8 IMPROVING WORKING CAPITAL MANAGEMENT IN MINH DUC BA VI LIMITED LIABILITY COMPANY

Role of working capital in the production and business process According to this classification, the working capital of enterprises is classified into 3 categories: 1 Working capital in

IMPROVING WORKING CAPITAL MANAGEMENT IN MINH DUC

BA VI LIMITED LIABILITY COMPANY

Major : English for Finance of Accouting

Student Code : 165D2202010025

Supervisor : Cao Phuong Thao,MSC

Hà Nội – 2020

This thesis is conducted to investigate the factual state of Improving working capital

management in Minh Duc Ba Vi limited liability company from the viewpoint of a

fourth year student of Faculty of Foreign Languages, Academy of Finance

The study focuses on clarifying the current situation of working capital management

in Minh Duc Ba Vi limited liability company In addition, the study proposes somerecommendations to improve working capital management to make sure thecompany always maintains sufficient cash flow

The thesis focuses on some outstanding aspects which are brought in three mainparts as follow Firstly, the thesis presents some fundamental concepts related toworking capital management Secondly, the thesis gives out the informationintroducing about Minh Duc Ba Vi limited liability company in working capitalmanagement Finally, the thesis raises out some personally recommendations tohelp the firm improve the current situation in managing working capital moreeffectively and efficiently

By and large, this research may be a helpful suggestion leading to better

development for the company’s working capital management in the near future

I would like to express my deep gratitude to all those who have given me thepossibility to complete this graduation thesis In preparing this graduation thesis, Ihave had generous help and advice from my teachers, my colleagues, my family and

my friends I would like to express my great thanks to all of them

First of all, I would like to express my deepest gratitude to my supervisor, MA CaoPhuong Thao, lecturer at Faculty of Foreign Languages, Academy of Finance, whohas given immeasurable help, constant guidance with many careful instructions,comments and valuable advice to me whenever I need Without her support, I amnot able to have a complete thesis And I really appreciate her patience in readingand correcting my thesis

Second, I wish to show my sincere thanks to all my teachers at Academy ofFinance, who have provided me with worthy lessons throughout 4 years of study atFaculty of Foreign Languages, Academy of Finance

Moreover, I have furthermore to thank every accountant as well as all the peoplework in Silky Vietnam Trading and Services Limited Company for their valuablesupports during my internship period Without their helps, it would be impossiblefor me to finish this work

Last but not least, I would like to send my loving thanks to my family whose greatlove and care in both spirit and health to encourage me to complete the thesis

