Improving the efficiency of working capital at lilama 10 joint stock company

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATIONAL PROGRAMSBACHELOR’S THESIS Major: Finance Topic: IMPROVING THE EFFICIENCY OF WORKING CAPITAL AT LILAMA 10 JOINT STOCK COMPANY

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATIONAL PROGRAMS

BACHELOR’S THESIS Major: Finance

Topic: IMPROVING THE EFFICIENCY OF WORKING CAPITAL AT

LILAMA 10 JOINT STOCK COMPANY

DO THUY LINH

HA NOI, 2018

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATIONAL PROGRAMS

BACHELOR’S THESIS

Topic:

IMPROVING THE EFFICIENCY OF WORKING CAPITAL AT

LILAMA 10 JOINT STOCK COMPANY

Major : Banking – Finance

Student’s ID :11152416 Supervisor : Prof LE THI HUONG LAN

After completing 4 years learning at National Economics University, I hadchance to accumulate and cultivate comprehensive knowledge in terms of Financeand Banking This report is carried out during my internship at LILAMA 10 JointStock Company

First and foremost, I would like to express my profound appreciation to Ms

Le Thi Huong Lan for her valuable guidance as well as positive support throughout

my writing report process

I also would like to give my sincere thanks to Mr Trinh Ngoc Tuan Hung who is the chief accountant as well as all staff in financial department at LILAMA

-10 Joint Stock Company for their useful information and instruction I couldcomplete my internship successfully due to their help

