Ineffective accounts receivable management at vietnam airport ground service company limited

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Duong Xuan Phuong INEFFECTIVE ACCOUNTS RECEIVABLE MANAGEMENT AT VIETNAM AIRPORT GROUND SERVICE COMPANY LIMITED MASTER OF BUSINESS ADMINISTRATION Ho Chi Minh City – Year 2020 UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Duong Xuan Phuong INEFFECTIVE ACCOUNTS RECEIVABLE MANAGEMENT AT VIETNAM AIRPORT GROUND SERVICE COMPANY LIMITED MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR TRAN PHUONG THAO Ho Chi Minh City – Year 2020 TABLE OF CONTENT LIST OF FIGURES LIST OF TABLES EXECUTIVE SUMMARY PROBLEM CONTEXT 1.1 Company overview 1.2 Problem context PROBLEM IDENTIFICATION 2.1 Possible problems 2.1.1 Poor account receivable management 10 2.1.2 Poor account payable negotiation 11 2.1.3 Overinvestment in equipment 11 2.2 Main problem validation 13 2.3 Main problem definition and its consequences 16 2.3.1 Main problem definition 16 2.3.2 Consequences 17 CAUSE VALIDATIONS 18 3.1 Possible causes 18 3.1.1 Poor credit policy 18 3.1.2 Weak credit assessment ability 19 3.1.3 Poor communication with customers on receivables 20 3.2 Cause validation 21 3.2.1 Real causes 21 3.2.2 Main cause 23 SUGGESTED SOLUTIONS 24 4.1 Alternative solutions 24 4.1.1 Credit standard issuance 24 4.1.2 Apply discount to payment of customers 26 4.1.3 Using bank guarantees to secure the debt collection process 27 4.2 Solution justification 29 4.3 Action plan for the organization 29 SUPPORTING INFORMATION 32 5.1 Summary of research methods in the study 32 5.3 Interview transcripts 33 References 40 APPENDIX 43 APPENDIX 44 APPENDIX 45 LIST OF FIGURES Figure Organization structure of VIAGS in December 2019 Figure Fluctuations in DSO, DIO and DPO of VIAGS and SAGS over the years Figure The initial cause-effect map Figure Fluctuations in short-term trade receivables of customer groups over the years Figure The cause and effect map LIST OF TABLES Table Categories of service provided by VIAGS Table Net revenue and net profit after tax of VIAGS Table Cash flow from operations of VIAGS Table Net working capital of VIAGS Table Net working capital of SAGS Table Cash conversion cycle of VIAGS Table Cash conversion cycle of SAGS Table Fixed assets of VIAGS Table The account receivables aging of VIAGS Table 10 Short-term trade receivables structure by customer groups EXECUTIVE SUMMARY The study has approached the problem of Vietnam Airport Ground Services Co., Ltd starting with a situation where the company has experienced a decrease in working capital in the last years This greatly affects the cash flow and performance of company because of the negative impact it has Through secondary data provided by the company, interviews with relevant people in the company and searching for related theories, the author realized that there were a number of factors leading to this situation, of which the main problem is identified as the inefficiency in receivables management The receivables of company mainly comes from credit sales However, customers' payment periods for credits tend to be extended Going further to find out the causes of the problem, the three most prominent ones are the ineffective credit policy, weak credit assessment ability and poor communication with customer After analysis, the main cause was determined by the company's lack of effective credit policies to control credit issuance and monitor customer payments To address this cause, the best solution is to issue a strict set of credit standards With this solution, the company hopes to tighten the conditions to apply credit to customers, thereby reducing the working capital needed to finance accounts receivable, reduce costs to maintain accounts receivable, and especially reducing the risk of bad debt The global economy has many fluctuations, especially in the coming years, after the Coronavirus pandemic occurred in the early months of 2020 and showed no signs of stopping until now Airlines - customers of VIAGS - suffered heavy losses unprecedented in history Within the last months, many airlines in the world have fallen into financial exhaustion and even went bankrupt And so, for VIAGS, the risk of bad debt from customers is likely to increase and be unpredictable in the near future Faced with these difficulties, tightening credit standards is expected to help the company maintain safety and stability PROBLEM CONTEXT 1.1 Company overview Vietnam Airport Ground Services Company (VIAGS) is a subsidiary of Vietnam Airlines, which was established on January 1, 2016, on the basis of merging ground service enterprises in Hanoi, Da Nang and Ho Chi Minh City including: NIAGS, DIAGS, and TIAGS VIAGS provide synchronous and international standard ground services to nearly 70 airline customers at 04 international airports from North to South of Vietnam After more than 25 years of development of enterprises and years of establishment of VIAGS, the company currently has more than 4,500 skillful staff who are professionally-trained from basic to advanced levels along with modern equipment system which is operated according to the highest safety and quality standards, meeting ISO 9001: 2015 and ISAGO standards The head office of company is located at Tan Son Nhat airport, HCM city Currently, the company has branches including VIAGS Noi Bai, VIAGS Da Nang, VIAGS Tan Son Nhat, and one affiliated company, which is Aviation Ground Services Co Ltd, (AGS) with a 25% stake The company's vision is to be the top of Vietnam