned tasks, such as purchasing goods or covering expenses.
Mortgages often occur in relation to loans With a mortgage loan, the borrower must deliver his asset to lender in lending period.
Collateral refers to the sum of money that a business pays to the owner when renting machinery or equipment This payment serves to enhance the renter's accountability for the proper use and timely return of the leased property The collateral amount is determined by the owner and can exceed the actual value of the leased asset.
Deposit is the amount of money or property paid in advance as security in relations to trade, become sales agency, etc.
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1.1.3 Roles of account receivables for an enterprise:
As economies evolve, credit relationships become increasingly complex and diverse, making debt an inevitable aspect of business Almost all enterprises engage in business activities that involve accounts receivable, which are essential to their operations However, the value of these receivables can vary significantly among businesses, ranging from minimal amounts to levels that can be difficult to manage.
Accounts receivable represent the amounts owed to a business by customers for goods or services sold on credit This capital, essentially pre-paid by customers, is crucial for enterprise cash flow Additionally, businesses may prepay suppliers for materials, creating advances that are also recorded as accounts receivable Other forms of receivables can include advances to employees When accounts receivable arise, it indicates that cash has been paid for future returns However, if these receivables accumulate over time with significant amounts and high risks of non-recovery, they can negatively impact the business, prompting the need to limit their size.
The presence of account receivables offers numerous advantages, particularly in today's challenging market conditions Extending credit to customers and establishing trade credit are effective strategies for expanding market reach, enhancing competitive capabilities against rivals, and attracting new potential clients.
In the following parts, we will discuss in details the roles of account receivables for the enterprise that is seller in a sales transaction.
1.1.3.1 The benefits of increasing account receivables:
To remain competitive in the market, businesses must leverage their capabilities, resources, and tools effectively A well-structured credit policy serves as a powerful strategy to enhance sales performance By relaxing credit conditions, companies can attract more customers and increase sales volume Furthermore, trade credit not only boosts a company's prestige but also builds a strong reputation in the market, encouraging customers to choose their products.
Account receivables management
Effective account receivables management is crucial for Chief Financial Officers (CFOs) as it directly impacts working capital decisions This management involves evaluating the trade-off between the costs associated with account receivables and the potential revenue generated from selling products on credit.
Account receivables management requires answers for the following five set of questions:
Enterprises typically sell their goods or services under specific conditions, which may include payment terms, delivery timelines, and product guarantees They often set a defined period for customers to settle their bills, which can vary based on the industry and customer relationship Additionally, many enterprises offer discounts to incentivize prompt payment, encouraging cash flow and fostering positive customer relationships.
Which guarantee of the amount owed by customers does the enterprise need?
Do the customers have to sign a receipt or other official kind of debenture?
To effectively classify customers based on their ability to repay loans promptly, enterprises should analyze historical records and financial statements Additionally, relying on bank certifications can provide valuable insights into a customer's financial reliability This dual approach ensures a comprehensive understanding of each customer's repayment potential.
To manage risks effectively, enterprises establish specific credit limits for each customer, balancing the potential for bad debts against the benefits of cultivating a loyal customer base While some businesses may deny credit to customers deemed suspicious, others may choose to accept certain risks, viewing bad debts as a cost associated with developing a larger and more consistent clientele.
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Enterprises utilize various methods to collect mature debts, including regular follow-ups, payment reminders, and negotiation strategies to encourage timely payments They monitor payments through systematic tracking systems that alert them to overdue accounts and payment patterns For customers unable to settle their debts, businesses often explore flexible repayment plans or alternative solutions before considering disengagement, ensuring they maintain a balance between recovery efforts and customer relationships.
1.2.2 Roles of account receivables management:
Effective management of accounts receivable is crucial for businesses, as it can represent a substantial portion of total assets When accounts receivable are managed well, it leads to higher capital turnover, which in turn fosters the growth and development of business activities.
A professional and timely accounts receivable monitoring system provides essential information that helps businesses minimize the risks of uncollectible debts and reduce collection costs.
