Tài liệu 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, 9 May, 2016 Student Dinh Thi Thien Hue 1 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. 2 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. 3 Dinh Thi Thien Hue Graduation thesis Academy of finance LIST OF ABBREVIATIONS No Abbreviations Full Phrase 1. AR Accounts Receivables 2. A/R Account receivables 3. CCC Cash conversion cycle 4. EOQ Economic order quantity 5. FA’s Financial accounting statement 6. JIT Just in time 7. P&L Profit and loss 8. WC Working capital 9. WCM Working capital management 4 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 5 Dinh Thi Thien Hue Graduation thesis Academy of finance TABLE OF CONTENT LIST OF TABLES 5 CHAPTER 1 1 LITERATURE REVIEW OF WORKING CAPITAL MANAGEMENT 1 1.1. Introduction of working capital in enterprises 1 1.1.1. Definition of working capital 1 1.1.2. Classification of working capital 1 1.1.3 Role of working capital 4 1.1.4 Structure of working capital 4 1.1.5 Factors affecting working capital 6 1.2. Working capital management 9 1.2.1. Working capital management and its objectives 9 1.2.2. Managing working capital 10 1.2.3. Working capital management efficiency ratios 16 CHAPTER 2 MANAGEMENT AT AGRICARE VIET NAM CO.LTD 26 2.1 General overview of Agricare Viet Nam Co., Ltd 26 2.1.1 History of the company’s establishment and development 26 2.1.2 Business fields and products 26 2.1.3 Organizational structure of Agricare Viet Nam Co.Ltd 28 2.1.4 Financial situation of Agricare Vietnam Co.Ltd 29 2.2 Working capital management situation in Agricare Viet Nam Co., Ltd 31 2.2.1 Working capital structure 31 2.2.2 Cash management situation in Agricare Viet Nam Co., Ltd. 36 2.2.3. Account receivable management situation in Agricare Viet Nam Co., Ltd 39 2.2.4 Inventory management situation in Agricare Viet Nam Co., Ltd 42 2.2.5 Other management situation in Agricare Viet Nam Co., Ltd 44 CHAPTER III SOLUTIONS FOR IMPROVING WORKING CAPITAL MANAGEMENT IN AGRICARE VIET NAM CO.LTD 45 3.2.1 Cash management 47 3.2.2 Receivables management 48 6 Dinh Thi Thien Hue Graduation thesis 3.2.3 Inventory management 3.2.4 Other recommendations CONCLUSION REFERENCE Academy of finance 49 49 51 58 7 Dinh Thi Thien Hue Graduation thesis Academy of finance Introduction 1. 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 8 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. 2. 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. 3. 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. 9 Dinh Thi Thien Hue Graduation thesis Academy of finance 4. 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. 5. 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. 10 Dinh Thi Thien Hue Graduation thesis Academy of finance CHAPTER 1 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 11 Dinh Thi Thien Hue Graduation thesis Academy of finance as follows: Figure 1.1 Classification of working capital 1.1.2.1 Permanent or fixed working capital A part of the investment in current assets is as permanent as the investment in fixed assets. It covers the minimum amount necessary for maintaining the circulation of the current assets. Working capital invested in the circulation of the current assets and keeping it moving is permanently locked up. The permanent or fixed working capital is of two kinds: (a) Regular working capital It is the minimum amount of liquid capital required to keep up the circulation of the capital from cash to inventories to receivables and back again to cash. This would include a sufficient amount of cash to maintain reasonable quantities of raw materials for processing into finished goods to ensure quick delivery etc. (b) Reserve margin or cushion working capital: It is extra capital required to meet unforeseen contingencies that may arise in the future. These contingencies may crop up on account of rise in prices, business depression, strikes, lock-outs, fires and unexpected competition. It is needed over and above the regular working capital requirements. 1.1.2.2 Variable working capital 12 Dinh Thi Thien Hue Graduation thesis Academy of finance The variable working capital fluctuates with the volume of business. It may be sub-divided into: Seasonal and Special working capital. (a) Seasonal working capital: It refers to liquid capital needed during the particular season. According to Gestenberg( 1959:282), “Beyond initial and regular working capital, most businesses will require at stated intervals a large amount of current assets to fill the demands of the seasonal busy periods”. During the season, the business enterprises have to push up purchase of raw materials (sugarcane by sugar mills, wool by woollen mills) and employ more people to convert them into finished goods and thus require large amount of working capital. (b) Special working capital: It is a part of the variable capital which is needed for financing special operations such as the organisation of special campaigns for increasing sales through advertisement or other sale promotion activities for conducting research experiments or execution of special orders of the Government that will have to be financed by additional working capital. The distinction between permanent and variable working capital is important in arranging the finance for an enterprise. Permanent working Capital should be raised in the same way as fixed capital is procured. It is undesirable to bring regular working capital into business on a shortterm basis because a creditor can seriously handicap the business by refusing to continue lending permanently. Its only recourse is to curtail operations unless another lender can be found. Variable capital requirement can, however be financed out of short term loans from the banks or inviting public deposits. 