LV Thạc sỹ_Enhancing working capital mangement at Thanh Thang company

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM ***************************** INTERNSHIP REPORT THESIS: ENHANCING WORKING CAPITAL MANAGEMENT AT THANH THANG COMPANY Tables of content Tables of content ABBREVIATION .5 INTRODUCTION 1.1RATIONALE: 1.2RESEARCH OBJECTIVES: 1.3RESEARCH QUESTIONS .10 1.4RESEARCH METHODOLOGY .10 1.4.1Method of collecting data 10 1.4.2Method of analyzing data 11 FUNDAMENTAL FRAMEWORK FOR WORKING CAPITAL MANAGEMENT 12 2.1 WORKING CAPITAL .12 2.1.1 Concept of Working Capital .12 2.1.2 Classification of Working Capital .14 2.1.3 Factors Affecting Working Capital 16 2.2 WORKING CAPITAL MANAGEMENT .20 2.2.1 Concept of Working Capital Management 20 2.2.2 Approaches (Methods) of Estimating Working Capital 21 2.2.3 Contents of WCM .25 2.2.4 Financing of Working Capital 30 2.2.5 Measures of Working Capital Management Efficiency 33 WORKING CAPITAL MANAGEMENT AT THANH THANG COMPANY (MDT Co., Ltd) 39 3.1OVERVIEW OF MDT CO., LTD .39 3.1.1Profile and History of MDT Co., Ldt 39 3.1.2Main Functions and Duties of MDT Co., Ldt .40 3.1.3Organizational Structure of The Enterprise 40 3.1.4Human Resources of Thanh Thang Company 42 3.1.5Operational Process 43 3.1.6Business Environment .43 Advanced Educational Program 3.2BUSINESS PERFORMANCE AND FINANCIAL SITUATION OF MDT CO., LTD IN 2009-2011 46 3.3WORKING CAPITAL MANAGEMENT IN MDT Co., Ltd 47 3.3.1Working Capital Structure at MDT Co., Ltd 47 3.3.2 Management of Working Capital Components 51 3.3.3Working Capital Management Efficiency 58 3.4FINANCING WORKING CAPITAL AT MDT CO., LTD .60 CHAPTER 63 SOLUTIONS FOR IMPROVING WORKING CAPITAL MANAGEMENT IN MDT CO., LTD 63 4.1Cash management improvement 64 4.2 Inventory management .65 4.3 Receivables management 67 4.4 Other suggestion: 69 Conclusion .71 Advanced Educational Program ACKNOWLEDGEMENT This report is the result of my two and a half months internship experience at Thanh Thang manufactory and trading company limited (MDT Co., Ldt) Through it, I want to express my gratitude and thanks to many people who have helped, supported and encouraged me during my internship Firstly, I would like to send my greatest gratitude to my advisor, PhD… at National Economics University, without whom I could not complete my thesis She has provided me with so much help from the beginning Her knowledge, professional experience and dedication are not only a motivation and inspiration for me to finish my thesis but also are very helpful to me Secondly, I want to express my sincere thanks to Thanh Thang Manufatory and Trading company limited where I have had a very interesting internship To work with people there is one of my honor They have provided me many useful practical experience which I have never been through before I learned a lot there and will apply this experience to further promote my future career I am also very grateful for the support and guidance of Mrs … She is the one who provided all the data I need for this report and answered all my questions regarding the company Advanced Education Program of National Economics University has provided me such a great chance to practice what I have studied The program is like a big family which always supports and takes care of every step I take in my student life years spending here is a very pleasure, warm and happy time of mine I deeply appreciate all the efforts of the members of the program Last but not least, from the bottom of my heart, I want to dedicate this report to my parents, who created all the greatest opportunities for me to fulfill my studies and desire They are always support me unconditionally Everything I do, I know I have them beside Advanced Educational Program me and that thought is the motivation for me to overcome all the difficulties and stress during not only this internship but also my whole life With all my love and gratitude Advanced Educational Program ABBREVIATION MDT Co., Ltd Thanh Thang Manufactory And Trading Company Limited SME Small And Medium Enterprise WC Working Capital WCM Working Capital Management CA Current Assets CL Current Liabilities A/P Accounts payable to sales COGS Cost Of Goods Sold Advanced Educational Program LIST OF TABLES Table 1: Thanh Thang's human resources 42 Table 2: Operation results of MDT Co., Ltd .46 Table 3: Working capital structure of the company 48 Table 4: Assets structure 50 Table 5: Cash and cash equivalent 52 Table 6: Receivables structure 55 Table 7: Payables structure 57 Table 8: Ratio analysis 58 Table 9: Current liabilities 60 Advanced Educational Program LIST OF FIGURES Figure 1: Working capital classification .15 Figure 2: Permanent and Temporary working capital 16 Figure 3: Organization Chart 41 Figure 4: Current Assets' Components 49 Advanced Educational Program CHAPTER INTRODUCTION 1.1 RATIONALE: In order to start and conduct a business, every firm needs working capital Even a firm with all types of fixed assets required is bound to collapse without adequate supply of raw materials for production, stock of finished goods to meet market demand, cash to pay for wages, electricity