Figure 1: Principle of account receivable management processing
In financial relationship among enterprises, the enterprise that plays role of seller often has to sell on credit in specific period of time and the enterprise that is
Increase costs related to account receivables
Opportunity cost of increasing account receivables
Compare between profits and incremental costs
In the realm of business, managing accounts receivable is crucial as it involves a delicate balance between maximizing profits and minimizing risks Enterprises often extend payment periods to customers, creating accounts receivable that can vary significantly in scale While selling on credit can enhance sales opportunities and profits, excessive credit sales can lead to increased administrative costs and a higher risk of bad debts, ultimately impacting cash flow and financial stability Effective receivables management is essential to ensure that businesses maintain solvency and financial capacity while capitalizing on sales potential.
The opportunity cost of rising account receivables represents the capital tied up by customers, which could otherwise be utilized for greater profitability While extending credit to customers can boost sales, it simultaneously sacrifices potential profits that could be realized if the owed amounts were collected promptly.
To determine if the enterprise should boost credit sales, the CFO must assess whether the additional profits outweigh the costs associated with accounts receivable and opportunity costs Essentially, it's crucial to evaluate if the savings from reduced costs can sufficiently compensate for any potential decline in profits Following this analysis, the enterprise can formulate an appropriate credit policy for its customers.
The success of a business largely hinges on product demand, which directly influences sales, profits, and stock prices While various external factors affect sales, several key elements remain within the company's control The primary controllable factors impacting demand include sales prices, product quality, advertising strategies, and the firm's credit policy.
Trade credit policy significantly influences the size and efficiency of accounts receivable by balancing risks and profitability This policy falls under the CFO's administrative control and plays a crucial role in stabilizing the enterprise.
A comprehensive credit policy is essential for businesses as it directly impacts sales and accounts receivable management The CFO plays a critical role in adjusting credit standards and limits to balance profit and risk, recognizing that lowering these standards can boost sales but also increase accounts receivable This necessitates careful evaluation due to the associated costs Additionally, adopting a long-term sales credit policy typically results in higher debts compared to short-term policies Since the credit policy influences the volume of goods sold, it is crucial for both sales and marketing executives and the CFO to collaborate on its implementation Ultimately, establishing tailored credit policies for each customer enhances the efficiency of accounts receivable management and is closely linked to the company's inventory management.
Contents of a trade credit policy include credit standards, credit periods, discount, collection policy and credit risks which are discussed more details in the following parts.
Credit standards define the financial criteria necessary for accepting customers into a credit agreement For businesses, these standards involve analyzing financial ratios, including debt and interest coverage ratios, as well as reviewing the customer’s credit history to assess their payment reliability In the case of individual customers, their credit score, determined by credit rating agencies, is the primary factor Ultimately, the crucial consideration for both business and individual customers is whether they are likely to fulfill their payment obligations on time.
To optimize profitability, businesses should consider reducing credit standards to ensure that the profits gained from increased credit sales at least match the associated costs of selling on credit This involves balancing the incremental profits against the additional costs incurred from accounts receivable that result from these lowered credit standards The challenge arises when
THE CURRENT SIATUATION OF ACCOUNT RECEIVABLE
Overview of Viglacera Packings and Brake Lining Joint Stock Company
2.1.1 The process of establishment and development of Viglacera P&B Co: 2.1.1.1 General information:
Company Name: Viglacera Packings and Brake Linings Joint Stock Company
Office Address: No 676 Hoang Hoa Tham Street, Tay Ho District, Ha Noi, Viet Nam Factory Address: Lien Co Village, Dai Mo Commune, Tu Liem District, Ha Noi Production Area: 30,156 m 2
Website: http://www.blc.com.cn
2.1.1.2 The history of establishment and development:
Precursor of Viglacera P&B Co is Hanoi Fibrocement Factory At start-up, the company was just a research group of 6 people that formed to produce Fibrocement roofing.
According to Decision No 24BCN-KH dated January 8, 1958, signed by Minister of Industry Le Thanh Nghi, Hanoi Fibrocement Factory was established under the authority of Mining and Metallurgical Department
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From foundation to 1974, the factory concentrated on producing roofing materials, Fibrocement tiles with an Amiang mine in Hoa Binh.
In 1974, shifting consumer preferences and dwindling Amiang reserves led to concerns over quality, prompting the factory to cease production and sales of Fibrocement tiles Consequently, the company redirected its efforts towards researching and developing marble tiles.