LIST OF ABBREVIATIONS

Assoc Prof Associate professor

EBIT Earnings before interest and tax

MDBV Minh Duc Ba Vi limited liability company

LIST OF ILLUSTRATOR, FIGURES AND TABLES

Illustrator 1.1: First sponsor model 17

Illustrator 1.2: Second sponsor model 18

Illustrator 1.3: Third sponsor model 19

Illustrator 3.1 : Coronavirus cases 61

Illustrator 3.2: Hospital beds per 1000 popilation (2017) 62

Figure 2-1: MDBV’s process of design and installation of equipment 29

Figure 2-2: Summarized diagram of the management structure of Minh Duc Ba Vi 31

Table 2.1: Number of employees of Minh Duc Ba Vi 33

Table 2.2: Liabilities of MDBV 35

Table 2.3 : Equity of MDBV 36

Table 2.4: Depreciation period 37

Table 2.5: Assets’ MDBV 37

Table 2.6: Capital Fluctuation 38

Table 2.7: Revenue and cost 40

Table 2.8: MDBV’s Return of investment coefficient 41

Table 2.9 Working capital distribution 43

Table 2.10: Regular working capital sources 45

Table 2.11: Short-term assets 48

Table 2.12: Liabilities 49

Table 2.13: Analyze capital in cash 52

Table 2.14: Receivable management 55

Table 2.15: Table: Inventories management 57

TABLE OF CONTENTS

DECLARATION i

ABSTRACT ii

ACKNOWLEDGEMENTS iii

LIST OF ABBREVIATIONS iv

INTRODUCTION 1

CHAPTER 1: OVERVIEW OF IMPROVING WORKING CAPITAL MANAGEMENT 5

1.1 Working capital 5

1.1.1 Definition 5

1.1.2 Types 6

1.1.2.2 According to the expression patterns 8

1.1.3 Working capital policies 10

1.2 Working capital management 11

1.2.1 The definition and goal of working capital management 11

1.2.2 The content of working capital management 12

1.2.3 The factor affect working capital management 22

CHAPTER 2: OVERVIEW OF MINH DUC BA VI LIMITED LIABILITY COMPANY 27

2.1 Overview of the Company 27

2.1.1 General information of Minh Duc Ba Vi Company Limited 27

2.1.2 Company’s Function 27

2.1.3 Operation’s structure of Minh Duc Ba Vi Company Limited 30

2.1.4 Overview of financial situation of Minh Duc Ba Vi 33

2.2 Situation of working capital management at Minh Duc Ba Vi 42

2.2.1 Determining the working capital needs 42

2.2.2 Working capital policies 44

2.2.3 WC sources and demand 47

2.2.4 WC management 51

CHAPTER 2 CONCLUSION 59

CHAPTER 3: RECOMMENDATION OF MINH DUC BA VI COMPANY LIMITED 60

3.1 The development strategy 60

3.1.1 Forecasting Vietnamese economy development 60

3.2 Assessment of Minh Duc Ba Vi limited liability company 63

3.2.1 The achievement and shortcoming 63

3.2.2 Recommendations 64

CONCLUSION 67

LIST OF REFERENCES 68

INTRODUCTION 1.Rationale of the study

Working capital management is a very important component of corporate financebecause it directly affects the liquidity and profitability of the company It dealswith current assets and current liabilities Working capital management is importantdue to many reasons For one thing, the current assets of a typical manufacturingfirm accounts for over half of its total assets For a distribution company, theyaccount for even more Excessive levels of current assets can easily result in afirm’s realizing a substandard return on investment However firms with too fewcurrent assets may incur shortages and difficulties in maintaining smoothoperations Efficient working capital management involves planning and controllingcurrent assets and current liabilities in a manner that eliminates the risk of inability

to meet due short term obligations on the one hand and avoid excessive investment

in these assets on the other hand Many surveys have indicated that managers spendconsiderable time on day-to-day problems that involve working capital decisions.One reason for this is that current assets are short-lived investments that arecontinually being converted into other asset types With regard to current liabilities,the firm is responsible for paying these obligations on a timely basis Liquidity forthe firm is not reliant on the liquidation value of its assets, but rather on theoperating cash flows generated by those assets Taken together, decisions on thelevel of different working capital components become frequent, repetitive, and timeconsuming Working Capital Management is a very sensitive area in the field offinancial management It involves the decision of the amount and composition ofcurrent assets and the financing of these assets Current assets include all thoseassets that in the normal course of business return to the form of cash within a shortperiod of time, ordinarily within a year and such temporary investment as may bereadily converted into cash upon need The Working Capital Management of a firm

in part affects its profitability

The ultimate objective of any firm is to maximize the profit But, preservingliquidity of the firm is an important objective too The problem is that increasingprofits at the cost of liquidity can bring serious problems to the firm Therefore,there must be a tradeoff between these two objectives of the firms One objectiveshould not be at cost of the other because both have their importance If we do notcare about profit, we cannot survive for a longer period On the other hand, if we donot care about liquidity, we may face the problem of insolvency or bankruptcy Forthese reasons working capital management should be given proper considerationand will ultimately affect the profitability of the firm Firms may have an optimallevel of working capital that maximizes their value Large inventory and a generoustrade credit policy may lead to high sales Larger inventory reduces the risk of astock-out Trade credit may stimulate sales because it allows customers to assessproduct quality before paying Another component of working capital is accountspayable Delaying payments to suppliers allows a firm to assess the quality ofbought products, and can be an inexpensive and flexible source of financing for thefirm On the other hand, late payment of invoices can be very costly if the firm isoffered a discount for early payment A popular measure of Working CapitalManagement (WCM) is the cash conversion cycle, i.e the time lag between theexpenditure for the purchases of raw materials and the collection of sales of finishedgoods The longer this time lag, the larger the investment in working capital Alonger cash conversion cycle might increase profitability because it leads to highersales However, corporate profitability might also decrease with the cash conversioncycle, if the costs of higher investment in working capital rise faster than thebenefits of holding more inventories and/or granting more trade credit to customers.This discussion of the importance of working capital management, its differentcomponents and its effects on profitability leads us to the problem statement which

we will be analyzing in this following thesis

For every business, when starting a business or planning a business strategy, usingcapital in the most economical and effective way is the most important aspect In

order to do so, the financial management and capital management of enterprisesmust be implemented accurately, fully and promptly to ensure it following the lawand regulation that implemented by the State Recognizing the importance ofworking capital management for the stable and sustainable development ofenterprises in the current economic period is the reason why the writer choose the

topic “Improving working capital management in Minh Duc Ba Vi limited

liability company” as graduation thesis.