and other overhead costs, and the ability to grant credit to its customers All these things are examples of working capital Working capital is thus like the lifeblood of a business The business will not be able to carry on day-to-day activities without the availability of adequate working capital Working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, accounts receivable and inventories Working capital is also known as revolving or circulating capital or short-term capital Net working capital is the difference between a firm’s current assets and its current liabilities Every company, regardless of manufacturing or trading, has working capital It directly affect the company’s operation and performance A proper amount of working capital is very essential to utilize fixed assets, to assure the firm’s long- term success and to achieve the overall goal of value maximization of shareholders Both, excessive working capital and inadequate working capital will impair the general health of a business Too much working capital often means inefficiency and reduced profitability but too little working capital can create a huge illiquidity and insolvency risk for the firm, which may lead to bankruptcy If working capital is managed poorly or becomes weak, the business can hardly prosper and survive For example, a shortage or bad management of cash may result in loss of cash discount and loss of reputation due to Advanced Educational Program non-payment of obligation on due dates Insufficient raw materials may be the main cause of production standstill and it may compel the enterprises to purchase raw materials at unfavorable prices That is why a balanced working capital and a good working capital management are very crucial to any firms of all sizes Working capital management (WCM) is of particular importance to the small business The small business may lower its investment in fixed assets by renting or leasing plant and equipment, but there is no way it can avoid an investment in cash, inventories and receivables With limited access to the long-term capital markets, these firms tend to rely more heavily on owner financing, trade credit and short-term bank loans to finance these needed investments Due to that fact, the purpose of this research is to study the working capital management in small and medium scale businesses, using Thanh Thang Company as a case study It is a small company, working in the field of trading paper, paperboard and paper-made products So, working capital is of extreme importance for the survival and development of the firm However, it is doubted about the efficiency of the company in managing this important part of capital because the company’s not so good business performance these years and its limited managerial ability and skills The company is having negative net working capital and the levels of working capital components fluctuated largely over years.This is hoped to help other people understand more about the concept of working capital management and their implication in enhancing a company’s performance 1.2 RESEARCH OBJECTIVES: This paper tries to explain the concept and theory of working capital and its implication to the performance of an organization It also studies the application of working capital management in the specific case of Thanh Thang manufactory and trading company limited; therefore, assesses the use of working capital in the company as well as provides solutions for working capital management improvement Advanced Educational Program 61 Because the company performance were not successful recently and the small size in nature of the company, the amount of equity is very small However, the increased equity and profits are hoped to improve the independence of the company on borrowed funds Look at the current liabilities section, it’s easily to find out that the company increased its short-term loan significantly To explain for this raising loan, I look again at the balance sheet The company’s investment in fixed assets hiked from 2009 to 2011 So, the company has used these short-term loans to finance new purchases of fixed assets As sales increase in this period, the company wanted to expand their operation and this required to invest in fixed assets such as machines and tools However, because MDT Co., Ltd is a small company, the company found it hard to access to longer-term loan That’s why it finances fixed assets by short-term loan, leading to negative net working capital amounts Negative working capital is very risky It deteriorates the company’s liquidity and credit worthiness A sudden accident which causes bankers recall the loan can lead the company to bankruptcy Negative working capital also indicates a poor financial health Investors, suppliers and bankers would see this as a bad sign and decide not to partner with the company The strategy used by MDT quite follows the aggressive approach in long-term short-term mix of financing assets Most of the company's assets are financed with bank loans The company bank loan is short term loan with month maturity and interest rate as prescribed by the SBV If