In 1978, the factory bought 30 hydraulic presses that were major machines to produce marble tiles At that time, marble tiles were primary products of the factory.
In 1979, marble tile products received the gold medal at the Vietnamese Trade Exhibition of Economic and Technological Achievements, reinforcing the factory's strong market position.
In 1986, the factory transitioned to a market-oriented operational model, embracing a socialist management approach that emphasizes covering expenses through generated income.
Also in 1986, the factory researched to produce automotive brake pads.
In 1992, the factory was rebranded as Ha Noi Marble Tiles and Brake Linings Factory, operating under the Construction Corporation of the Ministry of Construction Between 1992 and 1997, its main products included marble tiles and automotive brake pads.
In 1997, because production of marble tiles didn’t bring high economic efficiency, the corporation allowed the factory to stop manufacturing that item.
In May 1998, the corporation enhanced its factory by investing in a technological line dedicated to the production of corrugated carton packings, with the primary products being corrugated carton packings and automotive brake pads during this time.
In 2003, the Ha Noi Marble Tiles and Brake Linings Factory, part of the Glass and Constructional Ceramic Corporation, was transformed into a joint-stock company, following Decree No 64/2002/ND-CP issued by the Government on June 19, 2002, and Decision No 1108-QD-BXD from the Minister of Construction on August 14, 2003, with 51% of its capital held by the state.
Viglacera Manufacturing and Trading Joint Stock Company was established this year, operating in compliance with Business Law and possessing a charter capital of 5 billion VND.
In June, 2008, the company was again renamed Viglacera Packings and Brake Linings Joint Stock Company (Viglacera P&B Co) that has been maintained until today It is a subsidiary of Viglacera Corporation.
From 2008 to now, Viglacera P&B Co always fulfills excess of predetermined plan, incessantly develops own products and market shares.
As of 2011, the company had a total capital exceeding 40 billion VND, with shareholders' equity surpassing 13 billion VND Employing nearly 250 workers, the company generated an annual revenue of approximately 40 billion VND, resulting in a post-tax income of around 500 million VND and contributing over 130 million VND to the state budget.
Viglacera Packings and Brake Linings Joint Stock Company, though a relatively new player in the market with just four years of operation, has roots that trace back fifty years in Vietnam Since its inception, the company has consistently evolved and expanded, achieving significant success and establishing a stable position within the industry.
Viglacera Production and Commercial Joint Stock Company has function of both producing and trading.
The company operates in three primary business areas: the production and trading of construction materials, the manufacturing and trading of friction materials such as automotive brake pads, and the production, trading, and printing of packaging and related printing preparations Additionally, the company engages in the trade of printing materials and offers services for the receiving and delivery of goods.
2.1.2.1 Producing and trading construction materials:
At present, Viglacera P&B Co has three production lines Italy of brick and tile construction with refined clay with the output of 70 million a year The Tuynel oven
Báo cáo thực tập tổng hợp being given the product, which is fully cooked hardness, durability and high pressure, less absorbent, meet the needs of customers' tastes.
The company is supplying these building materials: stones for building, tiles and bricks, centrifugal concrete pipe Moreover, it is now doing business on steel shapes and other building materials.
Building stones: the company can supply millions of m3/1 year with various kinds (1x2, 4x6, 5x7, 0x4,
20x30, quarried stones, small stones, etc.) The differences among kinds are about size and pattern They are applied
Tuynel tiles and bricks offer high-quality products, boasting an impressive production capacity of 30 million bricks annually Their product range includes 4-hole hollow bricks, half-hole hollow bricks, wind pipe bricks, traditional tiles, and various types of tiles such as gạch tàu These products are manufactured in accordance with an International Quality Management System, ensuring exceptional quality and reliability.
Centrifugal concrete pipes: Concrete-mixer is automatically along with modern equipments, capacity of
60.000 m 3 a year These products are high quality and various sizes that are suitable for customer needs (from 300 to
2.000 centimeter pipes) It is applied International Quality
Viglacera P&B Co is renowned for its strong tradition and commitment to product quality, prioritizing customer satisfaction and delivering exceptional service The company is fully equipped to fulfill diverse customer needs regarding product quantity, variety, and quality specifications.
