Working capital and some solutions to improve its management efficiency at agricare vietnam co ltd

Graduation thesis Academy of finance DECLARATION I here with formally declare that this thesis is the presentation of result of my own research during the time of internship in Agricare Viet Nam Co.,Ltd, and has not been submitted for a degree to any other universities or institutions To the best of my knowledge, the thesis does not contain material previously published or another people, except where due acknowledgement is made in the text Ha Noi, May, 2016 Student Dinh Thi Thien Hue Dinh Thi Thien Hue Graduation thesis Academy of finance ACKNOWLEDGEMENTS During graduation thesis, I have collected a lot of knowledge about working capital at Agricare Viet Nam Co.,Ltd First of all, I would like to thank all professor lecturers whose experience helped me a lot in developing the thesis I also express my great gratitude to my supervisor M.A Tran Thu Hoai for her inspiring guidance, suggestions and critical evaluation of the work for the successful completion of my thesis Secondly, I would like to give thanks to all lecturers at Academy of Finance for their enthusiasm through the teaching and support process Thirdly, I would like to express my sincere thanks to all staff of Agricare Viet Nam Co Ltd for giving me assistance and corporation that helped me in writing this thesis Last but not least, I would like to thank my parents and friends for their care, support, encouragement, without which my thesis would not have been accomplished Dinh Thi Thien Hue Graduation thesis Academy of finance ABSTRACT In the context of development of global economy, Vietnam enterprises have less competitive advantages than international companies Agricare Viet Nam Co.Ltd, as many other companies, has to face many difficulties from globalization In this study, author analyzed working capital management of Agricare Viet Nam Co.Ltd to assess its efficiency and effectiveness From the results, author drew out the current situation of working capital management, identified strength, weakness and other outstanding points In the end of study are some recommendations that might be applied to improve the efficiency and effectiveness of working capital management Dinh Thi Thien Hue Graduation thesis Academy of finance LIST OF ABBREVIATIONS No Abbreviations Full Phrase AR Accounts Receivables A/R Account receivables CCC Cash conversion cycle EOQ Economic order quantity FA’s Financial accounting statement JIT Just in time P&L Profit and loss WC Working capital WCM Working capital management Dinh Thi Thien Hue Graduation thesis Academy of finance LIST OF TABLES Table 2.1 Business performance results of Agricare Viet Nam from 2012 to 2014 Table 2.2 Cash and cash equivalents Table 2.3 Cash management efficiency ratios Table 2.4 Receivables management efficiency ratios Table 2.5 Inventories management efficiency ratios LIST OF FIGURES Figure 1.1 Classification of working capital Figure 1.2 Typical inventory cycle Figure 1.3 EOQ and Inventory Cost Chart 2.1: Structure of current asset of Agricare Viet Nam in 2014 Chart 2.2: Comparing working capital from 2012 to 2014 Chart 2.3: Comparing working capital with fixed capital and total capital Chart 2.4: Cash and cash equivalent in total working capital Chart 2.5: Proportion of receivables in total working capital Chart 2.6: Proportion of inventories in total working capital Dinh Thi Thien Hue Graduation thesis Academy of finance TABLE OF CONTENT Dinh Thi Thien Hue Graduation thesis Academy of finance Introduction Rationale of the study In the market economy, capital is one of the most important factors for enterprises to survive and develop beside others factors such as human resources, the inventions, patents, technical management Generally, in the commercial activity and particularly in the commercial enterprises, capital is also an effective tool to enhance the competitiveness of enterprises Therefore, every business which wants to exist and develop has to concern about the capital creation and management Working capital is one of the two components of capital For commercial businesses, working capital accounts for a large proportion of the total capital approximately 75% - 95% Working capital management is an important area of financial management in every business function Working capital management deals with the administration of the liquidity components of firms’ short-term current assets and current liabilities (Baker and Powell, 2005; Brigham and Ehrhardt, 2005; Gitman, 2009) The most important current assets are cash, debtors or account receivables, stock or inventory and current liabilities consisting of creditors or account payables, accrued expenses, taxation liabilities, short-term debt such as commercial bills, and provisions for current liabilities such as dividends declared but not yet paid This is the reason why working capital management has become a hot topic for all enterprises, and improving working