after months, the company cannot pay back the loan, it will obtain another month loan Although interest expenses of short-term loans are less than long-term, the company may face difficulty paying back the loan and interest expenses when it comes due Vietnam economy is experiencing a very high inflation The strategy of heavy borrowing will increase the interest expense, which in turn, reduce profit for the company That’s why the company should find ways to reduce its borrowing An Advanced Educational Program 62 increase in sales may not cover all the cost of financing It has to weight between the revenue the investment brings and the interest that follows it If the source of financing assets is short-term liabilities, which is flexible but highly risky, equity, in contrast, is a stable and cheap source The increased net profits in 2010 and 2011 are hoped to contribute to the equity, helping the company abate the burden of short-term loans and making MDT Co., Ltd more independent Advanced Educational Program 63 CHAPTER SOLUTIONS FOR IMPROVING WORKING CAPITAL MANAGEMENT IN MDT CO., LTD Operating in the market economy now, to survive and develop and to find a foothold in the market, any businesses should always be careful about the issue of creating and utilizing their capital most effectively This problem can be seen as the heart of every business, deciding the survival and development of it Like all other businesses, Thanh Thang manufactory and trading company limited always appreciates the issues of improving the efficiency of its capital spending However, with limited resources and ability, the company still have some shortcoming managing working capital In general, the company is having trouble in managing working capital It incurred negative net working capital This reflects the lacks of liquidity and can deteriorate the company’s credit worthiness reputation as well as lead to bankruptcy So the most important thing for Thanh Thang to now is to reduce short-term liabilities and improve the efficiency of utilizing current assets Only by this way the financial health of the company can be improve and the threat of illiquidity can be reduced To better estimate overall working capital, Thanh Thang can use one of the formulas presented in part 2.2.2 of the paper These formulas will help the company to have a appropriate level of working capital, avoiding negative net working capital in determining working capital levels, the company should also concern about factors affecting working capital for example, when prices increase fast and fluctuate, a larger amount of cash and inventory should be kept in order to meet unexpected price change as well as avoid expensive input costs Advanced Educational Program 64 4.1 Cash management improvement MDT Co., Ltd has attained achievements in managing cash including a deposit cash in banks instead of keeping it in vault The company also has method to push up cash collection such as providing cash discounts for large, fast settlement and requires new customers to pay by cash immediately when purchase The company has a high level of cash and cash equivalent in 2011 and excessive short-term loan When a large amount of cash is reserved, the company would be active in controlling operating activities , but that money will not be profitable and generate opportunity costs of holding money, which leads to wasting and capital stagnancy Although retention of too much money can help the company be more active in the settlement, that money will not generate profit but incur opportunity costs of keeping the money The company should use this idle amount invest in temporary or short term investment with higher rate of return rather than deposit them in banks with low interest rates, or to retire the short-term borrowing from bank The company should diversify investment of idle cash, invest more variously Finding a channel of investment for surplus cash is the third step in managing cash The channel should be both flexible for the company to liquidate immediately when needs and safe and profitable with high return The company can invest in stock or bonds, however, these channels require expertise in securities Therefore, in my opinion, putting surplus cash in investment fund which generate high rate of return with already expertise may be a good choice for the company The company should also take more advantage from the slow disbursements of cash as it has quite low payables Payables is a source of free cash that is offered by suppliers Because the company purchase mostly from foreign suppliers, they are harder in granting debts for MDT To resolve this problem, the company can seek domestic Advanced Educational Program 65 sources of paper production These suppliers will be more likely in granting debts for the company The advent of the internet has brought a lot of innovations in the management of cash For example, by using the internet the SME can automatically route surplus cash to profitable investments This is an area that the company should consider investing in A web-enabled treasury function brings a number of benefits It allows