2.Aims of the study

The purposes of this research are to study, analyze and evaluate the current state ofworking capital management in Post and Telecommunication Joint Stock Company

to understand its existing achievements and limitations Under that basis as well asthe company’s own development strategy, this thesis recommends, suggests andproposes solutions to improve the efficiency of working capital management for thecorporate in the future

3.Scope of the study

The object of the research is working capital management during the period of2018-2019; working capital source, how it is implements and its effective on thecompany’s operation

4.Methodology

The thesis uses a combination of many research methods including but not limitedto: time-based comparison method (between this term and previous term; betweenreality and plan) to know the change as well as the trend of the business economic;space-based comparison method (between internship company and the industry onaverage) to evaluate the position and role of the company in the industry as well aschanges in capital movements and assets of the company This provide theinformation to calculate and establish the necessary financial ratios for the process

of evaluating the situation and efficiency of using capital and assets, thus analyzethe cost, revenue and profit of the company

5.Organization of the study

In addition to these sections: preface, list of terms, table of contents, conclusions,references and appendices, the main contents of thesis include 3 chapters:

Chapter 1: Overview of working capital and working capital managementChapter 2: Current status of working capital management

Chapter 3: Main solutions to strengthen working capital management

Hanoi, 20 th May 2020

Student

Phung Ngoc Mai

CHAPTER 1: OVERVIEW OF IMPROVING WORKING CAPITAL

MANAGEMENT 1.1 Working capital

1.1.1 Definition

The term working capital refers to the current assets of the firm those items that can

be converted into cash within the year Hence, working capital management is themanagement for the short term It is a process of short term decision makingregarding the current assets and current liabilities affecting the long term operation

of an enterprise It is a process of planning and controlling the level of mix ofcurrent assets of the firm as well as financing these assets It concludes decisionregarding cash and marketable securities, receivables, inventories and currentliabilities with an objective of maximizing the overall value of a firm Workingcapital consists broadly at the portion of the assets of business used in, or related to,current operational and represented at the any one time of the operating cycle bysuch items an account receivable, inventories of raw material, stores work inprogress, finished goods bills receivable and cash Asses of this type are relativelytemporary nature, since the invested names are normally capable of beingreconverted or of being change in form with in the short period of time, and the timeultimate recovery depends on the manufacturing cycle as well as sales andcollection cycles In other words, working capital is a controlling nerve of center ofevery business organization because no business can run smoothly without theproper control upon it Thus, it plays the crucial role in the success and failure of theorganization As the management of current assets and current liabilities of thebusiness organization is necessary for day-to- day operations, it plays the key role inthe success and failure of the organization not only in the short run, in the long runalso In the concern of the management of working capital there have been madenumber of studies from different management experts and students in variousenterprises

In a nutshell, working capital, also known as net working capital (NWC), is thedifference between a company’s current assets, such as cash, accounts receivable(customers’ unpaid bills) and inventories of raw materials and finished goods, andits current liabilities, such as accounts payable Working capital is a measure of acompany's liquidity, operational efficiency and its short-term financial health If acompany has substantial working capital, then it should have the potential to investand grow If a company's current assets do not exceed its current liabilities, then itmay have trouble growing or paying back creditors, or even go bankrupt.

1.1.2 Types

In order to effectively manage and use working capital, it is necessary to classify theworking capital of enterprises according to different criteria in accordance withmanagement requirements There are many different classifies as role of workingcapital in the production and business process, according to the expression patterns,source of working capital formation In particular, the most prominent is according

to the expression patterns

1.1.2.1 Role of working capital in the production and business process

According to this classification, the working capital of enterprises is classified into

3 categories:

(1) Working capital in reserve

- Capital on main materials: the value of materials used in reserve products, butwhen participating in production, they constitute the entity of the product

- Capital on auxiliary materials: the value of reserve supplies used in production.These types of materials do not constitute the main entity of the product, but theycombine with the main materials to change the color, taste, appearance of theproduct or facilitate the production process normally and smoothly

- Fuel capital: the value of reserve fuels used in production and business activities

- Spare parts capital: the value of materials used to replace and repair fixed assetsused for production and business activities

- Capital for packaging: the value of materials which participating in the productionprocess, constitute the product preservation packaging.

- Capital on equipment: the value of equipment not qualified as fixed assets, usedfor production and business activities

This type of capital is needed to ensure the production process of the business iscarried out uninterrupted

(2) Working capital in production

- Manufacturing product capital: the expression by money spent on production andbusiness expenses for products that still in processing

- Semi-finished products: the working capital that reflects the value of productionand business costs spent when producing products that have undergone certainproduction stages but have not finished into the final product

- Prepaid cost capital: The actual costs that have executed but provide effects onmany production and business cycles As such it cannot be fully calculated into theproduct cost in this period but gradually calculated into the price products of anumber of subsequent periods such as: expenses for experimental research,technical improvement, expenses for construction and installation of temporaryworks, costs for framework to be installed for basic construction

This type of capital is used for the production process, ensuring the productionprocess of production parts in the technological line is continuous and reasonable.(3) Working capital in circulation

Finished product capital: The value of finished products that met with technicalstandards and being transported to warehouse

Cash: Includes payable cash, bank deposits and money transfer Money is a type ofbusiness asset that can be easily converted into other types of assets or repay debts.Therefore, in business activities, each enterprise must have a certain amount ofmoney in reserve

Short-term investments: Short-term securities investments, short-term loans .These are investments to ensure solvency (due to the liquidity of short-term

financial assets) or additionally take advantage of the profitability of short-termfinancial assets to improve the efficiency of working capital use