TABLE OF CONTENTS

ACKNOWLEDGEMENT i

TABLE OF CONTENTS ii

LIST OF FIGURES iv

LIST OF TABLES v

STATUTORY DECLARATION 1

INTRODUCTION 2

CHAPTER 1: GENERAL THEORY OF WORKING CAPITAL AND THE EFFICIENCY OF USING THE WORKING CAPITAL IN THE ENTERPRISE 4

1.1 Overview of working capital in the enterprise 4

1.1.1 Concept, characteristics and role of working capital 4

1.1.2 Structure of working capital and factors affecting working capital 6

1.1.3 Working capital requirement and methods for estimating working capital requirement 7

1.2 The efficiency of working capital in the enterprise 9

1.2.1 Definition and the meaning of improving the efficiency of using working capital 9

1.2.2 Indicators for evaluating the efficiency of using working capital 10

1.3 Factors affecting the efficiency of using working capital 14

1.3.1 Subjective factors 15

1.3.2 The subjective factor 17

CHAPTER 2: THE STATUS OF THE EFFICIENCY OF USING WORKING CAPITAL AT LILAMA 10 JOINT STOCK COMPANY 20

2.1 Overview of LILAMA 10 Joint Stock Company 20

2.1.1 History of establishment and development 20

2.1.2 Characteristics of business activities of LILAMA 10 Joint Stock Company 22

2.2 Business performance of LILAMA 10 Joint Stock Company 32

2.2.1 Situation of assets and capital of LILAMA 10 Joint Stock Company 32

2.2.2 Financial performance of the Company 40

2.3 Analyze the situation of using working capital at LILAMA 10 Joint Stock Company 41

2.3.1 Analyze the working capital structure of the company 41

2.3.2 Financial ratio to evaluate the efficiency of using working capital at LILAMA 10 Joint Stock Company 46

2.3.3 Result of using capital at LILAMA 10 Joint Stock Company 50

2.4 Assessment of efficiency of using working capital at LILAMA Joint Stock Company 51

2.4.1 Achievements 51

2.4.2 Limitation and Causes 52

CHAPTER 3: SOLUTION TO STRENTHEN THE EFFICIENCY OF USING WORKING CAPITAL AT LILAMA 10 JOINT STOCK COMPANY 56

3.1 Goals and orientation for development of LILAMA 10 Joint Stock Company 56

3.1.1 Socio- ecomomic context 56

3.1.2 Goals and orientation for development of LILAMA 10 Joint Stock Company 57

3.2 Solution to strengthen the efficiency of working capital at LILAMA 10 Joint Stock Company 58

3.2.1 Budget estimation plans 59

3.2.2 Cash Management 60

3.2.3 Strengthen the management of receivables 61

3.2.4 Strengthen the Inventory management and minimize storage costs 62

3.2.5 Improve the management of Payables 63

3.2.6 Setting up backup plan to minimize risks 64

3.2.7 Determine the reasonable working capital needs 64

3.2.8 Human resources solution 65

3.9 Focusing on market research, seeking to expand its scale 65

3.3 Recommendations 66

3.3.1 Recommendations for company management 66

3.3.2 Recommendations for the state and the finance ministry 66

CONCLUSION 68

REFERENCES 69

LIST OF FIGURES

Figure 2.2: Organizational structure diagram at LILAMA 10 Joint Stock Company 23

Figure 2.3: Structure of accounting- Finance Department 25

Figure 2.4: Employees structure at LILAMA 10 Joint Stock Company 27

Figure 2.5: Labor Quality at LILAMA Joint Stock Company 29 Figure 2.6: The structure of working capital at LILAMA 10 Joint Stock Company45

LIST OF TABLES

Table 2.1: SUBSIDIARIES AND SUBTITLES UNDER THE LILAMA 10 JSC 26

Table 2.2: Situation of assets at LILAMA 10 Joint Stock Company ( million VND) .33 Table 2.3: Situation of capital at LILAMA 10 Joint Stock Company(million VND) 37

Table 2.4: Financial performance of the Company (million VND) 40

Table 2.5: Sources of working capital at LILAMA 10 Joint Stock company (million VND) 42

Table 2.6: Current asset structure of the company (million VND) 43

Table 2.7: Solvency of the Company (million VND) 46

Table 2.8: Cash indicator (million VND) 47

Table 2.9: Accounts Receivable Turnover of the company (million VND) 47

Table 2.10: Inventory turnover of the Company (million VND) 48

Table 2.11: Scale of working capital at LILMA 10 Joint Stock Company (million VND) 49

Table 2.12: The demand of Net working capital of the company (million VND) 49

Table 2.13: Indicators to evaluate the efficiency of working capital (million VND) 50

Table: 2.14: Debt Structure of the company (million VND) 53

STATUTORY DECLARATION

With the understanding of copyright infringement, I could assure that thisreport is not involved in plagiarism because it is written by myself This report wasfollowed by the requirement of Advanced Educational Program and based on theavailable data, which I collected from my internship time

Hanoi, / / 2019

Signature

Capital is the most decisive and indispensable factor in establishing andmaintaining the operation of a business In the expanding and growing marketconditions, enterprises have a multitude of options for the capital which is used.Therefore, finding sources of mobilization, methods of mobilization and how tomake the best use of capital sources are also more complex than ever Enterprisesneed to provide administrators and employees with the necessary knowledge as well

as a general plan of managing and using capital Enterprises always have two maincapital divisions: fixed capital and working capital Depending on the type ofbusiness, the structure of these two types of capital compared to the total capital will

be different For manufacturing enterprises, fixed capital tends to account for alarger proportion Fixed capital is a source of funding for long-term assets ofenterprises, such as factories, machines, etc These are essential resources forenterprises to be able to implement production and business activities Workingcapital is the capital that businesses use to maintain that business Working capital

is used to buy short-term and highly liquid assets For fixed capital, businesses oftenfocus on the scale and cost of capital, but with working capital, management andreuse are much more complex Using this capital to be most effective is always one

of the top concerns and a difficult problem for managers in the company because ofits diversity as well as the its impact

LILAMA 10 Joint Stock Company is not an exception Given that fact thatLILAMA 10 Joint Stock Company is an enterprise operating in the field ofconstruction and installation, the demand for working capital of the company is verylarge in order to make sure the production and business activities taking placecontinuously Therefore, improving the efficiency of using working capital is one ofthe most top concerns of the company

Due to the above reasons, after the period of internship, I decided to choosethe topic: “Improving the efficiency of working capital at LILAMA 10 Joint StockCompany” as a graduation topic

1 Research purpose:

The topic has 3 main research objectives:

Firstly, systemizing the basic issues of efficiency in using working capital inthe enterprises in general

Secondly, apply the theories to study the status of efficiency of using capital

of at LILAMA 10 Joint Stock Company

Thirdly, based on the situation, propose some solutions to improve theefficiency of using working capital at the Company

2 Research objects and research scope:

 Research object: Efficiency of using working capital of the Company

 Scope of research: Research on the using of working capital at LILAMA 10 JointStock Company in the period of 2015-2018

3 Research method: This topic uses a combination of research methods, which are

mainly methods of statistics, comparison, analysis and synthesis

4 The layout of the research topic:

The topic consists of 3 chapters:

 Chapter 1: General theory of efficiency of working capital and the efficiency ofusing working capital in the enterprise

