Efficiency of working capital

However, due to the complex circulation and limited financial management skills in many Vietnamese corporations, working capital has not managed and used effectively, which leads to the

JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE

MASTERS FINANCE AND CONTROL

THESIS

SITUATIONS OF THE EFFICIENCY OF WORKING CAPITAL USE IN THE VIETNAM ELECTRICITY CORPORATION - EVN

Prepared by: DO QUANG HUY Supervised by: Mr VU MANH CHIEN

Hanoi 2013

ACKNOWLEDGEMENTS

I would like to sincerely thank all of teachers for their education and enthusiastic helps that created favorable conditions for me in the process of study and research at Vietnam Commercial University (VCU)

I owe sincere and earnest thankfulness to Mr Vu Manh Chien, my supervisor in VCU for his helpful suggestions, guidance and enthusiasm

Also, I am obliged to many of the Director Board, staffs and particularly Ms Nguyen Thi Vinh Long - my supervisor at Vietnam Electricity Corporation - EVN, who supported me and created opportunities for me to access data, research documents on the business and operations

Table of contents

ACKNOWLEDGEMENTS - 1 -

List of tables - 5 -

List of charts - 5 -

INTRODUCTION 1

1 Research context 1

2 Research questions 1

3 Research objectives 1

4 Research methodology 2

5 The structure of the thesis 2

CHAPTER I: WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT IN ENTERPRISE 3