Payment capital: receivables, advances payment mainly in this section arereceivables of customers, which showing the amount that customers owe business

in the process of selling goods and services in the form of pre-sale and post-saleoperation This index is closely related to the business credit policy of enterprises,one of the important strategies of enterprises in a market economy In addition, insome cases of procurement of supplies and goods, enterprises must also pay inadvance to suppliers which form an advance payment

This type of capital is used to reserve products, ensuring regular consumptionaccording to customers' needs The classification of working capital by this methodhelps the manager to consider allocating working capital in each stage of theworking capital transfer process After that, the manager will have appropriatemeasures to create a reasonable working capital structure, increase working capitalcirculation and improve working efficiency of working capital

1.1.2.2 According to the expression patterns

According to this classification, the working capital of enterprises is classified into

4 categories:

(1) Money and cash equivalents

Capital in cash

Equivalent assets: Including short-term financial investments

Separating this item makes it easy for businesses to monitor their quick paymentcapability and take flexible measures to ensure its liability and improve theprofitability of working capital

(2) Receivables

Researching receivables helps businesses to closely grasp and provide reasonablecommercial credit policies to meet customers' needs, improve sales and capitalefficiency

(3) Inventory

These are working capital with specifically including:

Capital on raw materials and materials

Capital on main materials

Capital on auxiliary materials

Mortgage, collateral and deposit

1.1.2.3 Source of working capital formation

According to this classification, working capital is divided into 2 categories:

(1) Equity

As a source of capital owned by an enterprise, the enterprise has full rights topossess, use, control and dispose Depending on the type of enterprises of differenteconomic sectors from different industry, owners' equity has specific contents:Working capital allocated by the state treasury or originated from the state treasury(for state enterprise); capital contributed by members (for joint stock company) or

by individual contribute (for private company); working capital increased fromadditional profits; capital contribution from joint ventures; mobilized capitalthrough issuing shares

1.1.3 Working capital policies

In the free market economy, capital is both a factor and a necessary premise for theformation and development of business activities of an enterprise This poses arequirement for businesses in the process of capital management to consider andchoose the appropriate form of capital mobilization and organize their capitalappropriately Therefore, the classification of funds according to different criteriawill be an important basis for businesses to continue to improve the efficiency ofuse and allocation of their resources Usually in the management, the classificationmethod based on the criteria of time of mobilization and the use of capital is themost commonly used method because this standard is suitable for the division ofassets into two parts including short-term assets and long-term assets Based on thiscriterion, corporate capital can be divided into two categories: Permanent Capitaland Temporary Capital

Temporary Capital: Temporary capital means short-term capital sources (less than 1year) that enterprises can use to meet the requirements of temporary naturallydemand in business activities Temporary funds usually include short-term loansfrom banks and credit institutions, and other short-term debts

Permanent Capital: Permanent capital is the total of stable sources of capital thatenterprises can use for production and business activities This capital source isoften used to purchase, form fixed assets and a part of regular labor assets necessaryfor business activities of enterprises Permanent capital of enterprises at a certaintime can be determined by this formula:

Permanent capital = Owner’s Equity + Long-term debt

Permanent capital = Total assets of the enterprise - Short-term debt

Thus, from the circulating characteristics of working capital, sources of workingcapital formation may include from short-term sources (temporary capital) andlong-term sources (Permanent capital) Therefore, when considering andresearching the working capital, the source of working capital is also divided intotwo parts: current working capital and temporary working capital

Current working capital: Current working capital is a stable long-term source toform or sponsor current assets necessary for business activities of enterprises (may

be a part of or all of current assets of the company depending on the financialstrategy of the business) to ensure the business operations undisturbed and stable.Temporary working capital: Temporary working capital is a short-term source ofcapital for enterprises' working assets to meet with fluctuation demands according

to the business cycle of enterprises

1.2 Working capital management

1.2.1 The definition and goal of working capital management

1.2.1.1 Definition of working capital management

Under the basis of combining the theoretical foundation of corporate financialmanagement in relation to the characteristics and the nature of working capital inthe process of production and business activities of enterprises, we can provide theconcept of working capital management as follows:

“Working capital management refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company.”

1.2.1.2 Goal of working capital management

Working capital management commonly involves monitoring cash flow, assets, andliabilities through the ratio analysis of key elements of operating expenses,including the working capital ratio, collection ratio, and the inventory turnoverratio Efficient working capital management helps maintain the smooth operation ofthe operating cycle and can also help to improve the company's earnings andprofitability Management of working capital includes inventory management andmanagement of accounts receivables and accounts payables The main objectives

of working capital management include maintaining the working capital operatingcycle and ensuring its ordered operation, minimizing the cost of capital spent on theworking capital, and maximizing the return on current asset investments

In short, we can conclude the goal of working management as follows:

“The primary purpose of working capital management is to make sure the company always maintains sufficient cash flow to meet its short-term operating costs and short-term debt obligations.”