capital efficiency is the target for all business Recognizing the important of working capital management in the firm’s survival , growth and after my internship time in Agricare Viet Nam Co.Ltd, I had a chance to work in Finance- accounting department where had overall Dinh Thi Thien Hue Graduation thesis Academy of finance responsibility for using, managing capital, and contributing to company growth and profitability I choose the topic “Working capital and some solutions to improve its management efficiency at Agricare Vietnam Co.Ltd” as topic of the thesis Aims of the study The main objective of the study is to analyze the working capital management and suggest some methods to improve the efficiency of the process The specific aims of the thesis include: ● To provide a source of information on capital concepts encompassing definition capital, the importance of working capital ● To get a better understanding of working capital management at Agricare Viet Nam Co.Ltd ● To evaluate the current situation of organization and management of working capital at Agricare Viet Nam Co.Ltd o To offer business management recommendations on managing working capital Method of the study For this study the following approach was adopted Firstly, relevant literature, publications and studies are reviewed in order to get in-depth information on fixed capital management in general and this concept at Agricare Viet Nam in particular The company’s background is also studied and reviewed Secondly, data related to working capital management at the firm including financial statements and other required documents will be collected and examined Finally, the information obtained is analyzed, processed to evaluate the working capital management efficiency Dinh Thi Thien Hue Graduation thesis Academy of finance Scope of the study Due to the limited time and the scale, this dissertation emphasizes on working capital management at Agricare Viet Nam Co.Ltd in the period from 2012-2014 and propose some solutions for improvement Organization of the study Apart from the Introduction, Conclusion, Reference and Appendix, the thesis is divided into three main parts as follows: ● Chapter 1: LITERATURE REVIEW This chapter provides general background on capital and working capital management ● Chapter 2: THE STUDY This chapter gives the data and analysis of the enterprise’s working capital management ● Chapter 3: SOLUTIONS AND RECOMMENDATIONS This chapter suggests some recommendations to improving working capital management efficiency at Agricare Vietnam Limited Liability Company Dinh Thi Thien Hue Graduation thesis Academy of finance CHAPTER LITERATURE REVIEW OF WORKING CAPITAL MANAGEMENT 1.1 Introduction of working capital in enterprises 1.1.1 Definition of working capital In accounting and financial statement analysis, working capital involves a firm’s current assets and current liabilities that have maturities of less than one year and are needed for a normal business cycle The net working capital is the difference between current assets and current liabilities The current assets primarily include cash and short-term investments in marketable securities, inventories of raw materials, work-inprogress and finish goods as well as accounts receivables If the current assets excess the current liabilities, this indicates that the firm has ability to meet its short-term financing obligations The greater the net working capital is the more liquid or solvent the firm is According to a financing perspective, working capital is the amount a firm invests in short-term or current assets that required for day-to-day operation Current assets regularly turn over and play a key role for a firm to continuously operate If consider a business as a machine, the current assets could be seen as “lubricating oil” helping the “engine” of non-current assets to well function 1.1.2 Classification of working capital The amount of funds needed for meeting requirements normally varies from time to time in every business However, business always needs a certain amount of assets in the form of working capital if it is to carry out its functions This permanent need and the variable requirements are the basis for a convenient classification of working capital as regular, permanent, or variable 10 Dinh Thi Thien Hue The form of investing redundant cash is mostly deposit at bank, which is quite safe but low interest rate, then reducing the profitability of firm The reason is that Vietnamese financial market has not developed yet, especially in unstable economy currently, it is not easy to find safe investment channel for manufacturing firm ● Receivables management: The firm evaluates credit policy basing on long-standing customers relationship This strategy is quite good in reducing risk, bad debts and administrative receivables expenses However, a lot of potential and new customers are missed out ● Inventory management: The firm has not invested much in market fluctuation research to keep track on