in the field of airport ground services in the short-term, then become the leading ranking organization providing consistent and accordant solutions in South East Asia in 2022 and in Asia in 2027 After ten years, VIAGS will be the leading organization for providing innovative solution in the field of ground transportation services and business development The mission of the company is to provide quality aviation services in accordance with international standards meeting the ever-increasing needs of our clients through an effective corporate governance system and advanced resources In addition, as a comprehensive community, VIAGS provides innovative solutions in the aviation service industry to bring a differentiated experience to organizations, customers, communities and society The organization structure is presented as following: BOARD OF MANAGEMENT CHIEF EXECUTIVE OFFICER DEPUTY GENERAL DIRECTOR Accounting & Fina nce De pa rtm e nt Huma n Re s ource s De pa rtm e nt DEPUTY GENERAL DIRECTOR S a le s & Ma rke ting De pa rtm e nt S a fe ty & Qua lity As s ura nce De pa rtm e nt Tra ining Ce nte r S e rvice s S ta nda rd De pa rtm e nt P la nning & Inve s tm e nt De pa rtm e nt VIAGS NOI BAI (VIAGS - NBA) BRANCH VIAGS DA NANG (VIAGS - DAD) BRANCH Pa rty Orga nis a tion & Union Office Adm inis tra tion De pa rtm e nt VIAGS TAN S ON NHAT (VIAGS - TS N) BRANC H Figure Organization structure of VIAGS in December 2019 (Source: company documents) Services are offered by the company as follows: Category of services Core services Supplementary services Details - Passenger and baggage handling services - Ramp services - Load control and flight operation services - Station management services - Cargo and mail warehouse services - Executive aviation services - Training services - Repair and maintenance services - Baggage delivery services - Office and warehouse renting - Crew transportation - Personal Transceiver renting … Table Categories of service provided by VIAGS VIAGS has two types of services provided to customers The first type is core services, which are ground services that directly serve customer flights Core services create the main revenue source for the company The second type is additional services, which are related services and support for customer 1.2 Problem context Although the company has only been established for only years, since 2016, on the basis of merging enterprises which are currently the branches, these branches have operated independently for 23 years The company's financial statements show that the net revenue and net profit after tax grow over the years from 2016 to 2019 The figures are shown in the following table: Unit: million VND 2019 2018 2017 2016 Net revenue 2,204,771 2,038,983 1,851,474 1,633,127 Growth rate 108% 110% 113% - 159,850 148,913 132,109 105,331 107% 113% 125% - Net profit after tax Growth rate (Income statement of VIAGS) Table Net revenue and net profit after tax of VIAGS However, the growth rate of them has shown a negative sign as it decreases over the years In details, the revenue increased from 1,633,127 million VND in 2016 to 2,204,771 million VND in 2019 During this period, the growth rate of revenue decreased gradually from 113% to 108% Similarly for profit after tax, although the value increased from 105,331 million VND to 159,850 million VND, the growth rate has decreased sharply from 125% to 107% Assessing the cash flow from operating activities of the company, in general, cash flow has grown in the last years thanks to the growth of profit before tax However, the fluctuations of cash flow from receivables shows the bad signs that the company needs to assess Unlike cash flow from inventory and accounts payable, inventory cash flow has continuously decreased over the years, reflecting that customers are tying up more capital from the company and so the company owned less cash Unit: million VND 2019/ 2018/ 2018 2017 2019 2018 2017 Profit before tax 198,368 187,733 167,417 6% 12% Decrease in trade receivables (48,074) (41,609) (29,153) 16% 43% 2,231 5,883 4,174 -62% 41% Decrease in trade payables (35,521) 75,136 (13,504) -147% 656% Cash generated from operations 177,753 141,491 98,651 26% 43% Decrease in inventories (Cash flow statement of VIAGS) Table Cash flow from operations of VIAGS Changes in the working capital of company over the years have shown signs that need to be concerned which is illustrated at below table: Unit: million VND VIAGS Net working capital (million VND) 2019 2018 2017 45,187 83,598 107,618 -46% -22% 68% Growth rate Table Net working capital of VIAGS After the first year the company was officially put into operation, the working capital decreased rapidly The working capital of 2018 has decreased by 22% compared to that of 2019 In 2019, working capital has decreased by 46% compared to 2018 Compared to Saigon Ground Service JSC (SAGS), VIAGS's main competitor, the working capital SAGS are larger than VIAGS and tend to increase over the years from 2016 The figures are shown in the following table: Unit: million VND SAGS Net working capital (million VND) Growth rate 2019 2018 2017 536,834 390,644 191,482 37% 104% 37% Table Net working capital of SAGS The negative trend of VIAGS's working capital for consecutive years has indicated the bad symptoms that the company needs to be considered in managing it According to the Get comments from Opinions from departments, Sales and marketing August 31, departments and especially branches - units department 2020 branches about the draft that directly