1.2.2 The content of working capital management

1.2.2.1 Working capital demand and organization

Demand for working capital and methods to determine:

Demand for working capital of enterprises: The demand of necessary regularworking capital is the minimum working capital required to ensure the normalproduction and business activities of enterprises and can determine according to theformula:

WCM

Demand

= Inventories + Receivable - Supplier Debt

Methods to determine enterprise working capital demand:

a Direct method

The goal of direct method is to directly determine the demand for capital forinventory, accounts receivable, accounts payable to suppliers and then aggregateinto the total demand of enterprises

- Determining capital demand for inventories: Including inventories capital in

the stages of storage, production and circulation

+ Demand for working capital in storage: The general method for determining the

working capital needs for each type of reserve material is based on the need to usethe average capital per day and the number of reserve days for each type todetermine and then aggregate The general formula is as follows:

Vinv: Inventories capital demand

Mij: Average cost of using 1 day of inventory i

Nij: Number of stock days of inventory i

n: Number of types of inventory to be stockpiled

m: Number of stage need to store inventory

For the main material type, it can be determined by the formula:

Vm.mat= Mm.mat x Nm.mat

Note:

Vm.mat: Demand for reserve of main material

Mm.mat: The cost of main materials used on 1 day

Nm.mat: Number of days to reserve the main materials

For other types of materials, if any type is used more often and often, the sameformula as for main materials is applied For those that use less or less frequently, itcan be determined by the ratio (%) to the demand for principal materials or the totalamount of rotation of that material

Demand for working capital reserves in the production stage: Including the need to

form unfinished products, semi-finished products, average production cost per day,product cycle length, level completion of unfinished products, semi-finishedproducts, pre-paid expenses

Demand for unfinished products and semi-finished products is determined asfollows:

Vsx=Pn x CKsx x Hsd

Note:

Vsx: Demand for working capital in production

Pn: Avarage cost of production in 1 days

CKsx: Length of production cycle

Hsd: Coefficient of uncompleted products, semi-finished products (%)

Demand for prepaid expenses is determined as follows:

Vtt=Pđk + Pps + Ppb

Note:

Vtt: Demand for prepaid expenses

Pđk: Balance of prepaid expenses at the beginning of the period

Pps: Prepaid expenses incurred during the period

Ppb: Prepaid expenses allocated during the period

Demand for working capital reserves in circulation: Working capital in circulation includes reserve of finished products, receivable and payable capital.

Demand for finished products: is the minimum capital used to form the stock ofinventories and wait for consumption For finished product reserve capital, it isdetermined according to the formula:

Vtp = Zsx x Ntp

Note:

Vtp: Demand for finished products

Zsx: Avarage production cost of a product per day of the planned period

Ntp: Number of days of stocking finished products

Determining the demand for receivable debt capital: The receivable debt is the

capital amount occupied by the customer or the enterprise actively sells the goods tothe customer Because the capital has been occupied by customers, in order for theproduction and business activities to be normal, enterprises must put more workingcapital into production The formula for calculating receivables is as follows:

Vpt = Dtn x Npt

Note:

Vpt: Receivable debt

Dtn: Average daily sales turnover

Npt: Average collection period (day)

Determine the demand for capital to pay suppliers: Liabilities are the amount of

capital that businesses buy and take on goods or occupation of customers.Enterprises can determine the payable debts according to the formula:

Vpt = Dmc x Nmc

Note:

Vpt: Debts have to be paid

Dmc: Average credit purchasing daily

Nmc: Average payment to suppliers

This method has the advantage of calculating almost exactly the working capitalneeds However, the calculation is quite complicated, the volume is much calculatedand time consuming

b Indirect method

The following methods are included:

According to the percentage of demand of working capital compared to the reporting year:

Vkh = Vbc×Mkh

Mbc×(1 + t%)

Note:

Vkh: Working capital for the plan year

Mkh: The amount of circulation in the planed year

Mbc: The amount of circulation in the reported year

t%: The rate of reduce circulation in the reported year

The total capital turnover and the rate of capital turnover in the plan year:

Vkh = Mkh

Lkh

Note:

Mkh: Total capital turnover of the planned year (Net revenue)

Lkh: Number of circulation in planned year

Based on percentage of revenue

The content of this method is based on the fluctuation according to the ratio ofturnover of the components of the enterprise's report to determine the demand forelectricity by revenue of the plan year

Step 1: Calculate the average balance of the items in the balance sheet of theperformance period

Step 2: Selecting short-term assets and capital resources used in the balance sheetunder the direct impact and having close relationship with revenue and calculatingthe percentage of such items compared with revenue made in the period

Step 3: Use the percentage of items on revenue to estimate the demand for workingcapital to increase for the plan year on the basis of projected revenue for the plannedyear.

Demand for working capital increased = Revenue increased x Percentage of working capital demand compared to revenue.