price change or other variation related to inventory In addition, most of products are imported, the change is much more complex Hence, the firm has not intentionally control raw material cost Annual cost of goods sold is still high in comparison with total sales revenue, so the net sales is not considerable 3.2 Recommendations for improving working capital in Agricare Viet Nam Co.ltd 3.2.1 Cash management Utilizing idle cash to invest more variously, but it is essential to make an equivalent cash reserve which is available anytime to guarantee liquidity for the firm Due to most of raw materials are exported abroad and the settlement influenced by exchange rate, the risk of exchange rate is quite high The firm should have proper foreign currency management policy by employing hedging instruments such as SWAP, options, Acbits, etc In order to perform this policy well, the firm must have staffs who comprehend financial issues Complying the compulsory principle in business: separating the functions and obligations of cashiers and accountants Frequent and sudden examining the matching between real cash, cash in vault and cash in book to make sure everything is working properly Receivables management 3.2.2 Receivables take into account for a huge proportion in current assets of the firm The firm has experienced good receivables management recently The following, in my opinion, are some recommendations to help this management more effective: Firstly, the firm should slightly extend the credit term Increasing credit term a little bit will attract customers to the firm’s policy and strengthen relationship among counterparties In addition, penalty for late payment is necessary For example, it is possible to impose interest rate for overdue loans with increasing speed This procedure compensates loss for the firm when capital is stuck in customers’ hands and push up customers to faster finish settlement The huge amount of receivables that the firm has possessed will restrict it to utilize capital for a period of time, then reduce the efficiency in operational activities A method for collecting cash from such receivables before waiting customers’ settlement is factoring, which means selling receivables with some discount for interested creditors such as banks This method reduces risk of bad debts but attracts a lot of capital for firms use at hand The classification of customers and credit policy for each type are slightly general when the firm wants to keep on track closely these account receivables The firm should have more details for precise assessment of each customer because of not much quantity of customers In order to perform like that, the firm should organize a team specializing in managing receivables from following each customer’s receivables, customers’ performance to inform, force payment and collecting bad debts The Planning & Business Department staff should always access the market, exploring market information, grasp the market demand to purposely broaden the market shares 3.2.3 Inventory management The firm had better invest in research market to estimate demand for inventory to make right and in-time decisions Intentionally finding out the suppliers, establishing reliable and longstanding relationship with them to be offered the advantage such as credit term, discount in price, standard of raw materials then saving a lot of cost of goods sold Preserving inventory in good condition to avoid unexpected damage, and frequently evaluating value of inventory in order to price inventory value again especially in the case of market fluctuation due to this has effects on whether to complement inventory or whether to change cost of goods sold and products price Utilizing economically raw materials to save as much expense as possible This plan should be controlled closely by the factory management and managers 3.2.4 Other recommendations Due to quality of management department determines directly working capital management efficiency So, human resource should be paid attention to by strengthening recruitment and professional training activity for employees especially in financial management, spontaneously, completing award and punishment policy transparently in using capital - Regularly tracking on working capital using and measuring working capital demand to avoid waste and making right decision in daily operations For long-term orientation, the firm should put up a market-research team that is in charge of collecting and progressing information, making estimations and right decision - Opening books that follow each debt with specific information about customers, credit term, etc according to debt classification: before due, overdue, bad debts to put up timely solutions However, these solutions must ensure to be effective but not worsen relationship between the firm and customers - Making provision for loan loss to compensate damage in time to avoid the bad influence on daily operation of the firm - Broadening the scale of trading