increased control over cash positions and creates a portal for managing portfolios and trading in short term financial instruments like, over- night call account, treasury bills, others, available on the money market Because the company mostly imported inventory from abroad, it is widely affected by the exchange rate That’s why the company can invest in exchange rate hedging instruments such as SWAP, options, etc… Another the problem faced by MDT Co., Ltd is which is appropriate level of cash To accurately determine this amount the company should plan on payment requirements and payment capabilities, plan on budgeted revenues and expenditures of the company in each quarter The company should also strictly complying with the regulation: separating the functions of cashiers and accountants Frequent and sudden examination about the matching of real cash in hand and cash in book can also improve the accurateness of recording cash 4.2 Inventory management The company has quite high inventory levels on hand in 2009 and 2011 So the company need to determine the amount of inventory required for operations, not too much to create capital stagnancy, but not too low to interrupt the operation or to miss good business opportunity Advanced Educational Program 66 The company need to enhance it forecasting of demanded inventory, reducing the pile up of unnecessary stock therefore reducing the holding cost, storing cost, ordering costs and opportunity costs In order to this, the company should develop a “Just in time” approach to inventory to help the company control closely the change in inventory The company should also study the market demand, both via new customers, as well as familiar ones, and via the information provided by authorities such as Vietnam Paper Association It can also seek for new suppliers with lower prices and better services Currently, domestic paper producers are offering higher product prices, but they are investing more in production process and improving products quality If, once the prices of domestic product is reasonably lower, the company may consider buying from them as this will bring down the cost for transportation and imported tax than importing from a remote foreign supplier The company should focus on market research and expansion domestically and internationally Through local agents, it can investigate customer demand and tastes, as well as know the advantages and disadvantages of their products and competitors from which to plan appropriate action Furthermore, the company should actively participate in trade fairs and exhibitions in the country to showcase their products to foreign customers and expand business relations One of the most disadvantage of the company in working capital management is that it determines working capital level intuitively based on the amount of funds borrowed from bank This is not a professional way of doing business and can lead to many troubles as mentioned in chapter 3, the part about inventory management Instead of doing like that, the company can employ techniques of inventory management discussed in chapter Among the three techniques, ABC analysis is not quite appropriate as the firm does not purchase a large number of product types The company can use the Economic order quantity techniques in short term because the assumption of constant demand is true for the company just in short-term However, this technique is very Advanced Educational Program 67 useful since Thanh Thang is a trading company, its need to order inventory very frequently, and this technique can help it saves much money from ordering The company also need to determine the maximum and minimum level of inventory for each period And this task should be carried on a frequent basis as the business condition and requirement of the company change continuously 4.3 Receivables management Accounts receivable from suppliers of MDT Co., Ltd tend to increase over time In 2011, it accounts for 28% of the total current assets Companies need to reduce further the account as it’s expensive to the business operation The data shown that the company’s capital which was appropriated by other parties is too big (with total receivables in 2010 and 2011 accounting for 67% and 46% of total current assets respectively), forcing the company to borrow short-term loans to finance production Hence, if the company can quickly recover receivables, it will have more capital to supplement working capital needs, thereby reducing bank loans and interest payments To this, the company should adopt methods such as discounts at a reasonable level for patrons who pay ahead of time, and urge customer payments for goods, avoiding too much capital appropriated as last year In order to reduce receivables, the credit policy of the company must be both strict and liberal at the same time, applied flexibly to each customer The firm has some achievements in receivables management In specific: ₋ It has established a clear and detailed credit policy for each type of customers, the terms of trade, notably the period of credit to be granted, and any discounts to be allowed for early