Review current credit and treasury controls to improve cash management and minimize risks at exxonmobil Vietnam

HCMCITY OPEN UNIVERSITY UNIVERSITEÙ LIBRE DE BRUXELLES SOLVAY BUSINESS SCHOOL MASTER IN MANAGEMENT PROGRAM (MMVCFB6) TRAN TRUNG NGHIA REVIEW CURRENT CREDIT AND TREASURY CONTROLS TO IMPROVE CASH MANAGEMENT AND MINIMIZE RISKS AT EXXONMOBIL VIETNAM GUIDANCE COUNSELOR: Dr. NGUYEN VAN THUAN MASTER IN MANAGEMENT THESIS Hochiminh City 2007 WARRANT STATEMENT This is my original work. All data, results or quotes in the thesis are completely true. TRAN TRUNG NGHIA COMMENTS FROM THE THESIS TUTOR Student: TRAN TRUNG NGHIA Thesis: REVIEW CURRENT CREDIT AND TREASURY CONTROLS TO IMPROVE CASH MANAGEMENT AND MINIMIZE RISKS AT EXXONMOBIL VIETNAM Tutor: Doctor NGUYEN VAN THUAN I suggest the committee should give permission for the author to present the thesis to your kind perusal and consideration. Ho Chi Minh City, March 21 st 2007 Dr. NGUYEN VAN THUAN i TABLE OF CONTENTS Acknowledgements Comments List of figures List of tables List of Abbreviations Introduction 1. Problem statement 2. Objectives of research study 3. Scope and limitation study 4. Study method 5. Structure of the study Chapter 1: Literature review 1 1.1 Treasury 1 1.1.1 Definition of cash 1 1.1.2 Definition of cash management 1 1.1.3 Reason for holding cash 3 1.1.4 Determine the target cash balance 4 1.2 Credit 5 1.2.1 Definition of credit 5 1.2.2 Term of sales 6 1.2.2.1 Credit period 7 1.2.2.2 Cash discounts 8 1.2.3 Credit analysis 9 1.2.3.1 Credit Information 9 ii 1.2.3.2 Credit scoring 10 1.2.3.3 The decision to grant credit 10 1.2.4 How to finance trade credit 11 Summary of chapter 1 12 Chapter 2: An overview about Exxon Mobil corporation in the world and in Vietnam 13 2.1 Exxonmobil (global) 13 2.2 Exxon mobil Vietnam 20 Summary of chapter 2 26 Chapter 3: Current treasury controls and solutions to improve cash management 27 3.1 Current treasury controls at emvcl 27 3.1.1 Foreign exchange transaction 29 3.1.1.1 Local Environment 29 3.1.1.2 Policy and principles 30 a. General purpose 30 b. Foreign Exchange Strategies 31 c. Speculation 32 d. General 32 3.1.1.3 Authority and controls 33 3.1.1.4 Procedures 34 3.1.2 Bank transfer 35 3.1.2.1 Cash collection 35 3.1.2.2 Internal transfer 36 3.1.2.3 Payment processing 37 a. Payment term application 37 iii b. Custody and deliver of bank transfer 39 c. Payment recording 39 3.1.3 Loan 39 3.1.4 Working capital analysis 40 3.1.4.1 Cash 41 3.1.4.2 Accounts receivable 41 3.1.4.3 Inventories 42 3.2 Cash management solution 42 3.2.1 Electronic banking system 43 3.2.2 Efficient Fund transfer system 44 3.2.3 Key benefits of electronic banking system 45 3.2.3.1 Db-fast collect (electronic collections) 46 3.2.3.2 Db-fund transfer (Electronic payment) 49 3.3.4 Drawdown in USD or VND 52 3.3.5 Financial budgeting for year 2007 54 3.3.5.1 Cash inflows 55 3.3.5.2: Cash outflows 56 Summary of chapter 3 58 Chapter 4: Current credit controls and solutions to reduce risks when granting credit limit 59 4.1 Emvcl’s current credit policies and controls 59 4.1.1 Overview about policy and process 59 4.1.2 Roles and Responsibilities of people concerned 60 4.1.3 Use of credit 62 4.1.4 Customer risk revaluation 63 4.1.4.1 Basic process and considerations 63 iv 4.1.4.2 Documentation of risk evaluation 64 4.1.4.3 Small initial deliveries 65 4.1.4.4 Larger exposures 66 4.1.4.5 Separate processes between customer risk evaluation and granting credit 66 4.1.4.6 Identification and risk monitoring 67 4.1.5 Customer credit decision 68 4.1.5.1 Basic process and considerations 68 4.1.5.2 Exposure limits 69 4.1.5.3 Ongoing customer reviews 74 4.1.5.4 