Increased revenue = Revenue of the planned period - Revenue of the reported period

Percentage of working capital needs compared to revenue = Percentage of current assets compared to revenue - Percentage of capital occupied compared to revenue.

Step 4: Forecast funding for the company's increased working capital needs andmake adjustments to the financial plan to achieve the company's goals

1.2.2.2 Working capital distribution

The analysis of the working capital structure of enterprises follows classificationcriteria to better understand the specific characteristics of the working capital thatthey are managing and using Since then, it is necessary to identify the key andmore effective working capital management measures and measures in accordancewith the specific conditions of the enterprise Besides the management of workingcapital, the allocation and use of capital to make the most reasonable and effective

is also a very important factor in working capital management in enterprises

Depending on the characteristics of the field, business lines, characteristics of eachenterprise, businesses need to have appropriate management to create a reasonableand balanced mobile asset structure On the one hand, to ensure sufficient mobileassets for each part to serve the production and business process, on the other hand,

it is necessary to maintain assets in a reasonable and reasonable amount to avoidexcess and wastefulness, causing capital stagnation, pushing up the cost of capital

Models of sponsoring working capital in enterprise

 First sponsor model

The entire non-current assets and regular current assets are ensured by permanentcapital sources, the temporary current assets financed by temporary capital sources

Time

Regular current assets

Non-current assets

Temporary current assets Temporary capital sources

Permanent capital sources

Illustrator 1.1: First sponsor model

This model helps businesses establish a balance of time of asset use with time tomobilize funding At the same time, it helps businesses limit the risks of payment,higher safety level, reduce the cost of capital, but there is a limitation that it doesnot create flexibility in using capital in organizations, which reduce risk and ensurecertainty but less flexible

 Second sponsor model

All non-current assets and regular current assets and a part of temporary currentassets are temporarily secured by permanent capital source The rest of temporarycurrent assets is secured by temporary working capital

Time

Regular current assets

Non-current assets

Temporary current assets

Temporary working capital.

Permanent capital

Illustrator 1.2: Second sponsor model

Using this model ensures high solvency and safety, but businesses must use manymedium and long-term loans, so the cost of capital is higher

 Third sponsor model

The entire non-current assets and a part of regular current assets are ensured by

permanent capital, there is one part of regular current assets and temporary current

assets secured by temporary working capital

Time

Regular current assets

Non-current assets

Temporary current assets

Temporary capital sources

Permanent capital sources

Illustrator 1.3: Third sponsor model

This model has an advantage over the other two models is that the cost of capitalwill be lower because of the use of more short-term credit, the use of capital will bemore flexible However, this model will bring higher risks to businesses if there areabnormal fluctuations in business and production In fact, this model is often morechosen by businesses because of short-term credit sources is considered long-termbecause it is cyclical

1.2.2.3 Cash management

Cash (including paper money, bank deposits, transfers) is a component of term assets of the business This is the most liquid asset and determines thesolvency However, capital in cash itself is not self-profitable, it is only profitablewhen it is invested to use for certain purposes Moreover, with the characteristics ofhigh liquidity assets, capital in cash is also easy to lose, cheat and take advantage

short-Managing capital in cash of enterprises has a basic requirement to ensure absolutesafety and high profitability but at the same time to meet the demand for cash

payment of enterprises at the same time So when there is idle cash, businesses caninvest in short-term securities, lend or deposit money into banks to earn profits Incontrast, when cash is needed, businesses can withdraw bank deposits, sellsecurities or take short-term bank loans to get cash to use.

In enterprises, the demand to keep capital in cash is often due to 3 main reasons:

In order to meet the daily transaction and payment requirements such as paying forpurchases, paying salaries, wages, paying dividends or paying taxes of theenterprise

Help businesses capture profitable or business investment opportunities tomaximize profits

The need to prevent or overcome unexpected risks that may affect the productionand business activities of the enterprise

Capital management with cash in enterprises includes the following main contents:Properly determine minimum and reasonable cash reserves to meet the cashexpenditure needs of businesses during the period There are many methods ofdetermining the reasonable cash reserves of businesses The simplest way is based

on statistics on the average demand for cash use per day and the number of days ofreasonable cash reserves

Strictly managing of cash revenues and expenditures: In order to avoid lost money,misuse, businesses need to implement:

Actively prepare and implement annual cash flow plans, take appropriate measures

to ensure cash balance and payment and effectively use idle money

1.2.2.4 Receivable management

Receivables are the amount of money customers owe to businesses for purchasinggoods or services In business, most businesses have receivables but with differentscales and levels If receivables are too large or cannot be controlled, it willadversely affect production and business activities

Content of receivables management:

Determine a reasonable selling policy for each customer

Depending on the extent to which these standards are met, enterprises applying theselling policy will loosen or tighten accordingly In addition, it is necessary tocorrectly determine the terms of sale of goods and services, including thedetermination of the selling term and payment discount rate if the customer paysearlier than the selling period under the contract.