settlements in order to avoid bad debts while still promotes sales Advanced Educational Program 68 ₋ The firm has a good process for clearing receivables which regulates detailed steps to call back debts, punishment for late payment and discounts to accelerate ₋ payment The increase in receivables is accompanied with the increase in sales, this means the credit policy has worked However, in order to have a better credit control policy, the firm should: On a customer-by-customer basis, it is necessary to access the creditworthiness and to establish limits in terms of amount and time The classification of customers for credit policy of the company is still general More consideration should be given to assessing a customer’s creditworthiness, especially for new customers In addition to the above, consider reviewing existing customers from time to time, especially if they request that their credit limit should be raised A more detailed on accounts receivable should be implemented The company can use accounts receivable aging to this Accounts receivable aging may indicate that certain customers are not good credit risks It can therefore help a company make prudent decisions about whether or not to keep doing business with customers that are chronically late payers Assessing customers’ credit worthiness can be expensive in terms of both time and money, and as with all credit management the cost and the benefits have to be considered together Thus the more detailed and expensive investigations should be reserved for potentially important or especially risky customers Once deciding to provide credit receivable to the client, the company should make sure the contract has clearly stipulated the due date, method of payment and latepayment penalties The company can also replace receivables by other discount policies in promoting sales These discount policies still attract customers but it is faster in collection of money than granting receivables Discounts to customers can be in the form of quantity Advanced Educational Program 69 discount to people who buy in large quantities, trade discount for people who purchase products in period in accordance with marketing strategy, or cash discount To implement discount policies successfully, the discount provided by MDT Co., Ltd must be attractive enough for customers but also enough to cover the costs and risks that it may encounter when using trade credit policy Factoring is a good solution for the company to reduce its accounts receivable The huge amount of receivables that the firm possessed restricts it to utilize capital and reduces its efficiency in operating activities Factoring means selling receivables with some discount for other creditors such as banks This method not only reduces risk associated with receivables but it also free cash for the company to invest in other better assets For accounts payable to suppliers, the company must think carefully before handing over the money Since the Company's material restrictions on supply, price volatility, so the company must pay in advance for suppliers to buy raw materials But the fact that, after passing the money, the company can carry the risk that supplier may deliver the goods which does not guarantee the required quantity and quality to the company The company needs to choose the partners with high reputation, avoids paying the money but not get the ordered goods, and avoids capital appropriation affecting the efficient use of company working capital 4.4 Other suggestion:  Finding the most appropriate source of financing working capital: To ensure the working capital requirement, firstly, the company must find ways to mobilize maximum internal resources, intensify the mobilization of short-term funds to finance immediate working capital needs, take advantage of payables that have not come due such as the payables to employees, taxes and other obligations to the state budget that have not mature, borrow from suppliers through the use of accounts payable Using Advanced Educational Program 70 these source of fund, the company does not have to pay interest, therefore, improve its business performance once using these fund efficiently Once the mobilization of internal capital is not enough for business, the company can raise additional capital from outside sources by borrowing from banks and other credit institutions In recent years the capital the company borrowed accounted for a relatively high proportion Because when using this fund, the company has to pay a certain interest rate, all funds raised by the company should be put into use immediately and effectively If not, the financial situation of the company will encounter difficulties To be able to exploit external source of fund requires the company to operate effectively and its financial situation must be stable, which clearly can enhance the prestige of the company in the eyes of banks and credit institutions The company borrowed a large amount of short-term fund from banks This is not good as it creates illiquidity and insolvency problem for the firm, making it becomes very risky to invest to Also, a large amount