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2.1.2.2 Producing and trading friction materials:
Viglacera P&B Co is dedicated to the development and production of high-quality brake pads for automobiles and motorbikes, utilizing advanced raw materials, technology, and equipment imported from Europe Their products are specifically designed to withstand the Vietnamese climate, making them highly favored by consumers.
The company adheres to the QS9000 Quality Assurance System, offering around 2,000 varieties of brake pads and over 30 distinct formulas, including non-asbestos, semi-metal, and porcelain options, to cater to diverse customer needs With an impressive annual production capacity of approximately 4 million sets for cars and 1 million sets for heavy or engineering vehicles, the company ensures high-quality solutions for various automotive applications.
Besides, the company produces special friction materials for heavy industries such as: mechanics, mining, metallurgy, etc and for light industries such as textiles, footwear, etc.
The technological process of production brake pads is quite simple, but requires high craft nature.
Viglacera P&B Co is Vietnam's pioneering manufacturer of brake pads, with its friction products branded as "BLC" gaining increasing recognition in both domestic and international markets.
2.1.2.3 Producing, trading and printing packings and other printing preparations:
The current situation of account receivable management in Viglacera P&B Co: 34 1 Account receivables in Viglacera P&B Co
2.2.1 Account receivables in Viglacera P&B Co:
Accounts receivable is a key component of total assets, alongside cash and cash equivalents, inventories, fixed assets, and other assets For detailed information on these items, refer to Viglacera P&B Co’s balance sheet in APPENDIX B.
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Figure 5: Value of account receivables compared to total assets
Viglacera P&B Co has a concerningly high proportion of account receivables, which constitute 45-60% of total assets, significantly above the typical range of 15-20% for manufacturing and trading companies This excessive reliance on account receivables has resulted in a diminishing cash flow, as evidenced by the declining cash and cash equivalents over the past three years The current economic climate exacerbates this issue, making it increasingly difficult for the company to collect debts, particularly since a substantial portion of their receivables is tied to customers facing capital challenges.
Value % of total receivables Value % of total receivables Value % of total receivables
Table 4: Structure of account receivables in Viglacera P&B Co
The data indicates that accounts receivable from customers constitute the largest portion of total receivables, consistently around 90% over the past three years Notably, in 2011, accounts receivable surged by approximately 23% compared to 2010, outpacing revenue growth of 8.8%, while the increase from 2009 to 2010 was only about 5% Most receivables stem from former customers, with new customers contributing minimally; however, as these new customers age, they will transition into the former category This increase in accounts receivable is primarily attributed to the rising debts of longstanding customers.
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Table 5: Structure of account receivables from customers
The rise in accounts receivable from former customers over the years, coupled with a minimal share from new clients, indicates that the company struggles to collect outstanding debts from its previous customers To mitigate increasing arrears, the company must implement a more effective administrative policy.
Advanced payments to suppliers hold small percent It proves that the company is very prestigious towards suppliers But these amounts continuously decrease from
From 2009 to 2011, the company experienced a high level of credit sales to customers, reaching 60%, which exacerbated its capital shortage During challenging economic conditions, demand decreased, forcing the company to reduce production and subsequently lower material purchases from suppliers This decline in advanced payments to suppliers is not a positive indicator for the company's financial health.
Viglacera P&B Co has minimal intercompany receivables due to a limited number of agents, primarily concentrating their efforts in the northern region, particularly Hanoi While these receivables are not classified as bad debt, the company remains vigilant and is implementing appropriate solutions for adjustments.
In conclusion, the above analysis indicates that account receivable management still has many problems The company needs to find methods to quickly collect account receivables, especially from customers.
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2.2.2 Account receivable management in Viglacera P&B Co:
2.2.2.1 The current trade credit policy of Viglacera P&B Co:
Viglacera P&B Co categorizes its long-standing, reputable customers as type A, recognizing their strong financial stability and established trust within the enterprise This classification highlights the mutual understanding and enduring relationships that have developed over time.
Viglacera P&B Co categorizes smaller businesses with stable, long-term relationships but occasional late payments as Type B clients Although these companies possess solid financial capabilities, their order frequency is inconsistent, often resulting in delays of up to three months post-contract signing without incurring bad debts.
The enterprise categorizes customers with low prestige and uncertain financial capabilities as type C Despite this classification, the company remains committed to creating job opportunities for workers by offering products to these customers, albeit with specific payment and financing conditions.