work with content customers, are very important in following reality Hold a meeting to agree Summarize, evaluate, Sales and marketing September on the content of the discuss and agree on the department; 15, 2020 policy contents of the policy Accounting and Participants: Managers of finance department the departments, branches and related individuals Submission to the Report to the board of Sales and marketing September Board of Directors for directors about the outcome department 20, 2020 approval the final of the meeting version Propose to approve the Inform customers about the Sales and marketing September company's credit standards department 31, 2020 content of the policy and the issuance Issue and apply Sign the appendix to adjust the necessary content with the customer Track and adjust after Track the actual results September applying achieved after applying the 31, 2020 policy Adjust if the policy does not meet expectations 31 SUPPORTING INFORMATION 5.1 Summary of research methods in the study This study uses qualitative research methods to collect data and stakeholder’s perspectives to find out the main problem and the main cause of the ineffective management of receivables and propose appropriate solutions for the company The two data sources used include: - Secondary data: company structure; financial satements reports; internal documents include the regulations, procedures on the operation and administration of the company; literatures in researchs and jounals - Primary data: in-depth interview collected from in-depth interviews as below: Research objectives: Exploring the main problem that results in the inefficiency in receivables management hen finding out the main cause that leads to that problem and choosing the appropriate solutions for the main cause Duration time: 10 – 20 minutes for each interview Interviewees:  Mr Nguyen – the Sales and Marketing Director  Mr Cuong – the Sales and Marketing Deputy Director  Mr Hung – the Planning and Investment Director,  Mr Tam – the Chief Accountant Overall discussion guideline and timeline in each interview: No Main sessions Overall information Objectives Approach the company’s current Timing - minutes situation of business Find out the main To explore the main problem and problem and main then find out the main cause of the cause problem Choosing solution Identify the most appropriate solution amongst potential alternative solutions 32 - 10 minutes - minutes Detail interview content: No Question What you think about the Mr Mr Mr Mr Nguyen Cuong Hung Tam X X X X X X X X X operating situation of the company after consolidating enterprises (TIAGS, DIAGS and NIAGS)? Data show that net working capital X tends to decrease over the past years, so what you think are the potential problems that lead to the issue? What you think is the main problem? What are possible causes that lead to X X X main problem? What is the main cause? X X X X Do you have any suggestion to solve X X X X X X X X that main cause? Which is the most appropriate solution for the company? 5.3 Interview transcripts In-depth interview 1: Interviewee: Mr Nguyen Title: The Sales and Marketing Director Working experience: more than year experience in Marketing and Sales at VIAGS Q: What you think about the operating situation of the company after consolidating enterprises (TIAGS, DIAGS and NIAGS)? A: After years of establishment, the company has made drastic changes in all aspects With many years of operation experience of three enterprises before merging, the company was not surprised when it came into operation The growth in sales and certificates of merit as well as customer compliments have proven the growth of the company 33 Q: Data show that net working capital tends to decrease over the past years, so what are potential problems that lead to the issue? A: Decreased working capital may be a result of equipment investment After being established, the company operated independently, so it needed a lot of capital to invest in equipment For the same reason, the company needs a lot of money to pay its suppliers Previously, when enterprises operated individually under the sponsorship of the parent company Vietnamairlines, the service providers provided to the enterprises but paid for the parent company Currently, suppliers work and pay directly to VIAGS Besides, the fact that customers tend to pay slowly has a great impact on working capital because it determines the company's money Q: What you think is the main problem? A: The main problem comes from poor receivables management Receivables are the main source of revenue for the company It determines cash flow and performance It is also a determining factor in working capital in a service company like VIAGS Since the amount of inventory is not significant The slow collection of money will reduce working capital, causing many risks for the company The problem of investing in equipment and paying suppliers is the cost that the company has to spend and is only temporary Q: What are possible causes that lead to main problem? A: There are many factors that influence the timing of a customer's payment, including both internal and external factors As for the company, I think there are a number of reasons related to the system and the individual First, the company does not have a specific sales policy Especially the credit policy, since most of the company's revenue comes from credit sales The company has only been established for three years, it is very short time The processes and regulations still mainly