1.1 Working capital in enterprise 3

1.1.1 Definition of working capital 3

1.1.2 Characteristics of working capital and the differences between working capital and fixed capital 3

1.1.3 Classification of working capital 4

1.1.3.1 Based on the role of working capital in the production process 4

1.1.3.2 Based on the source of working capital 5

1.1.3.3 According to the expression patterns 5

1.1.4 Structure and determinants of working capital 5

1.2 Working Capital Management 6

1.2.1 Definition and components 6

1.2.2 Assessing the working capital performance 6

1.2.2.1 The rotating speed of working capital 7

1.2.2.2 The capital saving due to increasing the rotating speed of working capital 8

1.2.2.3 Coefficient of working capital 8

1.2.2.4 Coefficient of working capital profitability 9

1.2.3 Objective and necessity of enhancing Working Capital efficiency 9

1.2.3.1 Business objective of the corporation 9

1.2.3.2 The important role of working capital in corporation 9

1.2.3.3 The meaning of enhancing working capital efficiency 10

1.2.3.4 The fact of working capital efficiency in corporation 10

1.3 Assessment and management of working capital 10

1.3.1 Principles of Working Capital Management 10

1.3.2 Models of reserve and inventory management 11

1.3.3 Cash management models and highly liquid securities 12

1.3.4 Management models of receivables 14

1.3.5 Evaluating and overall managing via working capital metrics 15

1.3.6 Basic methods of enhancing working capital efficiency 15

CHAPTER 2: RESEARCH AND IMPLEMENTATION METHODOLOGY AT EVN 17

2.1 Introduction to EVN 17

2.1.1 Creation and development history 17

2.1.2 Organizational structure 18

2.1.3 Business operation features 19

2.1.3.1 Features of business sectors 19

2.1.3.2 Features of products 19

2.1.3.3 Features of market 20

2.1.4 Financial management mechanism of EVN 21

2.1.4.1 Capital and assets management 21

2.1.4.2 Revenue, profit, and business expense management 22

2.1.4.3 Financial Planning 23

2.2 Steps to collect and process the data 23

2.2.1 Secondary steps (literature review or document study) 23

2.2.2 Steps to collect and process primary data by interviews 24

CHAPTER 3: ANALYSIS OF WORKING CAPITAL EFFICIENCY IN EVN 26

3.1 EVN’s financial analysis 26

3.2.1 EVN’s business 26

3.2 Analysis of EVN’s working capital efficiency 29

3.2.1 Sources of working capital 29

3.2.2 Structure of working capital 29

3.2.3 Analysis of working capital efficiency 30

3.2.3.1 Rate of working capital turnover 30

3.2.3.2 The capital savings thanks to the increasing in the rate of working capital 31

3.2.3.3 Undertaking coefficient of working capital 31

2.2.3.4 Profitability coefficient of working capital 32

3.2.4 Analysis of factors affecting the efficiency of working capital use of EVN 32

3.2.4.1 Management of working capital forms 32

3.2.4.2 Working capital planning 33

3.2.4.3 General financial management 34

3.3 Assess the working capital efficiency of EVN 35

3.3.1 Synthetic conclusions from the indicators assessing WCM efficiency 35

3.3.2 Indicators of WCM metrics 36

CONCLUSION 38

1 Academic and managerial contributions 38

2 Limits and research perspectives or orientation 38

BIBLIOGRAPHY 40

List of tables

Table 1.1: Proportion of short-term assets and long-term assets in the sectors 4

Table 3.1: Profit indicators of EVN (2011- 2012) 26

Table 3.2: Assets Structure of EVN (2011- 2012) 27

Table 3.3: Capital Structure of EVN (2011-2012) 28

Table 3.4: Capital Structure of EVN (2011-2012) 30

Table 3.5: Indicator of working capital turnover (L) and duration of working capital turnover (K) of EVN (2011-2012) 30

Table 3.6: Indicator of undertaking coefficient of working capital of EVN (2011-2012) 32

Table 3.7: Profitability coefficient of working capital of VNE (2011-2012) 32

Table 3.8: Criteria assessing the efficiency of working capital use of EVN from 2011-2012 35

Table 3.9: Working capital management metrics of EVN in 2012 36

List of charts Chart 2.1: Organizational structure of EVN 18

Chart 3.2: Expense indicators of EVN (2011-2012) 27

Chart 3.2: Scale of sources can form the working capital 29

INTRODUCTION

1 Research context

Many financial analysts have considered the working capital of corporations as the blood circulation in the human body The reason for that comparison is the similarity of the circulation and the necessity of working capital for the body of corporation In the market economy, without capital, corporations cannot run their business activities In the corporations, capital in general and working capital in particular are present in all the operation stages from reserving and producing to circulating Working capital helps corporations survive and operate smoothly However, due to the complex circulation and limited financial management skills in many Vietnamese corporations, working capital has not managed and used effectively, which leads to the low efficiency of business operations

The Vietnam Electricity Corporation is a state-owned corporation, whose principal business is producing, transmitting, distributing and trading electricity; commanding and operating the system of production, transmission, distribution and distribution of electricity in the national electricity system In the Vietnam Electricity Corporation, the issues of working capital management did not receive concern deserving its importance; and enhancing working capital efficiency is a topic to which the Corporation pays a lot of attention With such awareness, the writer decides to choose the topic: “Situations of the efficiency of working capital use in the Vietnam electricity Corporation - EVN”

2 Research questions

The main research question of the thesis is: “What are the actual situation of working capital management and its efficiency in the EVN?” Since then, the specific research questions are outlined as follows:

- The theory of working capital & working capital management in the Corporation, the benefits of good working capital management and the quality evaluation methods of this operation;

- The situation of working capital management in the EVN: working capital forming sources, working capital structuring, working capital management efficiency evaluation through indicators and factors affecting working capital efficiency;

- The solutions to improve the quality of working capital management in the EVN

3 Research objectives

The purpose of the author is to indicate the situation of working capital management in

quality of this operation which is being studied in this Corporation The thesis will provide answers to the research questions above

4 Research methodology

The research subject of the thesis is the situation of working capital management in the EVN between 2011 and 2012 From that, the thesis will evaluate the efficiency of this operation through quantitative indicators

The thesis uses two data sources, namely: primary data (through interviews) and secondary data

5 The structure of the thesis

The structure of the thesis consists of three chapters:

 Chapter 1: Working Capital and working capital efficiency in the Corporation in the market economy

 Chapter 2: Research methodology implemented in EVN

 Chapter 3: Analysis of working capital efficiency in EVN

CHAPTER I: WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT IN ENTERPRISE

1.1 Working capital in enterprise

1.1.1 Definition of working capital

Normally, capital is the total material value invested by one enterprise to conduct business activities According to Jani, Virenda C (2007), all the enterprises need capital for two purposes: (1) establish and expand business extent and (2) pay for daily operation costs Capital exists in all the business stages, from reserves, production to circulation; businesses need capital

to invest in basic construction; need capital to maintain production and to invest in production capacity enhancement, etc