For potential customers, the enterprise classifies them as type N and applies credit terms at moderate and explorative level.
To determine which type of customers are, the company mainly bases on the customers’ past credit record.
In reality, the company mostly accepts to sell on credit for traditional, perennial customers.
State-owned enterprises generally enjoy a higher level of trust compared to private companies, often allowing them to sign contracts without the need for mortgages, collateral, or deposits.
New customers that don’t have introduction of familiar customers are compelled to have mortgages, collateral, or deposits in signing contracts.
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For new customers that the company builds relationship with through marketing, to assess their prestige, the company bases on the following elements:
Credit performance/results in the past: collected from many sources
Mortgages to ensure for customers’ debts
Capital: based on financial reports to examine customers’ current solvency.
In recent years, the company lowered credit standards for some kinds of customers, specifically that lowering is about deposit ratio.
For type A customers, the enterprise often don’t require them to deposit any % of value of the new contract versus 5% before.
For type B customers, the enterprise often requires them to deposit 5 % of total value of the new contract versus 10% before.
For type C and N customers, this ratio is 10% versus 12% for types C and 15% for type N before.
The company doesn’t differentiate old or new customers, it apply the credit period of 30 days for all customers.
The company does not offer any discounts to customers but allows them to postpone payments for a limited time If payments become overdue, the company will impose interest charges on the outstanding amounts, calculated according to the interest rates published by the State Bank of Vietnam (SBV) Typically, the company's interest rates range from 60% to 80% of the SBV's rates.
In collection policy, Viglacera P&B Co applies two payment methods: direct payment or transfer through banks.
The collection policy for delivering goods is determined by the specific delivery route The Planning Department collaborates with the Accounting-Finance Department to communicate the schedule for goods and other pertinent information effectively.
The Accounting-Finance department relies on the comprehensive internship report to inform customers about making partial payments on contract values, which helps the company secure necessary capital for production However, these partial payments often fall short of the department's expectations Once all goods are delivered, customers are granted a 30-day period to settle the full contract amount Typically, customers make multiple smaller payments throughout the delivery process, accumulating their total until the credit period concludes It's important to note that the practice of making multiple payments in line with the delivery schedule is not a mandatory requirement.
Viglacera P&B Co has a legal collection policy for overdue debts, but it rarely employs this method to maintain its reputation and customer satisfaction The company reserves this approach for clients facing bankruptcy or those with a history of chronic late payments.
Besides, the company considers both the value and time of delinquent contract.
To maintain positive customer relationships, it's important to gently remind clients about payment deadlines, especially when the amount owed is small and the delinquency period is short This approach helps avoid damaging their self-esteem and preserves their feelings towards the company.
Net revenue from sales and services 41,574,833,962 44,165,065,581 48,084,825,913
Table 6: Viglacera P&B Co’s days sales outstanding
Both two ratios (account receivable turnover and days sales outstanding) tend to deteriorate in three recent years
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Achievements and shortcomings of account receivable management in Viglacera P&B Co
To some extent, Viglacera P&B Co’s current collection policy creates certain advantages for the company For example:
Building good relationship with current customers based on conditions favorable for them
Creating good impression for potential customers.
Maintaining perennial relationship with other partners,
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Promoting customers to pay debts,
Stimulating customers to buy more products,
Ensuring competitive position of the company in the market,
Enhancing reputation and prestige of the company
In recent years, Viglacera P&B Co has effectively managed its account receivables, resulting in no unrecoverable debts While there are some bad debts, they are minimal, with overdue accounts typically not exceeding one year, except for a notable case in 2011 This demonstrates the company's strong commitment to overseeing and expediting debt collection processes.
The company maintains strong relationships with its suppliers, enjoying a high level of prestige that has led to reduced demands for advanced payments in recent years This positive dynamic helps minimize the capital tied up in advance payments and lowers accounts receivable, enhancing overall financial efficiency.
Between 2009 and 2011, despite significant fluctuations in both the global and Vietnamese economies, Viglacera P&B Co managed to maintain a stable and safe range for its customer account receivables, even as their aging extended.