rely on the precedents used from the three old enterprises These processes and regulations are no longer keeping up with reality The company lacks an independent and specific policy to manage trade receivables Secondly, personally, I find the credit evaluating ability of the staff is weak Employees follow up and remind customers in a timely manner, but the ability to identify risks of credits is weak, even lack of responsibility In addition, customer relations department is not good enough to communicate with customers, leading to not grasping their difficulties and motivating them in payment Q: What is the main cause? A: The main cause belongs to the system, where there is no specific and effective credit policy The remaining causes are actually derived from it Because credit rating staff is not 34 good because there are no specific credit standards as a basis While communication with customers also stops at tracking and reminding customers to make contractual payments Q: Do you have any suggestion to solve that main cause? A: We not have a credit policy, we must first create it That is the most important thing Moreover, we need to create a policy with strict standards to improve the current situation In addition, we can motivate our customers by offering incentives for early payment Q: So is issuing a tightened set of credit standard the most appropriate solution for the company? A: As I said, it is the first thing we need to In-depth interview 2: Interviewee: Mr Cuong Title: the Sales and Marketing Deputy Director Working experience: more than year experience in Marketing and Sales at VIAGS Q: What you think about the operating situation of the company after consolidating enterprises (TIAGS, DIAGS and NIAGS)? A: The company still faces many difficulties and challenges from internal and market However, overall, the company has developed quite well This is evidenced by the growth and achievements the company has achieved over the years It can be said that the merging of enterprises is a right decision from the management of the parent company Q: Data show that net working capital tends to decrease over the past years, so what are potential problems that lead to the issue? A: From the perspective of marketing and sales, I find that although the sales increase, the growth rate tends to decrease This shows that there is still a lack of stability in the development of the company Besides, the management of receivables from customers is not commensurate with the development of the company The actual operation process has shown that the company has not controlled the collection of customers well I recently received many notices from the financial department about reminders of customer debt I think we are having receivables management issues This is hindering the company's cash flow, making working capital often in short supply compared to demand Q: Thus, the problem of the company is the weakness in the receivables management? A: Yes Q: What are possible causes that lead to main problem? 35 A: These causes come from both processes and people Time to apply the process, regulations of the company's receivables management is only years If reality shows that the figures are not as expected, it is necessary to review these procedures and regulations Because the procedures or regulations that are drafted always need to be monitored and adjusted to suit reality The second is the people The company has a higher employee turnover rate since it was founded High turnover rate makes the quality of employees not good, including those in charge of signing contracts with customers as well as monitoring customer payments Q: What is the main cause? A: In my opinion both causes are very important and directly impact the effective design of receivables In fact, the poor quality of employees due to high turnover rate is only an indirect effect, because any company may encounter this problem The important thing is that the company does not have specific guidelines and standards for employees to apply, but instead, the current management of customer receivables is mainly based on employee experience Therefore, in general, it can be said that the underlying reason is that the company has not had specific regulations on receivables management Q: Do you have any suggestion to solve that main cause? A: The reality requires the company to have strict, specific, effective and practical regulations on the management of receivables These rules need to be tight enough to minimize risks for the company but also loose enough for the customer to feel comfortable Besides, reducing the turnover rate to maintain the stability of the system is also something the company needs to Q: Which is the most appropriate solution for the company? A: The most appropriate solution in the current context but also bringing long-term value to the company is to issue specific regulations on receivables management In-depth interview 3: Interviewee: Mr Hung Title: the Planning and Investment Director Working experience: more than year experience in Planning and Investment at VIAGS Q: What you think about the operating situation of the company after consolidating enterprises (TIAGS, DIAGS and NIAGS)? 