The problems of control account receivables turnover and ineffective finance leverage of minh phu seafood joint stock company

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 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 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 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 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 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 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: Figure 1: Minh Phu Seafood Join Stock Company structure 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 - 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 Solution Task Detail Start date Selection potential customers Revise credit collections January 2016 Duration 28 February 2016 months 30 April 2016 months 31 March 2016 months 30 May 2016 months Reassess the customer demand to 30 April 2016 31 December months the maintain proper level of inventories 2016 efficiency Set up the financial department Improve Review credit term in economic 28 February 2016 End date account contracts receivable Monitor account receivable by aging January 2016 turnover report and review the collection Increase collect efficiency Set up policies and method to collect 31 March 2016 overdue debts Improve Manage inventory effectively 28 February 2016 31 March 2016 months 31 December months Using finance leverage in of finance Completing analysing, managing 31 March 2016 appropriate time leverage corporate finance activities 2016 Table 11 Minh Phu Seafood Joint Stock Company Action Plan 33 Figure Minh Phu Seafood Joint Stock Company Action Plan The action plan can be divided into two main period: - From January 2016 till 30 May 2016 - From the beginning of June 2016 till the end of the year Of which, in the first period, Minh Phu may simultaneously selection potential customers, review credit term in economic contracts, monitor account receivable by aging report and review the collection, set up policies and method to collect overdue debts and set up the financial department.These are all activities that can be done almost right away In the second period, Minh Phu may carry out the remaining activities including reassess the customer demand to maintain proper level of inventories and completing analysing, managing corporate finance activities As these activities made up a long time to complete and it incurred daily based on the customer demand, customer order and any change of economic environment The business should also have either a monthly or a quarterly meeting schedule or both assessing the performance of these activities, ascertain of the target, adjusting with changes, and possibly edition of the list of activities After all, some activities listed in the first period should be done at all times instead of a brief period Nonetheless, on 31st December 2016, Minh Phu may also conduct an assessment period for all activities 34 Reference Kostini N, Marliasari F The Impact of Working Capital Management toward Profitability on Food and Beverage Companies Listed in Indonesia Stock Exchange Review of Integrative Business and Economics Research 2017; 6(2):350-358 Collier HW, McGowan,Carl B.,,Jr, Muhammad J Evaluating the impact of a 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Reduction PR Newswire 2008 Nov 18 21 Ladewig TL, Hecht BA Achieving excellence in the management of accounts receivable Healthcare Financial Management 1993 09;47(9):24-6, 28-32 36 Appendix Appendix Balance Sheet of Minh Phu from 2013-2015 37 38 39 40 41 42 Appendix Income statement of Minh Phu from 2013-2015 43 44 45 Appendix Interview with Minh Phu’s employees Question 1: Why did the performance of Minh Phu decrease noticeably and reach the lowest in the past years, even the Company made loss in 2015? Mr Le Van Diep, Deputy General Director: 2015 is a difficult year for the seafood industry in the world and in Vietnam as well In detail, the price of shrimp reach the lowest point in the past years, caused by the fall of oil’s prices in the world Currency of India, Indonesia devalued significantly, the price of shrimp from these countries went down dramatically from 30% to 40% Meanwhile, the price of shrimp in Vietnam was high due to the hight cost of shrimp breeding Quality of shrimps from Vietnam decreased resulted in the low competitive advantages in price and quality Mr Nguyen Thien Tam, Head of Supervisory Board: In 2015, there were fluctuations and difficulties for the world's seafood industry: prices of shrimp down, oil prices down, currencies devalued in many countries, shrimp prices in the country were high All these factors leaded to the company did not reach the business plan set out for 2015 Question 2: Why did the expense of the Company increase while the revenue decreased? Mr Le Van Diep, Deputy General Director: The increase of expense mainly related to the selling expense and interest expense In which, the selling expense increased by VND34 billion, 5% and financial expense increase significant by VND183 billion, 71% Selling expense increased mainly contributed by the increase of warehouse rental fee, according to the policy of the Company, we expected that the price of shrimp increase next year, we storage inventories as high level to reserve for high demand next year About the financial expense, we had more transactions in foreign exchanges (long-term borrowing, short-term borrowing) which lead to the difference change on FX rate Mr Luu Minh Trung, Chief accountant: The financial expense increased significantly come from the increase of interest expense by 30% equivalent to VND50 billion as the long-term debts with VND 3,500 bonds issued during this year We issued corporate bond VND 3,500 billion on 20 May 2015 for working capital to purchase more material to reach high demand they forecast in 2015, but the seafood industry had many fluctuations that lead to the performance was not as expectation 46 Question 3: Why did the Company maintain the high level of inventories in 2015 even the selling activities was not good? Mr Luu Minh Trung, Chief accountant: The inventories increased a lot in 2015 as we predict the higher demand of aquatic product in the coming years as well as to prevent the shortage of raw materials due to the epidemic diseases has not been fully controlled Question 4: Why did account receivable turnover decrease while account payable turnover increase? Mr Le Van Diep, Deputy General Director: The average collection period in 2015 was noticeably long in the last years We not well manage the account receivable, the account receivable was not controlled tightly and closely We also not has the detail policy or penalty stated in trade contract for the late payment In 2015, as the seafood industry faced difficulties, our customer have a trouble in selling shrimp to end customer, so we extended the term payment for our key customers to support them Mr Luu Minh Trung, Chief accountant: We mainly purchase shrimp raw material from farmer and household For this reason, we cannot hold the payable in a long time Even the difficulties, we need to made payment to the farmer to continue breeding shrimp That resulted in the increase of payable turnover Question 5: Why the Company always maintain high debt ratio, even the economic environment was bad in 2015 even it resulted in the high interest expense? Mr Luu Minh Trung, Chief accountant: We expected that sales in 2015 would reach to VND 23,000 billion and profit after tax would be VND1,500 billion higher than 2014's figures 53% and 63% respectively, we issued corporate bond VND3,500 billion on 20 May 2015 for working capital to purchase more material to reach high demand they forecast in 2015 The increase of interest expense increase also contributed by the foreign exchange difference We recognized the diminution of VND against USD in 2015, we decide to change all short-term borrowing in USD to VND to be not effected by the increase of foreign exchange rate Until the USD borrowing maturity and change to VND in September 2015 while the foreign exchange rate at the end of 2015 keep stable So we had to bear a higher interest rate when borrowing in VND, average to 67%/year compare with borrowing in USD with interest rate – 45%/year while the foreign exchange rate quite stable after our change 47 ... 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... Possible solutions of Minh Phu s case Figure Minh Phu Seafood Joint Stock Company Action Plan LIST OF TABLES Table Minh Phu s profitability ratios in the period 2013-2015 Table Minh Phu s ROA, ROE... 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