Working capital is as an important part of the total capital of enterprises Eugene F Brigham & Joel F Houston (2009) referred to many related concepts such “gross working capital”; “net working capital”; “net operating working capital” In particular, “working capital” are short-term assets or current assets, including cash, tradable securities, inventories and accounts receivable Current liabilities subtracted from current assets is called “net working capital” (Net Working Capital (NWC) is defined as current assets minus current liabilities) “Net operating working capital” is calculated by subtracting all noninterest-bearing current liabilities from current assets (accounts payable for supplies and other accounts payable) The definition assumes that cash and tradable securities in the balance sheet are used for the long-term goals and the company is not holding excess cash Cash surplus and trade securities surplus are not considered as net working capital The definition of “working capital” (or “net working capital”) interpreted in this thesis as the concept defined by The Accounting Principles Board of the American Institute of Certified Public Accountants is as under, “working capital” represented by the excess of current assets over current liabilities and identifies the relatively liquid portion of the total enterprise Capital which constitutes a margin or buffer for maturing obligations within the ordinary operating cycle of the business”

1.1.2 Characteristics of working capital and the differences between working capital and fixed capital

In his book, Modern Corporate Finance (2003), Tran Ngoc Tho analyses three main characteristics of working capital namely: (1) rotating with the rapid rate, (2) changing expression patterns, and (3) operating in a circulating cycle Working capital rotates with the rapid rate and complete a cycle after finishing a business cycle Working capital in the business

is always changing its expression patterns during the cyclic rotation, and it only participate in to

a production cycle but does not keep the original physical forms Its whole value is once shifted into the value of product Working capital operates according to a cycle from one form to

another form and then return to the original form with a greater value than the initial value The cycle of working capital is an important basis used to assess the working capital efficiency of the business

The most difference between working capital and fixed capital is that the fixed capital only shifts its value into the value of product with a certain level of depreciation gradually while the whole value of working capital is shifted into the value of product once Therefore, the movement and rotation of working capital is much larger than those of fixed capital Another feature between working capital and fixed capital is worth considering and studying, namely the scale of current assets and fixed assets There is no a certain model in the proportion of two groups of assets In practice, the most decisive factor to the scale of two groups of assets is the enterprise’s sectors Satish B.Mathur (2007) surveyed and counted the proportion of current assets and fixed assets according to the sectors as follows:

Table 1.1: Proportion of short-term assets and long-term assets in the sectors

20-30 70-80 Electricity Generation & Distribution

40-50 50-60 Iron & Steel, Basic Industrial Chemicals

1.1.3 Classification of working capital

Working capital may be classified on different ways only with the aim at managing and use working capital effectively Three main classification criteria are: (1) the role in the production process, (2) the source of working capital, (3) expression patterns

1.1.3.1 Based on the role of working capital in the production process

The classification of working capital based on this criterion helps to evaluate the allocation of working capita in each stage of the rotating process of working capital Thanks to that, managers will take appropriate measures in order to create a structure of working capital, to increase the rotating speed of working capital and to improve the efficient use of working capital According to Dang Thuy Phuong (2000), based on this classification, working capital consists of three types as follows:

• Working capital in the reserve stage includes the types of capital such as main material capital, additive material capital, fuel capital, spare parts capital, packing material capital and tool & instrument capital

• Working capital in the production process includes types of capital such as:

goods-in-• Working capital in the circulation includes end-product capital, cash capital, short-term investment, and capital during the payment process

1.1.3.2 Based on the source of working capital

This classification can help us see the structure of working capital of a enterprise Thanks

to that, enterprises can actively take measures to mobilize, manage and use working capital more effectively According to this classification, working capital can be classified into two types (Dang Thuy Phuong, 2000):

• Equity, the capital owned by the enterprise; that enterprise has full rights to possess, rights to use, rights to control and dispose

• Liability, including capital from borrowing loans from financial institutions; capital by issuing bonds and capital during the process of payment (accounts payable for customers, other enterprises during the process of payment)

1.1.3.3 According to the expression patterns

According to this classification, working capital is divided into four categories (Erik Rehn, 2012)

• Cash and cash equivalents Separating these items helps businesses easily monitor their fast payment ability and take flexible measures to ensure their payment ability as well as enhance the profitability of working capital

• Accounts receivable The study of accounts receivable helps businesses have a complete understanding and take appropriate commercial credit measures in order to meet the needs of customers, to improve sales of goods sold as well as to improve working capital efficiency