 Chapter 2: The efficiency of using working capital at LILAMA 10 Joint StockCompany

 Chapter 3: Strengthening the efficiency of using working capital at LILAMA 10Joint Stock Company

CHAPTER 1: GENERAL THEORY OF WORKING CAPITAL AND THE EFFICIENCY OF USING THE WORKING CAPITAL IN THE ENTERPRISE

1.1 Overview of working capital in the enterprise

1.1.1 Concept, characteristics and role of working capital

1.1.1.1 Definition of working capital

As mentioned above, in order to meet regular production and businessactivities, enterprises need to have a certain amount of liquid assets such as cash,inventory, etc These assets are formed from the use of working capital ofenterprises

Thus, working capital of the enterprise is the amount of capital raised to formcurrent assets to ensure the business process of the enterprise is carried out regularlyand continuously Working capital is one of the important indicators that areconcerned and used by analysts to calculate and evaluate the short-termperformance of a business

Working capital is transformed through many different forms, starting withcurrency into the form of supplies and goods When reserve supplies are put intoproduction, they are made into semi-finished products After the product producedare consumed, working capital returns to its original monetary form The productionprocess is continuous so working capital is also continuously cyclical, creating acycle of working capital Due to constant circulation, working capital often hasmany parts that exist at the same time in different forms in production andcirculation

Current assets (also known as short-term assets) mentioned in the aboveconcept can be understood as existing assets of the enterprise, often including itemssuch as: Cash and cash equivalents, Receivables, Inventory

1.1.1.2 Characteristics of working capital

During the process of participation in business activities, due to beingcontrolled by the characteristics of the current asset, the working capital in theenterprise has the following features:

 Working capital complete a circulation after a production cycle

 The whole value of working capital was converted once into the business costsrecover after business cycle

 Working capital always change in terms of morphology during the transfer

1.1.1.3 The role of working capital in the business of enterprise

Working capital management is a concern issue in the business of anyindustry but it is rarely taken seriously From the point of view of business ,maintaining the liquidity, in other words, management of working capital’sefficiency is a necessary and sufficient condition for businesses to survive anddevelop sustainably This is not only limit to meet the demand of short-termobligations but also serves long-term goal such as market expansion, creating newproducts and attracting more customers In addition, from the point of view ofmergers and acquisitions activities, the efficiency of using working capital alsodirectly affects the estimate value of enterprises or equity value in a business Infact, a significant amount of money has been lost due to the fact that enterpriseshave not optimized the efficiency of using working capital In short, "Revenue isVanity, Profit is Sanity but cash flow is the reality”

An enterprise can carry out its production and business activities when it hasall three elements: Capital, Labor and Technology Working capital as well as fixedcapital are necessary for an enterprise to start its business as well as maintain anddevelop, expand its scale

In the view of maintaining the business operations continuously, it isnecessary to mention ensuring sufficient and timely working capital Workingcapital was used to meet the demand of purchasing input materials, transactionpayment activities for suppliers, payment of salaries for enterprises' employees toensure that production and service provision are uninterrupted This is the mainreason for an enterprise to calculate ,reserve and ensure appropriate and adequateworking capital In addition working capital also affects the policies of enterprises

to increase profits, increase competitiveness or expand market share Enterprisescan use working capital to pay for advertising costs, support programs with theintention to reduce selling prices, implement a policy of credit sale in order toimprove the competitiveness and at the same time ensure payment ability thanks toworking capital

Using working capital efficiently also brings the following benefits forbusinesses:

 Reduce the dependence on borrowing

 Improve your credit limit

 Improve capital flexibility when company perform project financing

 Support the maximum revenue / cost reduction proposals.

 Create abundant capital for growth

 Increase the value of the business to the Seller and the Buyer in a merger,acquisition deal

• Optimize portfolio for many different investments

According to an analysis of working capital efficiency of PwC VietnamLtd in year 2016 and 2017 shows the correlation between working capitalmanagement and profit ratio / operation efficiency In particular, the highefficiency group recorded cash turnover of about 14 days, compared with 251days of group which have the ineffective management of working capital Thehigh efficiency group's payable cycle and trade receivables are 5 to 10 timeslower than the other group in 2017

Businesses are ranked based on the Cash Cycle for the period 2016-2017

1.1.2 Structure of working capital and factors affecting working capital

Working capital of the enterprise can be determined according to differentcriteria which are based on different ways of classification According to structure

of working capital, we can the composition and relationship in the total number ofreflected working capital

With different method of classification, depending on the orientation ofeach enterprise, the structure of working capital is not the same By analyzing thestructure of working capital, enterprise will be more aware of the characteristic ofworking capital that they are managing As a result, they will have better directionsand measures working capital in the most effective way, in accordance with thespecific conditions of each enterprise.