1.1.3 Role of working capital 13 Dinh Thi Thien Hue Graduation thesis Academy of finance Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully. In the business the working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. The inadequacy or mismanagement of working capital is the leading cause of business failures. Working capital is a prevalent metric for the efficiency, liquidity and overall health of a company. It is a reflection of the results of various company activities, including revenue collection, debt management, inventory management and payments to suppliers. This is because it includes inventory, accounts payable and receivable, cash, portions of debt due within the period of a year and other short-term accounts. The needs for working capital vary from industry to industry, and they can even vary among similar companies. This is due to several factors, including differences in collection and payment policies, the timing of asset purchases, the likelihood of a company writing off some of its past-due accounts receivable. 1.1.4 Structure of working capital Working capital structure refers to the elements of working capital and it shows which of the components is responsible for the sizeable amount of working capital. It is encapsulated in the concept of working capital management, which refers to the financing, investment and control of net current assets within the policy guidelines. It may be regarded as the lifeblood of the business and its effective provision can do much to ensure the success of the business, while its inefficient management or lack of attention may lead to the downfall of the enterprise. 14 Dinh Thi Thien Hue Graduation thesis Academy of finance According to Peter and Eddie (2006), working capital in terms of five components: ● Cash and equivalents: This most liquid form of working capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will peak cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it? ● Accounts receivable: Many businesses extend credit to their customers. If you do, is the amount of accounts receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them? ● Inventory: Inventory is often as much as 50 percent of a firm's current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What's the rate of inventory turnover compared with other companies in your type of business? ● Accounts payable: Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? ● Accrued expenses and taxes payable: These are obligations of your company at any given time and represent a 15 Dinh Thi Thien Hue Graduation thesis Academy of finance future outflow of cash. 1.1.5 Factors affecting working capital ● Nature of Business: The requirement of working capital depends on the nature of business. The nature of business is usually of two types: Manufacturing Business and Trading Business. In the case of manufacturing business, it takes a lot of time in converting raw material into finished goods. Therefore, capital remains invested for a long time in raw material, semi-finished goods and the stocking of the finished goods. Consequently, more working capital is required. On the contrary, in case of trading business the goods are sold immediately after purchasing or sometimes the sale is affected even before the purchase itself. Therefore, very little working capital is required. Moreover, in case of service businesses, the working capital is almost nothing since there is nothing in stock. 16 Dinh Thi Thien Hue Graduation thesis ● Academy of finance Manufacturing Cycle: Working capital requirement of an enterprise are also influenced by the manufacturing cycle. It refers to the time involved to make finished goods from the raw materials. During the process of manufacturing cycle funds are tied up longer the manufacturing cycle, the larger will be working capital requirement and vice-versa ● Production Policy: Working capital requirement is also determined by its production policy. If a firm produces seasonal foods, its production and sales volume fluctuate with different seasons. This type of fluctuating policy affects the working capital policy of the firm. ● Credit Policy Credit policy affects the working capital of a firm. Working capital requirement depends on terms of sales. Different term may be followed by different customers according to their credit worthiness. If the firm follows the liberal credit policy, then it requires more working capital. Conversely, if a firm follows the stringent policy, it requires less working capital. ● Availability of Credit: Availability of credit facility is another factor that affects the working capital requirement. If the creditors avail a liberal credit terms, the firm will need less working capital and vice-versa. In other works, the firm can get credit facility easily on favorable conditions. Thus, it requires less working capital to run the firm otherwise more working capital is required to operate the firm smoothly. 