of short-term fund will incur the company a lot of interest payment That’s why I suggest that Thanh Thang should liquidate its inventory a little bit to release short-term loan This will reduce the financial expense of the firm therefore, increase net income  Establish working capital utilization plan Plan to mobilize and use business capital is an important part of business planning as well as for other plans, so the preparation of this plan have to be based on an analysis about economic and financial indicators of the previous periods as a basis the plan must also be close to reality, completed and takes into account long-term financial health and be coordinated with other economic plans When borrowing, the company should avoid taking the amounts of debt larger than current assets In addition the company should use redundant cash and cash equivalent for investment purposes, hence, alleviate the burden of interest rate, thereby improving conditions for effective use of working capital Advanced Educational Program 71  Improve operating efficiency: As a factor affecting working capital requirement, operating efficiency play an important role not in working capital management but in the performance of the company as a whole to improve efficiency, the company need to organize labor and working process rationally, strengthen discipline, improve productivity, quality and labor efficiency and production cost savings in the form of encouraging the spirit of labor creativity and savings through methods such as rewards and promotion  Accounting practice and economic analysis Regular examination of the accounting practice and report should be carried out to timely correct errors, misstatements and frauds Also through the analysis of financial condition, managers can use this information to assess business potential, liquidity position, operating effectiveness and efficiency as well as business risk in the future Thus, finding the right and timely solutions for financial issues to ensure smooth business processes as outlined in business plans Conclusion Improving the efficiency of working capital use is a complex and regular task of each business For SMEs, this is even more important and practical than ever as they are often the ones that poses inefficient management of working capital The research has shown the role of working capital and the intimate relationship between efficient use of working capital and the goal of maximizing profits in a business It’s obvious that a business cannot be considered effective when operating working capital stagnant or loss The analysis also proved that this is a very complex subject and cannot be applied rigidly to all business Through the precious internship opportunity at Thanh Thang manufactory and trading company limited, by the evaluation of the theoretical knowledge and application of it to specific practical conditions, a picture about the efficiency of working capital management in the company is drawn It can be seen that the company’s management is Advanced Educational Program 72 not quite efficient It needs to ameliorate its forecast of market demand, sales and its managerial skills Only through improving working capital management can the company’s performance be enhanced Advanced Educational Program 73 REFERENCE Vietnamese: Financial reports of MDT Co., Ltd in 2008, 2009, 2010 and 2011 English Cheng F Lee,Alice C Lee, Encyclopedia of Finance, (Springer Science + Business Media Inc., 2006) Websites: ₋ Nhap khau giay tu cac thi truong nam 2011 http://sotrans.com.vn/index.php?option=com_content&view=article&id=1845%3Anhapkhau-giay-tu-cac-thi-truong-nam-2011&catid=50%3Athong-tin-chuyennganh&Itemid=70&lang=en ₋ Nam 2012 thue nhap khau giay giam 20% http://congnghegiay.com/tin-tuc/nam-2012-thue-nhap-khau-giay-giam-con-20/ ₋ Thi truong giay nhap khau thang dau nam http://www.anbinhpaper.com/Thi-truong-giay-nhap-khau-2-thang-dau-nam-2012_C14_D517.htm ₋ Tong quan nganh giay the gioi nam 2011 http://www.giayvietphap.vn/?module=cms&id=11&cms_id=16 ₋ Working capital http://en.wikipedia.org/wiki/Working_capital ₋ http://www.investopedia.com/ ₋ Types of working capital http://www.svtuition.org/2010/11/types-of-working-capital.html ₋ Project report on working capital http://www.allprojectreports.com/MBA-Projects/Finance-ProjectReport/working_capital_management/working_capital_management.htm Advanced Educational Program 74 COMMENTS Advanced Educational Program 75 INTERSHIP REPORT ASSESSMENT Signature of supervisor Advanced Educational Program ... working capital are: Gross working capital and Net working capital Gross working capital is the quantitative concept and Net working capital is the qualitative concept 2.1.1.1 Gross working capital. .. fluctuations in profits year from years 3.3 WORKING CAPITAL MANAGEMENT IN MDT Co., Ltd 3.3.1 Working Capital Structure at MDT Co., Ltd The working capital for Thanh Thang company is calculated... positive or negative A positive net working capital arises when current assets exceed current liabilities and a negative net working capital, called ? ?Working capital deficiency’ or ? ?Working capital