The carton packaging and brake pad markets are characterized by discerning customers and intense competition, particularly in the brake pad sector, where precision and safety are paramount The company maintains stringent credit standards tailored to each contract and customer, demonstrating its commitment to quality While the application of these standards may not be extensive or highly efficient, they highlight the company's dedication to meeting customer needs and maintaining industry standards.
The efficiency of account receivable management is low: account receivable turnover is small and average collection period is long.
While the flexible collection policy offers advantages, it can also negatively impact customers who frequently default on payments Prolonged and excessive appropriations can lead to significant financial losses for these customers.
Báo cáo thực tập tổng hợp opportunity cost, the interest of those debts are often low, doesn’t bring any benefit for the enterprise.
In account receivable management, the company employs analytical techniques to categorize and prioritize receivables based on their balance volume, indicating a concern for bad debts, albeit in a reactive manner Currently, the company only addresses bad debts when they arise and risks become evident, relying primarily on legal sanctions to enforce repayment This situation highlights the need for the company to implement proactive measures to mitigate risks and manage bad debts more effectively.
The system for evaluating customer prestige relies primarily on historical transaction data with the company Consequently, gathering information on new customers poses significant challenges, which can directly impact the decision-making process regarding partnerships between the company and potential clients.
Viglacera P&B Co's lenient credit policy has led to significant losses due to a rising number of delinquent customers An inadequate credit policy introduces various risks in transactions, highlighting that strong relationships and partners' financial stability cannot guarantee future cooperation In business, reliance on trust alone is insufficient for sustainable success.
The credit policy implementation at Viglacera P&B Co has not been adequately addressed, failing to adapt to the changing business environment The company lacks a mechanism to monitor the adherence to this policy, which undermines its seriousness Additionally, there are no measures in place to mitigate financial risks associated with accounts receivable or to manage potential bad debts in the future.
2.3.3 Reasons for shortcomings in Viglacera P&B Co’s account receivable management:
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The company's wholesale selling policy results in substantial contract values, with customers frequently opting for credit purchases due to limited capital or the desire to inspect goods before payment This preference for credit transactions leads to a higher increase in accounts receivable compared to companies engaged in retail trade, where payment is received immediately.
Managerial and professional qualifications of employees in Viglacera P&B Co are not high
At Viglacera P&B Co, the responsibility for managing accounts receivable falls to the chief accountant and sales department accountants However, these accountants possess only a basic understanding of accounts receivable management and rely on personal experience rather than formal training Consequently, they struggle to identify and analyze potential implicit risks effectively.
The lack of effective coordination between the account-finance and sales departments hinders overall company performance While the sales team offers numerous incentives, including credit options, to boost sales, this often leads to challenges for the account-finance department when customers fail to meet repayment deadlines, complicating debt recovery efforts.
Accountants typically utilize basic Microsoft tools such as Word, Excel, and Access to manage customer information and monitor accounts receivable However, the company does not employ specialized software for calculations and administrative tasks due to the complexities involved.
To boost sales and enhance revenue, Viglacera P&B Co frequently reduces payment terms and extends debt collection deadlines, benefiting customers However, many customers
Companies often face challenges when customers exploit payment terms, leading to prolonged delays in settling invoices This situation necessitates frequent reminders, and if unresolved, may escalate to legal action It is crucial for businesses to establish clear payment policies and enforce them to mitigate these risks.
SOLUTION TO IMPROVE ACCOUNT RECEIVABLES
Development orientation of Viglacera P&B Co in following years
Remain position as a leading friction material manufacturer
Incorporating cutting-edge technology into production and management processes can significantly reduce costs and enhance product quality, enabling companies to meet international standards and successfully enter export markets.
Extend market to the south
Achieve output production and consumption as high as possible
Decrease inventories and input costs at least level
Increase market share of brake pads in the north from 15% to 20%, in the south from 5% to 7%
Level of increase in profitability ratio is 6.5% based on the company’s business performance in three recent years and prospect in the following years.
Perform account receivable management more flexibly in order to increase the speed of collecting debts, increase bad debts, and then create capital for business activities of the company.
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Solutions to improve account receivable management in Viglacera P&B Co
Effective management of account receivables requires employees and managers to possess professional knowledge in financial management, particularly in account receivable management, along with relevant business experience Leadership plays a crucial role in shaping policies and strategies for account receivable management To enhance the expertise of its team, Viglacera P&B Co should invest in the professional development of its current employees by enrolling them in management courses at local or international institutions, provided they have the necessary language skills and a commitment to long-term employment Additionally, when recruiting new staff, the company must prioritize candidates with strong analytical abilities, relevant knowledge, and experience in financial data analysis.