In spite of passively waiting for export contracts, the firm had better purposely look for inside Vietnam contracts, building retail market for its products to increase revenues For efficiency of working capital management in firms, the role of the government and provincial authorities are very vital The government should continue stabilizing and clarifying regulations in business law and corporate law to create a healthy business environment for firms Along with inflation restriction policy currently, the government should consider the policy encouraging business activities for firms such as tax reduction, business procedure simplifying, step-by-step completion in financial market and instruments to help firms have more investment and financing opportunities CONCLUSION Every firm needs working capital for daily operational activities Most of firms realize that working capital management is considered vital for their survival However, working capital management is not an easy task to comprehend Due to the complexity of this topic, the thesis will focus on some outstanding aspects which are brought in three main parts including Chapter Presenting some fundamental concepts related to working capital management The target is providing readers foundation to comprehensive more clearly about the next core contents Chapter The thesis gives out the information introducing about Agricare Viet Nam Co.Ltd, which is the object of the research Along with overview about the establishment, development, functions, organizational structure, business activities of the firm, the report also analysis its financial and business outcomes over three years now In general, the company has experienced good performance with positive profit growth, financial criteria such as liquidity ratios, assets management ratios and profitability ratios have improved significantly However, the firm seems not be really good at expenses management, which has increasing trend in recent years The main content of the whole thesis, which evaluates the real situation of Agricare Viet Nam Co.Ltd in working capital management Working capital management of the firm has been analyzed in some aspects including working capital structure of the firm; policy in working capital management specifying cash management, inventory management, receivables management; assessing working capital management efficiency ratios basing on calculations In conclusion, working capital management of Agricare Viet Nam Co.Ltd has a lot of improvement especially the receivables management However, the efficiency has not been explored as expected in the firm The more details are presented in the analysis of this part Chapter The thesis summarizes the main achievements that Agricare Viet Nam has experienced in working capital management, and also points out the restrictions that the firm has been stuck in Form such disadvantages, the thesis raises out some personally recommendations to help the firm improve the current situation in managing working capital more effectively and efficiently These contributions may have constraints in reality, however, it is essential for the firm to consider for references After internship time in Agricare Viet Nam, the writer has had opportunities to approach the realistic situation which is out of books Such experiences will be the most valuable lessons at university At the end of the thesis, I would like to give my most sincere thanks to my teacher, my internship guide, my friends and my family for support and love to complete my internship course APPENDIXES Table 2.6: Balance Sheet of GG Viet Nam Limited Company BALANCE SHEET Currency: VND 2014 2013 Balance Balance ASSETS Code s Notes A - CURRENT ASSETS 100 30,222,353,336 21,351,832,174 I Cash and cash equivalents 110 1,457,849,029 519,618,067 Cash 111 4,577,432,447 2,541,897,762 Cash equivalents 112 - - II Short-term investments 120 - - Short-term investments 121 - - Provision for investments (*) (2) V.01 V.02 Short-term 129 - III Current account receivable 130 23,204,669,806 12,960,954,517 Trade receivable 131 2,925,229,702 Advances to suppliers 132 12,452,257,364 3,458,712,964 Inter-company receivables 133 - - Construction contractor 134 receivables based on agreed progress billings - - 8,646,032,000 119,532,000 (818,849,260) (1,023,767,382) Other receivables 135 Provision for doubtful debts (*) 139 V.03 140 IV Inven tories 10,406,476,935 2,506,894,614 3,684,517,602 Inventories 141 2,506,894,614 3,684,517,602 Provision for obsolete inventories (*) 149 - - V Other current assets 150 3,052,939,887 4,186,741,988 Short-term prepaid expenses 151 881,597 - VAT Deductibles 152 Tax and other receivables from State 154 Other current assets 158 3,052,058,290 4,186,741,988 B - NON-CURRENT ASSETS 200 10,043,425,925 7,629,682,800 I Long-term receivables 210 - - Long-term trade receivables 211 Provision for doubtful long-term 219 receivables (*) ( ) ( ) II Fixed assets 625,904,802 3,381,648,188 625,904,802 3,381,648,188 