• Inventory For manufacturing companies, inventory plays an important role as a safe cushion in the different stages of the business cycle when operations in the different stages are not always synchronous Inventory helps enterprises protect themselves against the volatility and uncertainty of demand for their products

• Other current assets, including advances; prepaid expenses; pending expenses; and collateral, deposits and short-term deposits

1.1.4 Structure and determinants of working capital

The structure of working capital is the proportional relationship among components of gross working capital at a certain time (Tran Ngoc Tho, 2003) The study of working capital structure helps us to see the situation of working capital collocation and each capital’s proportion

in each circulation period to identify the key working capital management and find the optimal method to enhance working capital efficiency For different corporations, working capital structure is not the same Thanks to analyzing working capital structure with different classification criteria and changes in working capital over time, corporations have better

understanding about the unique characteristics of working capital that they are managing and utilizing

According to Jani, Virendra C (2007), there are many factors affecting the scale and structure of working capital; and it is hard to rank their importance and effect However, the following factors are considered as the determining ones to working capital structure

• Factors of production: specification, corporation’s production technology, complexity

of manufactured products, the length of the production cycle, the organization of the production process, etc

• Factors of supply and demand: the distance between enterprises and providers, the providing ability of the market, delivery maturity and the volume of provided materials at each delivery; seasonal characteristics of the types of provided materials, etc

• Factors of payment: Payment method is selected in accordance with sale contracts, payment procedures, payment discipline compliance, etc

1.2 Working Capital Management

1.2.1 Definition and components

Working capital is an index related to the amount of money that a business needs to maintain its operations and regular business (calculated by subtracting total current liabilities from total current assets) Therefore, working capital management focus on solving the problems surrounding the management of current assets and current liabilities of the business and their relationship to ensure that the business can afford to make payment for maturing financial obligations during the coming short-term time and to make payment for its operating cost (Jani, Virenda C.,2007) Analysts often use this index as the basis for measuring the performance as well as short-term financial strengths of the business Weighed & Vischer (1998) has referred to the management of working capital with three main current assets supporting policies: aggressive policies, moderate policies (matching policies) and conservative policies

Working capital is one of the six aspects of financial management, along with financial planning and control; financial accounting & information and technology systems; analysis & interpretation of financial reports; cost and management accounting; and capital budgeting According to Satish B.Mathur (2007), management of current assets continues to be divided into three main contents of management: cash management; account receivable management; inventory management; account payable management

1.2.2 Assessing the working capital performance

Working capital plays an important role in daily business activities of one enterprise Therefore, in order to better improve their business appearance, enterprises should pay attention

to working capital during the process of making short-term financial decisions Three

frequently-used methods to assess working capital efficiency are such as ratio analysis, funds flow analysis and budgeting (Jani, Virendra C., 2007)

• Ratio analysis: Most frequently-used ratios are: Current ratio, Acid test ratio, Absolute

liquid ratio, Cash position ratio, Inventory turnover ratio, Receivables turnover ratio, Payables turnover ratio, Working capital ratio, Working capital leverage, and Ratio of current liabilities to tangible net worth, etc Some ratios in this category are mentioned in the section 1.3.5 General assessment and management through working capital metrics

• Funds flow analysis: This method is related to total input & output capital in the

accounting period

• Budgeting: As a part of the overall budget planning of enterprises, working capital

budgeting is estimated and set out working capital policies proposed by enterprises The working capital budgeting is correct or not (compared with actual performance and plans), which contributes to the assessment of working capital management quality and its benefit for enterprises

According to Mai Thanh Son (2004), of three methods above, ratio analysis is frequently used to evaluate working capital efficiency in Vietnamese companies The five most important criteria are presented as follows:

1.2.2.1 The rotating speed of working capital

The rotating speed of working capital measures how effectively a company is using its working capital A high or low ratio indicates whether procurement, production reserves and consumption in that enterprise are reasonable; whether reserves is used efficiently; how high or low the cost of production & business process is, etc This ratio can be assessed through two ratios: working capital turnover and time of working capital circulation:

(1) Working capital turnover in the period (Lt)

• Mt: The total working capital turnover during the period t In a year, the total working capital turnover is determined by net sales of the enterprise