There are three main factors that affecting the structure of working capital

in the enterprise:

 The factors of supply and demand of materials such as the distance oftransportation; period l and the amount of supplied goods, market supplylevel, the type of material which is provided is all affect the reserve ofworking capital structure

 The factors of payment: The more professional management and reasonableand timely payment method the enterprises have, the more stable theirstructure of working capital is Furthermore, customer consciousness aboutpayment also contribute significantly to the ratio of structure of workingcapital

 The factor of quantity of consumed products: The scale of productconsumption, distance and small or big enterprise are play an important role

in structure of working capital in circulation

1.1.3 Working capital requirement and methods for estimating working capital

requirement

1.1.3.1 Working capital requirement

In every business period, in order to make sure the working capital source

is sufficient or using excess working capital, the enterprises need to set up lucidplan about the demand of working capital

The enterprises generally have sources of working capital include owner’sequity, medium-term loan and long-term loan after deducting the investment infixed assets

The demand of using working capital in big or small planning period can beaffected by both objective and subjective factors such as: The scope of businessactivities in the planning period, credit policy, payment policy, and consumptionpolicy of enterprises; market prices, infrastructure conditions, etc Therefore, it isnecessary to find more sources of working capital (if not available) or specificmethods of using working capital (if redundant)

1.1.3.2 Methods for estimating working capital requirement

 Direct method:

Based on the demand of different of capital in a different period of business

activities, we can find out the need of working capital in the enterprise This

Advantage: This method can figure out the demand of working capital in the

enterprise accurately according to each type of capital at each period

Disadvantage: It is time- consuming to determine the demand of working

capital in case the enterprises have many types of supplies

=> As a result, this method is only suitable for enterprises which are just

established, economic norm and forward purchase contract are well-defined

- Indirect method:

This method determines the demand of working capital in the plan year

based on the result of previous year The basic for calculation is the ratio of each

type of working capital which is compared to net revenue (usually three main

components of working capital: inventory value, receivables, payables) There are

two cases in this situation:

- Case 1: This case based on estimated net revenue in plan period and

structure of working capital compared to net revue in previous period:

Demand of workingcapital∈ plan period=Estimated net revue∈ plan year x Workingcapital∈ previous period

Net revue∈ previous period

- Case 2: This case based on estimated net revenue in plan year and

ratio of working capital compared to net revenue in reported periodbut being increased or decreased by the effect of business condition inplan year

Calculation: V1c = M1 x (Tđ ± Tt) M1

 V1c: Demand of working capital in plan year

 M1: Estimated net revue in plan year

 Tđ: Ratio of demand of working capital compared to netrevenue in reported year

 Tt: ratio of increment (+) or reduction (-) demand ofworking capital in plan year

Advantage: This method is quick, suitable for the requirement of financial planning

of enterprise

Disadvantage: This method lack of accuracy

 Indirect method is suitable for stable enterprise

1.2 The efficiency of working capital in the enterprise

1.2.1 Definition and the meaning of improving the efficiency of using working

capital

1.2.1.1 Definition of the efficiency of working capital

An enterprise in every stage, from its establishment , throughout its business,and at the time of expansion needs capital Capital plays an important role indeciding form and scale of business Enterprises using long-term capital to invest infixed assets or long-term financial investments ,long-term capital often play asignificant role in the stage of development and expansion The use of workingcapital of enterprises is more periodic, the maintenance of business activities ismore frequent than the expansion and scale development so the enterprise oftenapply policies to working capital for a long time However, this does not mean thatusing working capital does not need to be flexible Capital is an extremelyimportant factor for enterprise , but not all enterprises which have enough capitalcan operate effectively and profitably In particular, business managers need to beflexible and clear-headed in planning to use working capital effectively to bring themost benefit to the enterprise

Efficiency of using working capital can be defined as the efficiency of usingcapital in general in the enterprise, that is: "The level of using available resources ofenterprises into business activities to achieve high results with the lowest cost”.Because working capital is the cash expression of current asset, we can understandthe "available resources" here are the factors that make up the current assets, suchas: Cash, Inventory, Receivables,

1.2.1.2 The meaning of improving the efficiency of using working capital

Improving the efficiency of using working cap is very important for theenterprise because of its effect on operation and status of enterprises Enterprises

that do not manage their working capital efficiently mean ignoring opportunities toaccess an available source of capital with low cost.