6,262,444,274 V.05 (200 = 210 + 220 + 240 + 250 +260) Paid-in capital in wholly owned 212 subsidiaries Long-term inter-company receivables 213 V.06 Other long-term receivables 218 V.07 Tangible assets 220 221 V.08 - Cost 222 2,016,989,731 - Accumulated depreciation (*) 223 (1,436,084,929) 2,880,796,086) Finance leases 224 - Cost 225 - Accumulated amortization (*) 229 Intangible assets 227 - Cost 228 V.09 ( ) V.10 ( ) - Accumulated amortization (*) ( ) 229 Construction in progress 230 V.11 III Investment property 240 V.12 - Cost 241 - Accumulated amortization (*) ( ) 0 242 ( ) ( ) IV Long-term financial investments 250 5,400,000,000 - Investments in subsidiaries 251 5,400,000,000 - Provision for long term investments 259 (*) ( ) ( ) V Other long-term assets 260 4,017,521,123 4,248,034,612 Long-term prepaid expenses 261 V.14 3,942,443,123 4,172,956,612 Deferred tax assets 262 V.21 Other long-term assets 268 75,078,000 75,078,000 TOTAL ASSETS (270 = 100 + 200) 270 40,265,779,26 28,981,514,974 A LIABILITIES (300 = 310 + 330) 300 9,218,799,019 8,869,390,179 I Current liabilities 310 9,218,799,019 8,869,390,179 Short-term loans and borrowings 311 2,000,000,000 2,000,000,000 Trade payables 312 4,046,019,519 3,908,632,280 Advances from customers 313 1,360,654,256 1,113,687,007 Tax and statutory obligations 314 1.111.579.374 1.174.622.948 Investments in associates, jointly 252 controlled entities Other long-term investments 258 V.13 RESOURCES V.15 V.16 Payables to employees 315 141.447.654 18.055.122 Construction contractor payables 318 based on agreed progress billings 245.805.187 302.805.187 313.293.029 351.587.635 - - Other payables 319 II Non-term liabilities 330 V.18 Long-term trade payables 331 Long-term inter-company payables 332 Other long-term liabilities 333 Long-term loans and debts 334 V.20 Deferred tax liabilities 335 V.21 Provision for severance allowances 336 Long-term provision 337 V.19 B OWNERS’ EQUITY (400 = 410 + 400 430) 31,046,980,242 20,112,124,795 I Capital 410 V.22 31,046,980,242 20,112,124,795 Contributed legal capital 411 30,079,360,000 17,249,980,000 Share premium 412 Other owners’ capital 413 Treasury share (*) 414 Assets revaluation reserve 415 Foreign exchange differences 416 Investment and development fund Financial reserve fund ( ) ( ) 417 92,764,795 1,103,493,636 418 2,000,000,000 462,187,687 Other funds belonging to owner’s 419 equity 10 Undistributed earnings 420 691,855,447 1,286,463,472 II Other funds 430 0 Bonus and welfare fund 431 Subsidized fund 432 Fund for in use welfare fixed assets 433 TOTAL LIABILITIES AND OWNERS’ EQUITY (440 = 300 + 440 400) V.23 40,265,779,261 28,981,514,974 REFERENCE Vietnamese Financial statements of Agricare Viet Nam 2012, 2013, 2014 PGS.TS Nguyễn Trọng Cơ, TS Nghiêm Thị Thà (2010), “Giáo trình Phân tích tài doanh nghiệp”, NXB Tài Chính English MA Bui Van Van and MA Vu Van Ninh, corporate finance, financial publisher, 2013 Peter Atrill and Eddie Mclaney, financial accounting for non-specialists (fifth edition), pearson education, 2006 NHẬN XÉT CỦA ĐƠN VỊ THỰC TẬP Họ tên người nhận xét: Ông Đàm Quang Thắng Chức vụ: Tổng giám đốc công ty trách nhiệm hữu hạn Agricare Viet Nam Nhận xét trình thực tập tốt nghiệp Sinh viên: Đinh Thị Thiên Huế Khóa: 50; Lớp: 51.01 Học Viện Tài Chính Đề tài: Vốn lưu động số biện pháp nâng cao hiệu quản lý vốn lưu động công ty trách nhiệm hữu hạn Agricare Viet Nam (Working capital and some solutions to improve its management efficiency at Agricare Viet Nam Co.Ltd) Nội dung nhận xét: Về tinh thần thái độ thực tập sinh viên ………………………………………………………………………………… Về ý thức kỷ luật, tuân thủ quy định đơn vị thực tập ………………………………………………………………………………… Về kỹ giao tiếp, kỹ mềm ………………………………………………………………………………… Về kiến thức chuyên môn ………………………………………………………………………………… Người nhận xét (ký tên, đóng dấu) SUPERVISOR’S JUDGEMENT Name of supervisor: Trần Thu Hoài Comment on graduation thesis of: Student: Đinh Thi Thiên Huế Class: CQ50/51.01 Topic: “ Working capital and some solutions to improve its management efficiency at Agricare Vietnam Co.Ltd” “ Hanoi, / /2016 Mark - In number: In word : Supervisor REVIEWER’S JUDGEMENT Name of reviewer: Comment on graduation thesis of Student: Đinh Thị Thiên Huế Class: CQ50/51.01 Topic: “Working capital and some solutions to improve its management efficiency at Agricare Vietnam Co.Ltd” Hanoi, / /2016 Mark - In number: In word : Reviewer ... managing capital, and contributing to company growth and profitability I choose the topic Working capital and some solutions to improve its management efficiency at Agricare Vietnam Co. Ltd as topic... Receivable to working capital = Working capital X100 This ratio indicates which proportion of account receivable in working capital ● Inventory to working capital: Inventory Inventory to working capital. .. data and analysis of the enterprise’s working capital management ● Chapter 3: SOLUTIONS AND RECOMMENDATIONS This chapter suggests some recommendations to improving working capital management efficiency