Poor accounts receivable collection at binh minh plastics joint stock company

UNIVERSITY OF ECONOMIC HO CHI MINH CITY International School of Business - PHAN THI THANH TRAM POOR ACCOUNTS RECEIVABLE COLLECTION AT BINH MINH PLASTICS JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION Ho Chi Minh City - 2017 UNIVERSITY OF ECONOMIC HO CHI MINH CITY International School of Business - PHAN THI THANH TRAM POOR ACCOUNTS RECEIVABLE COLLECTION AT BINH MINH PLASTICS JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: Prof Pham Phu Quoc Ho Chi Minh City - 2017 SUPERVISOR’S REPORT ON THE FINAL THESIS SUBMITTED FOR DEGREE OF MASTER of BUSINESSADMINISTRATION The final thesis title: POOR ACCOUNTS RECEIVABLE COLLECTION AT BINH MINH PLASTICS JOINT STOCK COMPANY Student Name: PHAN THI THANH TRAM Supervisor: Prof Pham Phu Quoc General comments:  Remarks on the student’s attitude: …………………………………………………………………………… ……………………………………………………………………………  Remarks on the assignment’s academic quality: …………………………………………………………………………… …………………………………………………………………………… Overall assessment: ฀ Meet requirement for submitting ฀ Not meet requirement for submitting Other remarks:  Did the student follow the report schedule? ฀ Yes ฀ No  The Turnitin plagiarism percentage: Supervisor’s signature ฀ Other………………………… CONTENTS EXECUTIVE SUMMARY CHAPTER 1: INTRODUCTION Company background 2 Company symptom CHAPTER 2: PROBLEM IDENTIFICATION 2.1 Potential problems 2.2 The central problem .12 CHAPTER 3: CAUSE VALIDATION 15 3.1 Possible causes .15 3.2 Central cause validation .17 CHAPTER 4: SOLUTIONS .19 4.1 Possible solutions 19 4.2 Suitable solutions 21 CHAPTER 5: ACTION PLANS 23 CHAPTER 6: CONCLUSION 27 APPENDICES 28 REFERENCES 51 LIST OF TABLES Table 1: Days sales outstanding of Binh Minh Plastics Table 2: Analysis the possible solutions of Binh Minh Plastics Table 3: Binh Minh Plastics Joint Stock Company Action Plans LIST OF FIGURES Figure 1.1: Binh Minh Plastics organizational structure Figure 1.2: Days sales outstanding of BMP, NTP and industry Figure 2.1: Aging of BMP’s accounts receivable in 2016 Figure 2.2: Overdue debt ratio of BMP in 2016 Figure 2.3: Initial cause and effect map Figure 3: Final cause and effect map EXECUTIVE SUMMARY Days sales outstanding of Binh Minh Plastics Joint Stock Company in the period 2013 - 2016 tends to increase and be higher than competitors and the industry which shows signs of bad working capital situation tied up in accounts receivable In addition, there is an increase in the risk of bad debts if it can not be recovered, and increased costs associated with receivables monitoring and receivables collection This thesis aimed at investigating practices adopted by Binh Minh Plastics in the management of accounts receivable to find out the central problem to make high days sales outstanding over the years and to recommend ways to solve this problem Follow-up investigations revealed three possible problems: ineffective trade credit policy, poor credit collection and late payment from customer In particular, the problem of poor credit collection is defined as the central problem, which has the great influence on the increase high days sales outstanding and can be solved in the present situation After considering all the aspects that affect the central problem, the thesis has found the main reason caused the poor credit collection is poor credit collection policy Besides that, the thesis finds and proposes alternatives solution and practices for effective credit collection policy to improve this issue Binh Minh Plastics should improve a credit collection policy by setting out the procedures and practices to be used by the company to collect overdue or delinquent accounts receivable In addition, the company should automate their electronic invoicing system to cut down on the time taken to present invoices to customers CHAPTER 1: INTRODUCTION Company background Industry overview Construction plastics - real estate and warming construction are major support for the growth of the sector The plastic construction market occupies only 18.2% of the total plastics industry but grows rapidly, to 15 - 20% per year Currently, there are 180 enterprises operating in the two sectors: construction plastic pipes and building materials According to the BMI predicted the average real growth of Vietnam's infrastructure will be 6% per annum in 2016 - 2024 The demand for plastic pipes is increasing, creating a momentum for the growth of the construction industry in the future Market share and competitors Construction plastics are mainly domestically under more severe competitive pressure Binh Minh Plastics (BMP) leads the market in the South with a market share of nearly 50% and 25% of the national market share While Tien Phong Plastics (NTP) holds about 60% of the northern plastic pipe market share and 29% of the national market share However, Binh Minh Plastics recently faced market penetration by competitors such as Hoa Sen, Europipe and Tan A Dai Thanh…As you can see, competition in the construction plastics market is becoming much more intense and market share slice may have to be broken up for these new businesses The domestic plastic industry is still dominant thanks to its large scale and strong brand So if BMP are no reasonable policies to adapt to the competitive market, market share will be affected Company background Binh Minh Plastic, which was established on November 16th 1977, is a leading company in Vietnam manufacturing and trading in plastic pipes and fittings for water supply and drainage, telecommunication, electricity, industrial and civil construction The Company has four factories in Ho Chi Minh City, Binh Duong, Long An and Hung Yen provinces with capacity of 150,000 tons/year, entirely meeting domestic demands and preparing for international exports in the future On the other hand, Binh Minh Plastics has applied sale model of distribution system through stores The store systems of the company include main stores and branch stores Currently, the company has a total of nearly 1,500 stores across the country ensuring supply of goods quickly and timely at demands of customers In addition, the company also has engaged in key national projects with government as the role of supplier for the water supply and construction buildings Company name: CƠNG TY CỔ PHẦN NHỰA BÌNH MINH English name: BINH MINH PLASTICS JOINT - STOCK COMPANY Abbreviation: BMPLASCO Business registration certificate and tax code: 0301464823 Charter capital: VND 454,784,800,000 Head office: 240 Hau Giang, Ward 9, District 6, HCMC Telephone: (84-28) 39 690 973 Fax: (84-28) 39 606 814 Website: www.binhminhplastic.com.vn Security code: BMP Besides, the implementation of commitments and sustainable management solutions such as taking care and developing eco-friendly resources, utilizing energy consumption, improving internal HR policies, investing in high technology, and caring for the working environment improvement in the past years had the positive effects to the business result of the company The internal structure of the company is showed in the graphic as follow: Figure 1.1: Binh Minh Plastics organizational structure (Source: BMP’s annual report in 2016) Company symptom After deep analysed the company's annual report and investigated the financial ratios in the period from 2013 to 2016, the symptom of the problems had been revealed is high in days sales outstanding (DSO) during the period of four years Table 1: Days sales outstanding of Binh Minh Plastics Item Net credit sales (1) Average Accounts Receivable (VND) (2) Receivable Turnover Ratio (Round) (3) =(1)/(2) Days sales outstanding (4)=365/(3) %change in DSO comparision with the previous year Year 2013 1,276,043,760,135 297,203,614,064 4.29 85 0% 2014 1,119,039,841,368 294,615,362,613 3.80 96 13% 2015 2016 1,068,879,615,018 1,033,005,969,909 322,413,279,111 405,097,125,465 3.32 2.55 110 143 15% 30% (Source: BMP’s financial data 2013-2016) In order to increase revenue and diversify its distribution channels, beside its traditional distribution system, forced the company to apply the policy of lenient credit policy So, the days sales outstanding of BMP tend to increase over the years, rising sharply by 2016, with 30% higher than in 2015 and 68% higher than in 2013 In 2013, the days sales outstanding is 85 days, the trend is to increase gradually over the years 2014, 2015, and especially in 2016 with 143 days Meanwhile, the credit term of the company is from to 90 days It means that in 2016, in BMP, days sales outstanding is higher than credit term for collection customers 53 days (compared to the highest level), equivalent more than 59% This shows a symptom of days sales outstanding of accounts receivable is much higher than the previous years its and the credit term for customers Days sales outstanding of BMP, NTP and industry 160 140 120 100 80 BMP 60 NTP 40 Industry 20 - 2013 2014 2015 2016 BMP 85 96 110 143 NTP 68 65 71 75 Industry 76 79 86 98 Figure 1.2: Days sales outstanding of BMP, NTP and industry (Source: BMP, NTP’s Balance Sheet 2013-2016) In comparision to the construction plastics and the formidable competitor NTP, BMP’s days sales outstanding are the highest While NTP's days sales outstanding is always lower than that of the industry, BMP’s days sales outstanding is always higher than the industry Comparing to the ratio of rival NTP, the days sales outstanding of BMP is nearly double in 2016, nearly 1.5 times compared with the industry It is notable that in overdue Bad debts