Security 75 4.1.5.5 Credit Approval Limit 76 4.1.5.6 Reductions in credit limits 77 4.1.5.7 Loans and product advances 78 4.1.5.8 High Level Alarm 79 4.1.5.9 Overdue limits 79 4.1.5.10 Common customers across LOBs 80 4.1.5.11 Other 80 4.1.6 Controlling exposure 80 4.1.6.1 Reaching the Credit Limit 81 4.1.6.2 Procedure of block order release 82 a. Overdue orders 82 b. Excessive Credit Limit 85 4.1.7 Invoicing and payment term 85 4.1.7.1 Monetary limits of authority for 2006 86 4.1.7.2 Standard Payment term 87 v 4.1.7.3 Deviations from standard terms 88 4.1.8 Collection 89 4.1.9 Risk monitoring 90 4.1.10 Problem on collecting and bad debt 92 4.1.10.1 Working capital 94 4.1.10.2 Bad debt expense 96 4.1.11 Customer analysis 96 4.2 Solution to reduce risk 98 4.2.1 Effective credit assessment process 98 4.2.1.1: Lines of Business 98 4.2.1.2 Credit group 98 4.2.1.3 Customer Service 99 4.2.2 Customer Risk Assessment Model 99 4.2.2.1 Qualitative information 99 4.2.2.1.1 Year in business 100 4.2.2.1.2 Year Exxon customer 100 4.2.2.1.3 Quality of shareholders 100 4.2.2.1.4 Quality of management 101 4.2.2.1.5 Legal form 101 4.2.2.1.6 Competitive position 101 4.2.2.1.7 Vulnerability to market changes 102 4.2.2.1.8 Exxon-customer supply relationship 102 4.2.2.1.9 Business Integrity 103 4.2.2.1.10 Quality of Operations 103 4.2.2.1.11 Suppliers and Buyers 103 4.2.2.1.12 Payment performance 104 vi 4.2.2.2 Financial strength 105 4.2.2.2.1 Networth 106 4.2.2.2.2 Profitability 106 4.2.2.2.3 Interest cover 107 4.2.2.2.4 Gearing 107 4.2.2.2.5 Current ratio 108 4.2.2.3 Final assessment 108 4.2.3 Distributor finance 109 4.2.3.1 Spreading the statements 110 4.2.3.2 Calculate common size percentages 111 4.2.3.3 Calculate key relationships 112 4.2.3.3.1 Liquidity 112 4.2.3.3.2 Safety 113 4.2.3.3.3 Profitability 114 4.2.3.3.4 Operating performance 117 4.2.3.4 Analysis cash flow 122 4.2.3.5 Compare to trends and industry averages 123 4.2.3.6 Identify problems 123 4.2.3.7 Determine solutions 123 4.2.4 Goods distribution 123 4.2.5 High risk customers 124 4.2.6 Unacceptable terms 124 Summary of chapter 4 125 Conclusions 126 LIST OF FIGURES Figure Content Page 1 The Baumol model (Cost of holding cash) 5 2 Trade credit 7 3 The cash flows of granting credit 7 4 ExxonMobil’s upstream activities 14 5 ExxonMobil’s upstream activities 14 6 ExxonMobil’s downstream activities 15 7 ExxonMobil’s downstream activities 16 8 ExxonMobil’s chemical activities 17 9 Exxon trademark 18 10 Mobil trademark 18 11 Esso trademark 18 12 Functional map 24 13 Business service chart 25 14 Flowchart of Exxon Mobil treasury procedure 27 15 Local collection process 47 16 Local payment process 50 17 Historical steps 110 [...]... review the Credit and Treasury to improve the cash management as well as reduce risks when granting credit lines to distributors Finally, We will give some recommendations and ideas for improving cash management and reducing credit risks for the next years 3 SCOPE AND LIMITATION OF RESEARCH STUDY This research will concentrate on the Treasury and Credit management at ExxonMobil Vietnam It will focus... methods like gathering credit information, how to score credit in order to analyze as well as to grant credit limit to customers In next chapter, we will state an overview of ExxonMobil corporation in the world and Vietnam 13 CHAPTER 2 AN OVERVIEW ABOUT EXXON MOBIL CORPORATION IN THE WORLD AND IN VIETNAM 2.1 EXXONMOBIL (GLOBAL) ExxonMobil is the world’s largest publicly traded international oil and gas... current credit arrangement 1.2.3 Credit analysis: When granting credit, a company tries to distinguish between customers that will pay and customer that