• AWCt: Average working capital in the studied period

(2) Time of working capital circulation (K)

or

• AWCt: Average working capital in that period

• Mt: The total working capital turnover during the period

• Nt: Estimated numbers of days in the analysis period (360 days a year, 90 days a quarter, 30 days a month)

• Lt: Working capital turnover in the period

1.2.2.2 The capital saving due to increasing the rotating speed of working capital

The capital saving is an indicator to reflect the working capital which could be saved by increasing the rotating speed of working capital during this period in comparison with the previous The working capital saving due to increasing the rotating speed of working capital is represented by two criteria:

(1) The absolute saving level of working capital (Vas)

With the unchanged working capital circulation, thanks to increasing working capital rotation speed, corporation needs less capital as well as can save an amount of working capital for other utilization The amount of less capital is the absolute saving level of working capital

• Vas: The absolute saving level of working capital

• AWC0, AWC1: Average working capital in the reporting year and the planning year

• M1: Total circulation of working capital of the plan year

• K1: Time of working capital circulation of the plan year

(2) The relative saving level of working capital (Vrs)

The nature of the relative working capital saving level: thanks to increasing working capital circulation speed, enterprises can raise the total rotation of working capital ( to create a great net sales) but need no further increase or have an insignificant increase in the scale of working capital

• Vrs: The relative saving level of working capital due to increasing working capital turnover

• M1: the total rotation of working capital (net sales) of the planning year

• K0, K1: The time of working capital rotation of the reporting year and the planning year

1.2.2.3 Coefficient of working capital

Coefficient of working capital reflects the amount of needed working capital to get a unit

of net sales The lower this coefficient is, the higher working capital efficiency is

1.2.2.4 Coefficient of working capital profitability

This indicator reflects how much profit a unit of working capital can create (before or after corporate income tax) The higher coefficient of working capital profitability is, the higher working capital efficiency is:

1.2.3 Objective and necessity of enhancing Working Capital efficiency

1.2.3.1 Business objective of the corporation

In the market economy, the principal objective of corporation is to maximize its value In order to assure this objective, the corporation often sets up and makes long- term and short -term financial decisions Managing and using working capital efficiently is a key part in short -term financial decisions and has a great influence on the objective of maximizing the value of corporation According to Chopde et al (1997), corporation makes an effort to manage working capital efficiently thanks to the following motivations:

• Liquidity ratios and paying the due payment on time make the corporation’s reputation higher, which helps corporation be able to get more preferred credit limits, interest rate, and loan terms thanks to its good credit history

• To ensure the stability of the inputs to let corporation operate continuously, without interruption of production

• To obtain chances from the market such as purchasing and storing a great number of materials, finished products when the market price goes down, then reselling them when the market is in equilibrium with higher price and getting profit This transaction just can be done when corporation has enough funds to do it at that time

• To increase the ability of corporation to response to economic crisis

1.2.3.2 The important role of working capital in corporation

In the market economy, a corporation that wants to run business must have capital Working capital is of importance to raise corporation’s capital It appears and plays an important role in all stages of the production process At the stage of reserving and producing, working capital guarantees production to be manufactured continuously, ensuring technology process As regard of goods circulation, working capital assures reserved finished products to meet the consumption demand continuously, rhythmically and meet the demand of the customers Short time for circulating working capital and big cycle of circulation make management and usage of working capital take place daily and regularly Having such an important role, increasing speed

of working capital circulation and enhancing working capital efficiency is a certain request

1.2.3.3 The meaning of enhancing working capital efficiency

Enhancing the efficiency of working capital can increase working capital circulation’s speed and shorten working capital’s time at stages of reserving, manufacturing, and circulating, then decrease the number of used working capital and save working capital in circulation Thanks to the increase of working capital circulation’s speed, corporation can reduce the number

of used working capital but still remain the same production and business; or with the constant working capital scale, corporation still can expand the scale of production Increasing the working capital circulation’s speed has good effect on lowering production cost, which helps corporation have enough capital to meet production need, fulfill the obligation to pay taxes to the state budget, and meet the need of economic, social development in country

1.2.3.4 The fact of working capital efficiency in corporation

In fact, there are many reasons causing corporation’s inefficient business, even failure in the market There are objective and subjective reasons; however the most popular reason is still the capital inefficiency in purchasing, reserving, manufacturing, and consuming goods This leads to working capital inefficiency, low working capital circulation’s speed , less profit and may even causes loss of business; consequently, the corporation is out of control of working capital resulting in the inability to the business, solvency