are on the rise Interviewer: Would you explain about current trade credit policy? Interviewee: For groups of customers of water supply and constructions who purchased debt by trust and relationship, the company will accept the limit of sale of debt and time debt as approved by the Director General Different customers will be issued different credit term and credit limit Interviewer: What you think about the problem of poor credit collection? Interviewee: There is no effective cooperation between sales staff and accountants Salespeople are not concerned about the due or past due receivables Therefore, they often ask for approval of the sale even if the customers are overdue receivables and the receivables time is too long The receivables collection policy is not clear, because the customer relationship, when the overdue receivables arisen, receivables accountant does not call or send a written reminder to customers That's just, at the end of each month, the debt notification to customer When receivables are due or overdue, because of customer relationships, the receivables accountant does not notify directly to the customer but through the sales staff These employees will contact customers to request for repayment of old receivables to be can purchase Although customers of water supply or constructions have overdue debt, the sale of debt will continue with the approval of the general manager and the decentralized Because of the relationship with guests, most credit sales will be done despite having overdue debts or overdue large amounts or long periods of time 39 Interviewer: Is the collection process not accountant directly contact the customer? Interviewee: Yes The collection of money is also through intermediaries is sale department, when the need to notify the customer about receivable is sent through the sales to transfer debt notification to guests Interviewer: On the customer side, what the customer group has difficulty in debt collection? Interviewee: Project customer and water supply customers delayed their debt for longer time There are bad debts from customer agents who can not afford to pay They only pay when handing over the works to the investor, which is often late in comparison with the payment time Interviewer: Based on what you have found, what is the main cause make poor credit collection? Interviewee: I find that due to poor credit collection policy If a clear and effective receivable collection policy helps the receivables accountant to take more robust debt collection steps, collaborate more effectively with the sales staff Interviewer: To solve the problem of poor credit collecting, what solutions you propose? Interviewee: Now, although the company has imposed an overdue debt penalty of 1% per month on the value of outstanding debt, the application of the loan is not effective It is almost impossible to enforce the charge, but wait for the customer to pay interest, or unless there is a discount Interviewer: Finally, would you like to share more? 40 Interviewee: Not at all Interviewer: I think that this analysis and research will help the company find the exact cause of the problem as soon as possible Based on these reasons, optimal solutions will be proposed to address and improve the situation I hope to still be able to contact you when new issues arise Interviewee: Yes of course Interviewer: Thank you for your supporting Interviewee: No problem Interviewer: Goodbye and see you later Interviewee: Goodbye 41 Transcript 4: Sales manager Location of interview: at head office of Binh Minh Plastics, 240 Hau Giang Street, District, HCM city, Vietnam Time: 13:00 PM, 10 October 2017 Transcript Interviewer: Good afternoon Ms Nga, my name is Tram Now I am working as a staff in finance and accounting department of Binh Minh Plastics Currently I have a research to study the existing problem in finance and accounting department of Binh Minh Plastics, and from that, propose the solutions to improve it I am looking forward to receiving your help Interviewee: Ok Interviewer: Please tell me about the current business situation of BMP Interviewee: Regarding the current business situation of BMP, although sales have increased over the years, the business has faced many difficulties in competition in the industry There are a lot of plastic companies competing with BMP in plastic construction Besides competitors traditional Tien Phong Plastics, now on the market has emerged many competitors such as Hoa Sen, Tan A Dai Thanh Interviewer: How the company's sales policy to compete with competitors? Interviewee: BMP has the advantage of being the industry leader in building plastics, so it has a strong competitive advantage However, competitors run for the price in the form of high discount, for the