To enhance account receivable management, Viglacera P&B Co should create a dedicated department, either under or separate from the accounting-finance department, focused solely on monitoring account receivables By assigning personnel to roles that align with their expertise, the company can maximize their strengths and improve overall management efficiency.
Simultaneously, Viglacera P&B Co needs to improve the effectiveness of combination between accounting-finance, sales, planning and production department.
Effective financial management, particularly in accounts receivable, is a collective responsibility across all departments within a company It is crucial to educate employees about the significance of debt collection efforts When accounts receivable management is prioritized and collaboratively handled, it enhances overall organizational efficiency and financial health.
Báo cáo thực tập tổng hợp company have active cooperation, firmly efficiency and quality of account receivable management will increase.
In Vietnam, various financial tools like SUN and i-bigTimes are available to enhance accounts receivable management Viglacera P&B Co should adopt these software solutions to replace traditional methods, leading to significant time and cost savings These tools offer the convenience of monitoring accounts receivables by categories such as age, value, and customer type.
To effectively manage accounts receivable, Viglacera P&B Co must ensure that employees are proficient in using updated technology To achieve this, the company should employ computer engineers who can provide on-site training and promptly address any technical issues.
Viglacera P&B Co needs improve its credit policy in the aspects as follows:
Viglacera P&B Co should continue to relax credit standards for customers, ensuring that the anticipated additional profits outweigh the costs associated with accounts receivable This approach must be tailored to each individual customer To maintain safety and make informed credit decisions, the company must prioritize accurately assessing each customer's reputation from the outset.
Before extending credit, Viglacera P&B Co must thoroughly assess customer information, including their payment ability, financial status, and collateral Additionally, the company needs to evaluate potential risks and estimate possible losses.
To enhance customer acquisition, Viglacera P&B Co must prioritize meticulous collection of customer information from diverse sources rather than solely depending on referrals from existing clients This includes gathering data directly from new customers, such as their historical purchases with other companies and relevant financial reports.
The comprehensive internship report, or data gathered by financial institutions such as banks and credit institutions, ensures that customer information is handled securely With the expertise of banks, which offer professional consulting services and possess a vast, reliable information network, companies can trust the accuracy and confidentiality of the collected data.
For current customers, the company must frequently re-assess their credit status, at least once a year.
After extending credit to customers, it is essential for the company to collect feedback on its credit policy to assess its effectiveness and identify any shortcomings Customer responses play a crucial role, as they can influence whether clients choose to engage in transactions with the company based on their perception of the credit policy Thus, understanding customer feedback is vital for refining and improving the credit approach.
Viglacera P&B Co needs to enhance its customer classification system, as it currently only lists customers along with their account receivables balance at the end of each period While this approach helps identify outstanding debts, it has significant limitations; a customer may show a high balance without any impending payment deadlines To improve financial management, Viglacera P&B Co should categorize customers based on various criteria, including business purpose (resale or direct consumption) and customer relationship status (traditional, new, or potential).
Viglacera P&B Co should extend its payment period to 60 days, providing customers ample time to distribute goods to their agents and complete payment processes, thereby reducing the likelihood of overdue debts.
Currently, Viglacera P&B Co does not offer any discounts to customers, instead providing a defined payment period When debts exceed this period, a penalty interest rate is imposed, aligned with the bank's interest rate This approach fails to encourage timely debt payments, resulting in a significant accumulation of outstanding capital by customers.
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Implementing discounts and reduced selling prices for high-value contracts, loyal customers, and those who pay promptly encourages earlier payments, allowing the company to optimize cash flow and minimize the time capital is tied up.
A suitable discount rate should be determined as follows:
Bank’s deposit interest rate < competitors’ discount rate < the company’s discount rate< lending interest rate
The company's discount rate is strategically set higher than its competitors while remaining below lending interest rates, encouraging prompt customer payments and securing advantages for the business.
Viglacera P&B Co should collect debts directly at customers’ office or ask help from companies specializing in collecting debts and consultancy of lawyers.