Firstly, managing money and cash equivalents effectively will helpbusinesses ensure liquidity, improve the ability to pay transactions for suppliers orloans, and ensure the credibility of the enterprise If the solvency of the enterprise isnot guaranteed, not only the reputation is affected but it will also have a negativeimpact in terms of economic aspect If it is not well- managed, the enterprise doesnot have enough cash to pay, this can lead to the problem of borrowing unplannedcapital and increasing capital usage costs, reducing the profitability of theenterprise Worse, if the overdue debts are left too long and the enterprise do nothave ability to pay, the they may have to declare bankruptcy

Secondly, the management of working capital includes the management ofreceivables and the management of this item also has an impact on the liquidity ofthe enterprise If the customer or other individuals occupy the capital withoutproviding any specific benefit or have no plan to recover promptly and reasonably,

it will lead to bad debt, or reducing the efficiency of using capital of enterprises,causing a decrease in revenue If the situation is prolonged, it will lead tobankruptcy

Thirdly, the effective management of working capital means that theproduction and business activities of enterprises are always circulated Demand forinputs such as Materials, Tools, etc is always satisfied, helping to boost productionactivities Inventory of the enterprise is managed appropriately to import and export

so that it is suitable to production needs and prevent being backlog and waste

In conclusion, using working capital can have direct and continuous impact

on business results of enterprises If it is done effectively, it will bring high profits

At the same time, it can lead to bad consequences if management takes placepassively and stagnantly

1.2.2 Indicators for evaluating the efficiency of using working capital

There are many approaches to evaluate the efficiency of using workingcapital We can evaluate based on the criteria of production and turnover ofenterprises, because these are the two most common indicators when talking aboutthe business status of an enterprise However, we need to determine that thesenumbers are only valid for a general evaluation of the scale, not the efficiencyaspect The rise of output or revenue depends on the type of business as well as thescale of the enterprise

1.2.2.1 Rotational speed:

One of the main approaches to evaluate the efficiency of using workingcapital is to consider rotational speed However, if only these criteria areconsidered, the results of efficiency of using working capital is not completelyaccurate According to this indicator, if the number of rotation is higher or therotation time is shorter, the efficiency is higher However, there are many otherfactors that can affect this result, such as the nature of the product being sold, themethod of sale, the discount policies…

The rotation speed of working capital is evaluated based on two basicfactors: the number of cycles and the average time of a rotation Improving therotational speed of working capital is the goal of all enterprise because it helpsincrease revenue and profit with a smaller amount of working capital

Working capitalcycle= Net revenue

Average working capital∈the period

Working capital cycle is calculated as the ratio of net revenue in a period to theaverage working capital of the enterprise in that period This indicator indicateshow many rounds of working capital have been turned over in a period, fast orslow The faster this indicator shows, the more efficient the enterprise uses theworking capital

Time of a cycle= Time of analysis period

Number of cycle

This index shows how long a working capital cycle of the enterprise takes tocomplete a cycle In contrast to the cycle ratio, the smaller the cycle time, the higherthe efficiency of using working capital in the enterprise

In this group, we consider the two criteria: working capital consumption andprofitability of working capital

Working capitalconsumption= Average working capital∈the period

Net revenue

The above index shows the amount of working capital which theenterprises have to use in order to create a unit of revenue This indicator is lowmeans the enterprises are using small amount of working capital to make generaterevenue and they perform high efficiency of using working capital

Profitability of working capital= Pro fit after tax

Average workingcapital ∈the period

Profitability of working capital is also an indicator of the level of usingworking capital, but it is to generate profit after tax This indicator is closer to theend result of the enterprise, so it is often more interested by investors However, formanagers with the only interest in efficiency of using working capital, this index isnot really as useful as the working capital consumption because it is also affected bythe cost management of enterprise as well as the impact of tax obligations ofenterprise In contrast to the working capital consumption, the higher this indicator

is, the better the management of the enterprise

Current ratio= Total average current assets

Total short−term liabilities

The current ratio indicates that 1 VND short-term debt of the enterprise isguaranteed to be paid by how much VND of working capital Short-term debt of anenterprise is debt which have repayment period is less than one year by the time ofmaking financial statements Therefore, ensuring the ability to pay these debts isextremely important and also within the scope of the management of workingcapital Ensuring sufficient current assets to serve for debt payment enterprisesmaintain their reputation with their customers as well as reduce the cost ofborrowing for the working capital The higher the index shows, the better theguarantee of short-term debt repayment of the enterprise However, if this index istoo high, it shows that the enterprises use less capital from other organizations in themarket, causing the profitability of the working capital to decline