credit which penetrated market share very quickly Therefore, the company also has to apply lenient credit policy to maintain market share BMP’s customers have two major customer groups that are 42 distribution store system and water supply and drainage and construction companies In addition to maintaining the distribution system as the foundation, BMP implemented a strategy to expand its customer base to the project through the lenient credit policy Interviewer: How the business department is interested in or coordinated in receivable collecting? Interviewee: The sales department considers the issue of receivables collection to be the responsibility of the accounting department, we are only in the support role, intermediary contact with customers when receiving information from the accounting department or customer Interviewer: The problem that needs to be resolved now is the poor receivables collection, according to you the cause of the problem? Interviewee: Through observation and working with the accountant in debt collection, I realize that this poor income due to many reasons such as overdue debt penalty is not really effective As evidence, there are many customers still lacking interest penalty overdue debt, but the company still sells and transactions normally, even discounted when buying goods The second cause is the lack of monitoring and supervision of debt accounting When there arises overdue debts or due debts, accountants have no steps to remind customers to pay Interviewer: To solve the problem of poor credit collecting, what solutions you propose? Interviewee: In my opinion, it is a good idea to improve the debt collection policy so that debtors can perform well The second is that the company can use the debt service or debt collection agency for customers with bad debts 43 Interviewer: Finally, would you like to share more? Interviewee: That's what I said Interviewer: I think that this analysis and research will help the company find the exact cause of the problem as soon as possible Based on these reasons, optimal solutions will be proposed to address and improve the situation I hope to still be able to contact you when new issues arise Interviewee: Yes of course Interviewer: Thank you for your supporting Interviewee: No problem Interviewer: Goodbye and see you later Interviewee: Goodbye 44 Transcript 5: Sale staff Location of interview: at head office of Binh Minh Plastics, 240 Hau Giang Street, District, HCM city, Vietnam Time: 17:30 PM, 10 October 2017 Transcript Interviewer: Good afternoon Mis Lan, my name is Tram Currently I have a research to study the existing problem in finance and accounting department of Binh Minh Plastics, and from that, propose the solutions to improve it I am looking forward to receiving your help Interviewee: Ok Interviewer: How long have you worked in Binh Minh Plastics? Interviewee: I have been in sale staff at BMP for years Interviewer: Could you tell me something about your daily work, please? Interviewee: My daily job is to receive orders from customers, check inventory and debt levels are still owed to sale for customers Interviewer: For orders in excess of debt levels, you allow for further sales? Interviewee: Under the debt sale policy, if the order exceeds the debt level below 5% of the value of debt, the sales staff is allowed to sell Except for overdue debt and exceeding that level, please seek approval from the CEO With the approval of the director, and more of important customers who have a special relationship with BMP, so these orders can not sold to customers Receivables management is the work of accounting, also about sales only sells goods when the approval of the director 45 Interviewer: The problem the company is facing is the poor collection lead to bad debts, according to you what does the main cause? Interviewee: I think debt accounting is not really effective in debt collection They are often asked to trade debt by customers, so they are passive in excess debt When the new order arises, then the debt accountant will announce the excess debt Therefore, making us passive in selling Need to change this process to sell more favorably Interviewer: To solve the problem of poor credit collecting, what solutions you propose? Interviewee: I think it is a good idea to change the debt collection policy so that accountants are more active And customers will know their debt levels faster and more accurately Interviewer: Finally, would you like to share more? Interviewee: Not at all Interviewer: I think that this analysis and research will help the company find the exact cause of the problem as soon as possible Based on these reasons, optimal solutions will be proposed to address and improve the situation I hope to still be able to contact you