will not pay There are a number of sources of information for determining creditworthiness 1.2.3.1 Credit Information Information commonly used to assess creditworthiness includes the following: a Financial statements A company can ask a customer to. .. receivables and issues securities to finance items 12 SUMMARY OF CHAPTER 1 In the first chapter, we gave the literature reviews on treasury, reviewed definition of cash, cash management, the reason why we hold cash and determine target cash balance We have clarified the term cash by giving the economic definition of cash and introduced some cash equivalents Another important point related to treasury is cash. .. managers and colleagues Analysis, assessment and supplement Base on the available information and data collected, we focus on analyzing explaining, giving assessments and supplements 5 STRUCTURE OF THE STUDY Introduction Chapter 1 Literature review Chapter 2 An overview about ExxonMobil corporation in the world and in Vietnam Chapter 3 Current treasury controls and solutions to improve cash management. .. services, it can be paid in cash immediately or wait for a time to be paid, that is, extend credit to customers Grading credit is investing in a customer, an investment tied to the sale of a product or service An account receivable is created when credit is granted These receivables include credit granted to other firms, called trade credit, and credit granted customers, called consumer credit 2 W.S Baumol,... at ExxonMobil Vietnam It will focus on introducing about the ExxonMobil Global and Vietnam, processes, procedures, models applied at ExxonMobil Vietnam We also give some ideas and recommendations on current Treasury and Credit controls and for improvement in the future 4 STUDY METHOD Desk research Information and data in this thesis is gathered from the global company website (empa.ap.xom.com), other... frequently referred to as cash equivalents”, treasury bills, certificates of deposit and purchase agreements 1.1.2 Definition of cash management1 : Cash management is balance the cash collection and disbursement, i.e determining the appropriate target cash balance, collecting and disbursing cash effectively and investing excess cash in marketable securities: Determining the appropriate target cash balance... level of cash the company holds The cash balance for most companies can be thought of as consisting of transaction balances and compensating balances However, it would not be correct for the company to add the amount of cash required to satisfy its transaction needs to the amount of cash needed to satisfy its compensatory balances to produce a target cash balance The same cash can be used to satisfy... point related to treasury is cash management; how to manage cash, the reasons for holding cash and ways to determine the target cash balances and some objectives in cash management was stated obviously is this chapter We also mentioned about credit, some specific examples and figures offered to illustrate for trade credit as well as terms of sales such as credit period, cash discounts Moreover, this chapter . THE THESIS TUTOR Student: TRAN TRUNG NGHIA Thesis: REVIEW CURRENT CREDIT AND TREASURY CONTROLS TO IMPROVE CASH MANAGEMENT AND MINIMIZE RISKS AT EXXONMOBIL VIETNAM Tutor: Doctor NGUYEN. MASTER IN MANAGEMENT PROGRAM (MMVCFB6) TRAN TRUNG NGHIA REVIEW CURRENT CREDIT AND TREASURY CONTROLS TO IMPROVE CASH MANAGEMENT AND MINIMIZE RISKS AT EXXONMOBIL VIETNAM. the ExxonMobil Global and Vietnam, processes, procedures, models applied at ExxonMobil Vietnam. We also give some ideas and recommendations on current Treasury and Credit controls and for improvement