Analyze the financial reputation of customers who buy

The main reason is to assess the financial ability and the level of meeting customers'payment requirements when the debt is due Therefore, enterprises need to collectinformation about customers (financial reports, credit rating results, credit ratings,other informations ); evaluate customer reputation according to the informationcollected; the choice to decide to loosen or tighten the sale, even refuse to sell.Apply management measures and improve debt recovery efficiency

- Using professional debt collection accounting

- Determine the focus on debt management and recovery in each period to have anappropriate debt recovery policy

- Implementing measures to prevent selling risks, such as accruing provisions forbad debts; setting up financial reserve fund

a higher inventory level

The scale of reserve stocks is directly affected by the inventory level of enterprises.However, each type of reserve inventory has different influencing factors:

For inventory of raw materials, often affected by production scale factors,availability of materials for the market, price of materials and goods, distance oftransportation from the supplier to the business.

For uncompleted products, semi-finished products are often influenced by technicalfactors, production technology, product manufacturing time and productionorganization level of enterprises

For finished product inventory levels are often affected by the number of productsconsumed, the smooth coordination between production and consumption,purchasing power of the market

Being aware of the influencing factors will help enterprises have appropriatemanagement measures to maintain the most reasonable inventory

1.2.3 The factor affect working capital management

1.2.3.1 Organization of working capital

 Determining demand for working capital

Enterprises need to evaluate the difference between the anticipated working capitalneeds and the actual working capital needs under both absolute and relativedifferences, if the difference is large, proving the method of the company todetermine the needed working capital is having problems, it is necessary to useother more suitable method or market research, forecasting that the revenue of thecompany is not good

To determine the demand for working capital forecasted, there are 2 direct andindirect methods that are presented in section 1.2.2.1 (Determine the demand forworking capital and organizing the working capital)

If the demand for WC is forecasted to be much higher than the actual demand forWC: The forecast of the company's demand for WC is not good, leading to asurplus in the amount of WC, increasing the cost of capital and reducing efficiency

If the demand for forecasted WC is approximately equal to the actual demand ofWC: The forecast of the company's demand is relatively good, ensuring the

continuous production and business process and increasing the efficiency of usingthe company's capital .

If the demand for WC is forecast to be much lower than the actual demand for WC:The forecast of the company's demand for electricity is not good, causing a shortage

of quantity of materials, causing the company to mobilize more funding for thedifference in deviation, causing increasing in costs and reducing the efficiency ofusing capital of the Company

 Organization to ensure working capital

Based on the characteristics of production and business activities, scale andfinancial situation, each enterprise has a different funding policy However,basically considering the stability of the production and business process and thesafety of payment, it must meet the requirements of the principle of financialbalance: "Long-term assets can only be funded by a portion of long-term fundingand only a portion of short-term assets is financed by short-term funds”

Whether or not this principle is guaranteed is expressed in the NWC indicator:

NWC = Short-term assets – Short-term liabilities

Or NWC = Long-term equity – Long-term assets

This criterion is used to assess how business capital is financed and often combinedwith a set of indicators reflecting solvency to analyze and assess safety or financialrisks in operations of the business

Net working capital (NWC) situations:

Example 1: When NWC > 0: The principle of financial balance is ensured, creatingstability in business operations of enterprises because there is a part of workingcapital that regularly sponsors labor assets to use for business activities

Example 2: When NWC < 0: Failure to ensure the principle of financial balance,this is a worrying sign for businesses when operating in the field of industry orconstruction, which is a sign of misuse of capital, the balance of payments hascertainly loss of balance, short-term debt payment ratio <1 However, for the

commercial sector, this way of financing can still happen because the industry has afast capital turnover.

Example 3: When NWC = 0: Failure to ensure the principle of financial balance,does not create stability in production and business activities of enterprises,especially for industries with slow capital turnover

For each business at different times, the way of financing working capital is alsodifferent However, considering the above relationship, it allows administrators toassess the situation of the financial support of enterprises, on that basis, there will

be adjustments and selection of working capital financing policies suitable forenterprises take initiative in organizing and ensuring working capital

1.2.3.2 Structure of working capital

The working capital structure represents the proportion of each part and therelationship between them in the total working capital of the enterprise

 WC proportion based on structure and liquidity

Cash proportion = Cash∧cashequivalent Short−term assets

Inventories proportion = Short−term assets Inventories

Receivable proportion = Short−term assets Receivable

1.2.3.3 Cash management

In order to assess the management of capital by money, people consider thepayment criteria of the business This coefficient group indicates the financialability of the enterprise in the payment of debts Including:

● Short-term debt payment coefficient

Short-term debt payment coefficient = Short-term asset

Short-term liabilities

This coefficient reflects the ability to convert assets into money to cover short-termdebts, so this coefficient also reflects the level of assurance of short-term debtpayments of businesses If this is low, it will show that the ability of enterprises topay short-term debts is weak and also as a warning sign of potential financial

difficulties that businesses may face in debt repayment However, in some cases,even if high coefficients may not necessarily reflect the payment capacity of thebusiness as well.