when new issues arise Interviewee: Yes of course Interviewer: Thank you for your supporting Interviewee: No problem Interviewer: Goodbye and see you later Interviewee: Goodbye 46 Appendix 3: Definition of theoretical frameworks Accounts receivable Accounts receivables are debts owed to the firm by customers arising from sale of goods or services in ordinary course of business (15) Hence accounts receivables are asset accounts representing amounts owed to the firm as a result of the credit sale of goods and services in the ordinary course of business There have been many theories proposed for trade credit Accounts receivable turnover One of ratios which reflect the productivity of accounts receivable is receivable turnover rate This ratio shows the relationship between credit sales and accounts receivable of a firm It shows the level of sales on credit per VND invested in this account and how often receivables are received and collected during the year (16) It also displays the liquidity of accounts receivable Therefore, the higher turnover rate is the better The receivable turnover rate is defined as follow: Accounts receivables turnover = Net sales on credit Average accounts receivable Where Average accounts receivable = Opening+closing receivables Days sales outstanding (DSO) Days sales outstanding (DSO) is a very widely used method that is intended to help evaluate effective of a company in collecting its trade receivables It is a metric used to measure the average number of days it takes a company to collect what is owed to them after a sale has been completed The quicker DSO reflects the faster speed of capital reinvestment back into company To evaluate the position of company the DSO is compared to other companies or the industry DSO DSO can be calculated by dividing the amount of accounts receivable during a given period by the total value of 47 credit sales during the same period, and multiplying the result by the number of days in the period measured Days sales oustanding = Or Average accounts receivable Net sales on credit Days sales oustanding = x 365 365 Accounts receivables turnover Appendix 4: Days sales outstanding of Tien Phong Plastic Year Item 2013 Net sales (VND) 2,480,732,747,569 2014 2015 2,997,535,071,629 2016 3,556,141,614,986 4,354,163,055,017 Short-term trade receivables (VND) 454,783,283,480 609,807,952,787 778,130,928,465 1,012,918,824,967 Average Account Receivable(VND) 460,821,825,055 532,295,618,134 693,969,440,626 895,524,876,716 5.38 5.63 5.12 4.86 68 65 71 75 Account Receivable Turnover (Round) Days of sales outstanding Appendix 5: Days sales outstanding of Da Nang Plastic Year Item 2013 Net sales (VND) 2014 2015 2016 78,087,263,348 77,455,172,229 81,614,726,548 67,426,424,805 Short-term trade receivables (VND) 6,769,136,924 7,409,109,858 11,786,801,158 6,913,770,464 Average Account Receivable(VND) 8,625,972,170 7,089,123,391 9,597,955,508 9,350,285,811 Account Receivable Turnover (Round) Days of sales outstanding 9.05 10.93 8.50 7.21 40 33 43 51 Appendix 6: Days sales outstanding of Dong Nai Plastic Year Item 2013 Net sales (VND) 2014 2015 2016 387,020,885,435 594,502,827,695 903,843,201,634 1,454,703,068,206 Short-term trade receivables (VND) 95,324,265,818 174,847,298,934 202,305,779,589 317,193,910,698 Average Account Receivable(VND) 88,764,982,775 135,085,782,376 188,576,539,262 259,749,845,144 4.36 4.40 4.79 5.60 84 83 76 65 Account Receivable Turnover (Round) Days of sales outstanding 48 Appendix 7: Days sales outstanding of BMP, NTP, DPC, DNP, Industry Days sales outstanding 2013 2014 2015 2016 B MP 85 96 110 143 NTP 68 65 71 75 DPC 40 33 43 51 DNP 84 83 76 65 Industry 76 79 86 98 Appendix 8: Aging of BMP’s accounts receivable in 2016 Item -45 days 45 days - months months - months months - 12 months years - years over years - consider as default Accounts receivable 2,451,034,427 203,755,463,917 18,085,645,825 170,179,930,197 5,446,639,702 62,794,400,840 462,713,114,908 Rate 1% 44% 3% 37% 1% 14% 100% Overdue debts 1,455,032,740 8,671,259,554 5,085,437,978 114,308,618,092 795,413,776 62,794,400,840 187,157,798,453 Rate 0.3% 2% 1% 24.5% 0.2% 14% 42% Appendix 9: Balance sheet of BMP 2013-2016 49 Appendix 10: Balance sheet of BMP 2013-2016 50 REFERENCES Brigham, F, Houston J F, Eugene F 6th Edition Fundamentals of Financial Management; 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CHI MINH CITY International School of Business - PHAN THI THANH TRAM POOR ACCOUNTS RECEIVABLE COLLECTION AT BINH MINH PLASTICS JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION... in sales and receivables at Binh Minh Plastics The aim of these interviews is to investing at about trade credit policies, collection and management of receivables at Binh Minh Plastics in order