17 Dinh Thi Thien Hue Graduation thesis ● Academy of finance Growth and Expansion: Growth and expansion also affects the working capital requirement of firm. However, it is difficult to precise; determine the relationship between the growth and expansion of the firm and working capital needs. Therefore, the other things being the same growing firms needs more working capital than those static ones. ● Price level Change: Price level change also affects the working capital requirement of a firm. Generally, a firm requires maintaining the higher amount of working capital, if the price level rises. Because the same level of current assets needs more due to the increasing price,it will affect to working capital of a firm. In conclusion, the implications of changing price level of working capital position will vary from firm to firm depending on the nature and another relevant consideration of the operation of the conserned firm. ● Operating Efficiency: Operating efficiency is also an important factor, which influences the working capital requirements of the firm. It refers to the efficient utilization of available resources at minimum cost. Thus, financial manager can contribute to strong working capital position through operating efficiency. If a firm has strong operation efficiency then it needs lesser amount of working capital and vice-versa. ● Profit Margin: The level of profit margin differs from firm to firm. It depends upon the nature and quality of product has a sound marketing management and enjoy the monopoly power in the market, then it earns quite high profit and viceversa. Profit is sources of working capital because it contributes towards the working capital as a policy by generating more internal funds. 18 Dinh Thi Thien Hue Graduation thesis ● Academy of finance Level of Taxes The level of taxes also influences working capital requirement of firm. The amount of taxes to be paid in advances is determined by the prevailing tax regulations. But the firm’s profit is not constant, or can not be predetermined. Tax liability in a sense of short-term liquidity is payable in cash. Therefore, the provision for tax amount is one of the important aspects of working capital planning. If tax liability increase, it needs to increase the working capital and vice-versa. ● Other factors Effective co-ordination between production and distribution can reduce the need for working capital. The availability of credit to a firm depends on its creditworthiness in the money market. If a firm has good reputation with banks, suppliers and investors, it can get credit easily and with favorable terms, which means less working capital is required. 1.2. Working capital management 1.2.1. Working capital management and its objectives Working capital management is the process of managing and monitoring activities related to working capital. There are two main objectives of working capital management. It helps managing effectively the day-to-day activities of the business to improve the firm’s profitability and it ensures that the firm has sufficient liquidity to meet its short-term obligations. Working capital decisions related to maintaining an optimal balance of each working capital components, allowing sufficient resources for the operation and growth. The two important decisions associated with the level of investment in working capital and the sources for financing working capital, are required serious attention of firms’ managers. Managerial 19 Dinh Thi Thien Hue Graduation thesis Academy of finance decisions of working capital is short-term decisions, for instance, the decision of whether to offer credit for customers, if yes, how many days and what level of discounts are relevant? Another example of working capital decisions is related to question: What should the firm do with the temporary surplus cash? 1.2.2. Managing working capital Peter and Eddie (2006) mentioned in their book some methods to manage working capital as the following: 1.2.2.1. Cash management Cash is the most important current asset and is considered as the “lifeblood” of a business, helping the business run a continuous basis. The term cash includes currency, checks and balance in bank accounts. The goal of cash management is: ● To maintain an adequate level of cash on hand to meet the daily cash requirement in operation ● To maximize the amount of money that are available for investments and obtain the maximum of interest earned on excess cash while ensuring the safety. The management of cash concerns with three important aspects: ● Firstly, a firm should manage the cash balance. It is very important to find an optimal holding cash balance in order to maximize the interest earned on funds that are not immediately needed and reduce the cost associated with the delays in transmission of funds. Holding a small amount of cash can increase the opportunity to invest the excess cash with a good return but it also increases the risk of insolvency, financial distress and thus bankruptcy. When deciding the relevant cash holding levels, it is necessary to concern with liquidity and risk of insolvency. Both excess and inadequate cash can consequently degenerate a firm into problems. With insufficient cash 20 Dinh Thi Thien Hue