● Debt solvency coefficient

Debt solvency coefficient = EBIT

Interest payment

This coefficient indicates that the equity before interest and tax (EBIT) generated inthe period can ensure how much the business can pay for the total interest whenmobilizing debt capital If this coefficient is big that demonstrates businessactivities are highly profitable and are the basis for ensuring the payment situation

of healthy enterprises and vice versa

1.2.3.4 Inventories management

1 Inventories turnover

This is an important indicator reflecting how much inventory capital has beenturnover in a period and is determined by the formula:

Inventories turnover = Base cost of goods

Average inventories value

High or low inventory turnover depends on business characteristics and inventorypolicy of the enterprise Normally, if the inventory turns low indicates that anenterprise can store excess inventory, resulting in stagnation or slow consumptionand vice versa

2 Inventories rotation days

This coefficient reflects the average number of days of an inventory turnover,determined by the formula:

Inventories rotation days= Days in period

Receivable rotation days

Receivable rotation days= 360

Receivable turnover

Meaning: Indicate the number of days needed to recover receivables during the period The smaller this indicator, the faster the rate of debt recovery is

CHAPTER 2: OVERVIEW OF MINH DUC BA VI LIMITED LIABILITY

COMPANY

1.

2.1 Overview of the Company

2.1.1 General information of Minh Duc Ba Vi Company Limited

Minh Duc Ba Vi Company Limited (“MDBV”) was established on 31 March 2015

under Investment Certificate No 0106806181 issued by Hanoi’s Department ofplanning and investment and the subsequently amendments

As an independent accounting entity, the Company operates in various fieldsrelating to the construction industry, such as: consulting on constructionsupervision, irrigation traffic, leasing construction machinery, trading, and installingput office equipment, build road works, build houses,

The Company main business strategy is focusing on provide one stop serviceincluding planning/design, construction, and maintenance The Company alsoperforms the functions of designing, manufacturing and sale of constructionmaterials, etc and for sale and lease of real estate

Procurement of materials and equipment

As mentioned above, for the purposes of project implementation for its customers,MDBV procures its materials and equipment from the suppliers.

MDBV always prioritizes in selecting local suppliers for equipment and materials.However, in case those products are not available in the domestic market, MDBVseeks support from overseas companies in the procurement process Therefore,equipment and materials that MDBV purchases from local third-party suppliers aredifferent from those purchased from related parties in terms of productscharacteristics and quality

2.1.2.2 Logistics in respect of procurement

With respect of materials and equipment procured from overseas suppliers forMDBV’s projects in Vietnam, the delivery term is normally Cost, Insurance andFreight (“CIF”) MDBV’s suppliers will be responsible for the shipment of thosematerials and equipment from their warehouse to the Company’s warehouse.MDBV, in its turn, is responsible for delivering materials and equipment toprojects’ sites

2.1.2.3 Design and installation

MDBV provides construction and installation services for civilian and industrialinfrastructure projects

The exhibit below shows the installation of equipment by MDBV

MDBV Major general contractors Customers

(C)⑤Material/ work (G)⑥Material/ work

Transaction

flow

Transaction type (C)：Receiving orders directly from customers

(G)：Receiving orders through general contractors

Figure 2-1: MDBV’s process of design and installation of equipment

Normally, MDBV receives orders directly from customers or indirectly thoughgeneral contractors Afterwards, MDBV’s technical team is responsible for orderingmaterials and equipment, as well as employing labor from local and its ownconstruction team Materials and equipment will be delivered directly to theconstruction site by suppliers MDBV’s design department then starts the designand construction work to deliver to customer

2.1.2.4 Marketing and Sales

 Project Bidding

MDVC actively bids for contracts with support from its connection given thelatter’s relationship experience in the industry

 Marketing and sales

MDVC’s executives mainly engages in finding and developing relationship withnew customers in Vietnam while also maintaining and developing relationship withlong-term customers

2.1.2.5 Maintenance and renewal

MDBV also offers maintenance and renewal services for construction contract andsystems, beside the design/installation packages

2.1.2.6 Quality assurance

MDBV is responsible for assessing the condition of the construction materials andequipment which arrive at the respective project sites MDBV also inspects theinstallation works performed by third-party subcontractors, in line with projectspecifications and requirements

2.1.3 Operation’s structure of Minh Duc Ba Vi Company Limited

2.1.3.1 Structure of the company

The company is organized and operates under the Enterprise Law that wereapproved by the National Assembly of the Socialist Republic of Vietnam MDBV isowned by shareholders, has legal status, own seal and is entitled to open bankaccounts The company also has charter capital and has limited liability for debts.According to the MDBV’s Financial situation, the Company is considered in smalland medium enterprise list The Company’s structure is centralized in its officewhile it has many operations and contract in Vietnam and the around Hanoi inparticular