1.3 Assessment and management of working capital

1.3.1 Principles of Working Capital Management

According to Sharma R.K & Gupta S.K (2000), four fundamental principles of a policy

of working capital management efficiently include principle of risk variation, principle of capital cost, principle of equity position, and principle of maturity of payment

Principle of risk variation: The inverse relationship between profitability and liquidity of assets explains this principle There are many chosen funding policies for working capital to apply, which depends on corporation’s risk appetite such as aggressive policy, moderate policy,

or conservative policy However, the goal of working capital management is to determine a reasonable trade-off between profit and risk

Principle of capital cost: The different working capitals have different capital cost as well

as corresponding risk levels Managing of working capital efficiently always aims to get balance between cost and risk The basic principle is the higher the risk, the greater the cost of capital

Principle of equity position: According to this principle, each penny invested in current assets has to generate net worth for corporation The scale of current assets is determined by other criteria For example, current assets equals X% of total sales or equals Y% of total assets of corporation

Principle of maturity of payment: According to this principle, a corporation tries to fulfill due financial obligations from its equity Normally, the shorter the due time of fulfillment in comparison with the time of the cash inflow is, the later corporation fulfils those obligations

1.3.2 Models of reserve and inventory management

Reserve, inventory is an important part of working capital and is necessary stepping- stone for corporation’s normal operation Inventory is categorized into 3 types: raw materials for the manufacturing process, unfinished products and finished products (Dang Thuy Phuong, 2000) Reserved materials do not directly generate profit but have a huge role to help the production process normally regulate Effective management of reserved materials will contribute to enhance the efficiency of working capital Therefore, the corporation has to calculate a reasonable amount of reserved materials If that amount is so big, it is costly and leads to capital accumulation; if that amount is too small, it makes production process interrupted, which results in a series of consequences such as lose its market or reduce corporation’s profit (Eugene F Brigham & Joel F Houston, 2009)

Inventories in the manufacturing process are the raw materials in the stages of production line If the longer production line is and the more the production stages are, the more inventories are in the production process These are small stepping- stones to make production process continuous According to Jani, Virendra C (2007), there are four current ordering systems of Inventory including (1) Economic Order Quantity System (EOQ); (2) Fixed Period Ordering System; (3) Single Order and Scheduled delivery System; and Timely Supply System (or Zero Reserve)

EOQ (Economic Ordering Quantity System) method: This model is based on the

assumption that the supply of goods every time is equal According to this model, the optimal order quantity is:

Where:

• Q*: Optimal order quantity

• D: Demand quantity

• C2: Cost to place a single order (shipping and transaction management cost)

• C1: Inventory- holding cost per unit (insurance and preservation cost …)

Method of Fixed Period Ordering System: Daily used materials are not a fixed number

but constantly change Therefore, in order to ensure the stability of production, corporation needs

to maintain an amount of safe reserved inventory depending on its specific situation The amount

of safe reserve is the reserve of goods in addition to the reserves at the time of ordering

Method of Single Order and Scheduled Delivery System: Theoretically it is assumed only

when the previous quantity of goods is over, do corporation store the new one into warehouse but in fact, it is never However, if the order is too early, the number of material inventory will increase Therefore, corporation has to determine time for new orders

Time for a new order = Quantity of daily used materials * Length of delivery time

Method of Timely Supply System (or Zero Reserve): According to this model, a number of

corporations in business closely related to each other form relationships When having an order, they will mobilize unfinished goods and products from other corporations without reserving Applying this model will minimize cost of reserve However, this model creates ties between corporations, which sometimes makes corporation lose its initiative in business

1.3.3 Cash management models and highly liquid securities

Cash is understood as cash in hand, money in payment account of a corporation in a bank Cash itself is an asset that does not bear interest, however, cash maintenance in business is very important because of some following reasons: Ensuring daily exchange, compensating for the banks about services that the banks offer for the corporations; meeting provisional needs in case of unexpected changes of cash inflow and cash outflow of the corporation, benefiting advantages from good purchasing negotiation Cash management mentions to management of paper money and bank deposits This kind of management closely relates to management of assets that associate with cash, for example highly liquid securities Some mathematics models are researched to identify the optimal rate of cash that the corporations should hold, for instance: (1) Operating Cycle Model; (2) Inventory Model; (3) Stochastic Model; (4) Probability Model … (Jani, Virendra C., 2007) In which, two models: Inventory Model of William J Baumol and Stochastic Model of M.H Miller and Daniel Orr are the most popular and shown below:

Inventory Model was developed when William Baumol found the EOQ inventory

management model that can be used for cash management model In business, corporations have

to hold cash which is necessary for payment bills; when the cash quantity goes down; the corporations have to supplement cash by selling highly liquid securities The cost for holding cash is opportunity cost and the interest that the corporations lose The cost for goods order is the cost for selling securities Therefore, using EOQ model, we have the quantity of optimal cash holding (M*):

• M*: Total of disbursing cash per annum

• Cb: Cost for one selling of liquid securities

• i: Interest

Baumol model shows that the higher the interest is, the less cash quantity the corporations hold, and on the other hand, the higher cost from selling liquid securities, the more cash quantity the corporations hold According to Baumol model, the cash residue is not practical

in case of supposing the corporations pay the cash stably However, this theory is not always true

in real-life

Stochastic Model of Miller Orr is a close combination of simple model and the real life

According to this model, the corporations will identify the up limitation and the down limitation

of cash, in which the corporations start to purchase or sell highly liquid securities in order to balance the anticipated cash This model is shown in the graph below:

The planned cash is identified as follows:

The anticipated fluctuation range of cash depends on three following factors: (1) The rate

of daily budget revenue and expenditure large or small; (2) Fixed cost of purchasing and selling securities; (3) the higher the interest is, the less cash quantity the corporations hold, and therefore, the quantity of fluctuating cash will reduce The fluctuation range of cash is identified

by the formula below:

Lower limit

• Cb: The cost of one liquid securities purchasing and selling transaction

• Vb: The variance of budget revenue and expenditure

• i: interest

In large corporations, the daily inflow and outflow cash of the corporations is very high,

so the cost for securities purchasing and selling will become small in comparison with the lost opportunity cost because of holding an amount of idle cash; therefore, the securities purchasing and selling action should happen day by day in these corporations On the other hand, we also find that why the small and medium corporations hold a significant amount of cash balance

1.3.4 Management models of receivables

Commercial credits, an efficient and indispensable instrument with every corporation, which can make the corporations stay stable in the market, but also bring the risk for corporations’ action Thus, the corporations need to give analysis, researches and decisions whether they should provide commercial credits for that customer or not That is the main content of the management of receivables

+ Analyzing credit capacity of the customers: In order to provide credits for the

customers, at first, the corporations have to analyze the credit capacity of the customers This work includes: (1) building an appropriate credit standard; (2) verifying credit qualification of potential customers If customers’ credit capacity is suitable with minimum credit standards that the corporations have given, the commercial credits can be granted The establishment of credit standards of financial managers has to reach to the suitable balance If the credit standards are too high, it will remove a lot of potential customers and reduce the profit, if the standards are too low, the revenue can increase, but there will be a lot of highly risky credits and money collection cost is also high

+ Analyzing and evaluating offered credits: After analyzing credit capacity of the

customers, the corporations conduct the analysis and evaluation of the offered commercial credits the analysis and evaluation of the offered commercial credits is conducted in order to decide whether issuing or not based on NPV calculation of cash flow

• NPV: Net present value of changing from paying at sight to credit sales

• Q, P: The goods quantity per month and the unit price if the customers pay at sight

• Q’, P’: The quantity and the unit price in case of credit sales

• C: Cost of debt conversion and compensating sponsor for receivables

• V: Variable cost for an unit of goods

• r: percentage rate of unpaid sale goods

If NPV>0, it means that credit sales bring higher effectiveness than payment at sight, which is profitable for corporations, so the credits are accepted

+ Inspecting receivables: Inspecting receivables is an important content in managing

receivables Doing this job well will help the corporations timely to change commercial credit policies in order to fit the actual situation Normally, so as to inspect receivables, we use criteria, methods and models such as average money collection period, arranging “age” of receivables; identifying receivables’ residue, etc With this inspecting and managing methods, corporations can see the influence of commercial credit policies and have timely adjustment, which is appropriate to each customer, each specific credit