36 A: In general, the company has developed quite well in the recent period Annual revenue exceeded the plan while the cost was lower than planned Revenues and expenditures are always effectively balanced This is thanks to the best efforts of all company employees in the face of difficulties and challenges of the market Q: Data show that net working capital tends to decrease over the past years, so what are potential problems that lead to the issue? A: After being restructured as a subsidiary of Vietnam Airlines, VIAGS must lease equipment from the parent company to operate independently in accordance with the vision and long-term development orientation Most of the company's long-term capital is used to invest in equipment, besides, short-term capital is also fully and reasonably utilized This in part caused a decrease in working capital In addition to renting equipment from the parent company, VIAGS also directly invests and purchases other goods and services that were previously performed by the parent company This has put considerable pressure on balancing annual revenue and expenses The company's revenue has grown but also contains instability because it depends heavily on the macro environment in Vietnam and the countries of company’s customer airlines Therefore, companies often have to adjust their plans to flexibly meet actual needs Q: What you think is the main problem? A: Equipment investment as well as revenue instability is the main problem Q: What are possible causes that lead to main problem? A: As mentioned, restructuring is the cause of investment and procurement This is the indispensable thing the company must In terms of revenue instability, despite being heavily influenced by external factors, it is shown that the company has not taken appropriate measures to minimize these risks as sales policies, credit standards, incentive policies Q: What is the main cause? A: I think that lack of policies and standards is the main reason The reason is that this is one of the things the company must but the company has not done yet Q: Do you have any suggestion to solve that main cause? A: Company can solve the problem by balancing sales and costs, promoting sales to increase sales, issuing specific policies to serve as a basis for implementing and managing sales Q: Which is the most appropriate solution for the company? A: The balance of revenue and costs should be closely monitored Along with that, soon issue policies, regulations and standards to manage sales, especially the policy of collecting money from customers 37 In-depth interview 4: Interviewee: Mr Tam Title: the Chief Accountant Working experience: more than year experience in Accounting at VIAGS Q: Data show that net working capital tends to decrease over the past years, so what are potential problems that lead to the issue? A: The recent decline in working capital is a major issue that we are concerned about The structural change in the company's development process contains many factors that affect the performance of the company, including working capital The working capital structure of VIAGS is mainly influenced by account receivables Therefore, the fluctuation of working capital mainly comes from the fluctuation of accounts receivable The finance and accounting department recently noticed that customers' payment time has been increasingly extended Employees must regularly send reminder notices Employees must regularly send reminder notices by email and dispatch Especially as the case of Malaysia Airlines recently, we have a lot of difficulties in asking customers to pay This is unprecedented However, we can only stop sending notices to customers and ask the sales department to speak with them to find out and influence them to make payment soon With this bad trend, the company will face a lot of risks if it does not improve the situation Q: What are possible causes that lead to this problem? A: The monitoring and handling of corporate debt are in compliance with debt management regulations This regulation is mainly used to handle debts when they happened, instead of having solutions to limit risks from the beginning Therefore, this regulation has many shortcomings In addition, the coordination between the departments in tracking customer payments is not good The departments have no connection but only fulfill their responsibilities, considering the debt settlement is the responsibility of the Accounting and finance department only Q: What is the main cause? A: The risk we face comes from credit selling We apply this form to most customers, except for charter customers with a non-fixed schedule The increasing payment time of customers has shown the inefficiencies in receivables management This may be the main cause Q: Do you have any suggestion to solve that main cause? A: Company can change the situation by improving the shortcomings of current debt management regulations For input, enhance the strictness of the standards applied to 38 customers For outputs, use safe solutions like receivables guarantees The company may have to receive customer dissatisfaction in the short term, but that's what it takes to improve the situation Q: Which is the most appropriate solution for the company? 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International School of Business Duong Xuan Phuong INEFFECTIVE ACCOUNTS RECEIVABLE MANAGEMENT AT VIETNAM AIRPORT GROUND SERVICE COMPANY LIMITED MASTER OF BUSINESS ADMINISTRATION... Tan Son Nhat, and one affiliated company, which is Aviation Ground Services Co Ltd, (AGS) with a 25% stake The company' s vision is to be the top of Vietnam in the field of airport ground services... Supplementary services Details - Passenger and baggage handling services - Ramp services - Load control and flight operation services - Station management services - Cargo and mail warehouse services