1.3.5 Evaluating and overall managing via working capital metrics

According to Banomyong (2005), WCM metrics (Working capital management metrics) used including following criteria:

DSO Average collection period

DPO Receivables payment period

DIO Circulating inventory period

CCC Circulating money cycle (budget cycle

1.3.6 Basic methods of enhancing working capital efficiency

Planning working capital is one of the very first important and necessary duties for corporations The content of planning working capital in corporations normally consists of some parts namely the working capital need plan, the working capital source plan and working capital usage plan over time

+ Planning working capital: In order to build an exact and adequate working capital plan,

at the first phase, corporations have to identify working capital need for production and business activities accurately Identifying working need for production and business activities accurately and suitably ensure the corporations’ production and consumption of products are conducted continuously at one side; in the other side, the corporations will avoid stagnant material situations, capital wasted usage, does not cause the artificial tension about operating capital need

of the corporations After identifying regular working capital need, in order to ensure the

continuous production, it is necessary for the corporations to have the plans that response that capital need by steady and stable capital sources In actual production in corporations, about working capital needs for production and business, the capital usage in different period in one year is normally dissimilar The reason is that in short period such as quarters, months, beside the specific need of necessary operating capital, there is also temporary need which generates because of many reasons

+ Organizing, managing the working capital scientifically and stably: The managers have

to choose working capital management models which are appropriate to operating activity conditions of corporations when they apply these models While applying scientific working capital models, corporations should know how to combine models to create the consistency in overall working capital management of corporations Good working capital management facilitate for the corporations to give solutions timely and actively to resolve arising issue, ensure plan’s working capital implement, avoid drain, waste so as to enhance the effectiveness of using working capital

+ Shortening production and business cycle, decreasing the production cost via applying

scientific and technological progress into production: Business cycle of corporations relies on

time length of phases: reserve, production and circulation When the corporations apply scientific and technological progress into production, which ensures the production of high-quality products, high productivity and decline the price This also means that the time of direct production phase will be shortened On the other hand, the enhanced effectiveness in production will have positive influence to reserve and circulation phase: high products’ quality, reducing price will ensure the faster products’ consumption of corporations, decrease the time in circulation phase; so that, corporations will be more active in reserve, create a faster working capital circulation

+ Good organization in financial based on continuous improvement of financial

management staff’s qualification: Human resources have always been recognized as an

important factor determining the success or failure of a business venture Using working capital

is a part in financial management of a business, which is conducted by financial staff, so, their capacity and qualification have direct impact on financial organization in general and working capital efficiency in particular

CHAPTER 2: RESEARCH AND IMPLEMENTATION METHODOLOGY AT EVN

2.1 Introduction to EVN

2.1.1 Creation and development history

According to the Decision No: 562/QĐ-TTg on October 10th 1994 of the Prime Minister, EVN was established which based on rearranging the units of Ministry of Energy; EVN organized and operated by order of the regulation attached with the Decree No: 14/CP on January 27th 1995 of the government On June 22nd 2006, the Prime Minister gave the Decision No: 147/QĐ-TTg about approving a model project of establishment of EVN and the Decision No: 148/2006/QĐ-TTG about ascertaining the parent company – EVN Until June 25th 2010, Prime Minister promulgated the Decision No: 974/QĐ-TTg about replacing the parent company – EVN to a state-owned one member limited liability company On June 6th 2011, Prime Minister gave the Decision No: 857/QĐ-TTg to approve the organization and operation regulation of EVN with some main contents as below:

● Full name: Vietnam Electricity Corporation

● International trading name: Vietnam Electricity Corporation

● Company name in abbreviation: EVN

● Type of firm: One member limited liability company

● Head office: No 18, Tran Nguyen Han street, Ly Thai To, Hoan Kiem district, Hanoi city

● Tel: (84-4) 2.2201371; Fax: (84-4)2.2201369

● Website: www.evn.com.vn

Some history landmarks during the establishment and development process of EVN (EVN):

○ April 11th 1994: Establish the national electricity system moderation center

○ January 1st 1995: Establish EVN

○ April 10th 2005: Open the Phu My Electricity center for public use

○ December 2nd 2005: Begin the construction of Son La hydroelectric power plant, the largest one on Vietnam and Southeast Asia

○ June 22nd 2006: Establish EVN

○ December 31st 2007: Establish Electricity trading company