Cash ratio= Cash+short−term financialinvestment

Current Liabilities

Similar to the Short-term Debt Ratio, Cash Ratio indicates the ability to pay term debt of the enterprise in a short time, so it only considers Cash and equivalentmoney This high index also shows the guarantee of debt repayment but if it is toohigh, it means that the enterprises are leaving Idle balances to be wasted

short-b The components of working capital

The analysis of the rotation of each component, which contribute to currentassets can allow managers inside and outside the enterprise to get a detailedview of the use of the working capital Thus, they are able to see the remainingproblems in the management process to make adjustment decisions,investment,

Cash cycle= Net revenue

Accounts Receivable Turnover= Net revenue

Inventory Turnover Ratio= Cost of Goods Sold

it also shows that the enterprises are importing inadequate Inventory for productionand they have to import many times, which will also increase the cost ofwarehousing

We can see that when considering the rotation ratio in the enterprises, it is also necessary to consider the characteristic of the industry, the financial situation ofeach company because it depends on other factors

1.3 Factors affecting the efficiency of using working capital

Managing working capital should always be considered a strategic priority

of each enterprise However, using working capital strategies of enterprises onlypartially adjust the efficiency of working capital use as well as other activities inbusiness Using working capital are affected by many different factors,including subjective factors that enterprise can adjust and objective factorsbeyond the control of the enterprise Industry characteristics, payment methoddifferences and supply chain limitations are one of the reasons affecting theefficiency of using working capital in Vietnamese enterprises In addition to anumber of industry-specific factors that directly affect working capital needs,there are many controllable factors that help Vietnamese enterprises improve theefficiency of using working capital

1.3.1 Subjective factors

a Specific capital requirements of each industry

The most important factor when making policies and planning to use capital

in the enterprise is the demand for working capital sources Companies of differentindustries will have different demands for working capital Even in the sameindustry, demand for working capital between enterprises with different sizes will

be different The capital-intensive industries often require high demand for working

capital On the other hand, for the services industry, for example, the Hospitality &Leisure Service, there is a low demand for working capital due to the pre-servicepayment, leading to shorter cash cycle than other industries.

b Monetary policy and interest rate fluctuations

The economy is growing strongly because lending rates are kept at arelatively low level, so the credit crisis is not a big However, this situation is notguaranteed to continue for a long time Can enterprises continue to grow depending

on the source of loans? Enterprises need to focus on managing working capital orcontrolling cash flow to ensure the capital needed to compete effectively in thecurrent business environment

Because the purpose of the working capital in an enterprise is to servedirectly for the demand of buying and selling goods in order to ensure regularproduction and sales activities, so the working capital often have higher rotationthan long-term capital In contrast to long-term capital, working capital iscirculated, mobilized and repaid many times in a period Because of thischaracteristic, this capital source is greatly affected by market interest rates Asthe lending rate increases, the cash balance in working capital will become morevaluable to businesses and the cost of capital used by businesses is also increases.Due to market instability, businesses find it difficulties to choose capitalmobilization plans in the most beneficial way and it is hard to avoid sufferinglosses when the market changes in a bad direction When interest rates in themarket increase, the cost of capital that business are also increase

c Supply and demand in the market

For manufacturing enterprises, the input supply has a significant effect onworking capital If input goods become scarce, their prices will increase The nextinfluence depends on the policy of the enterprises If enterprises choose to reducethe amount of imported goods corresponding to the increased price, it will reduceinventory If the enterprises still import goods as usual, the cash and cashequivalents will decrease, the enterprises need policies to avoid effect on liquidity

as well as the increment in the cost of using capital

Similarly, when the economy is in the development stage, supply anddemand increase, enterprises will be able to make best use of existing resources.Thus, the enterprise can increase the efficiency as well as the scale of workingcapital In the case of a declining economy, the enterprise will have to narrow thescale of operations, which can lead to the decrease in the source of working capital

d International integration

International integration affects every aspect of a nation's economy and have asignificant impact on working capital of domestic companies Our country is one ofthe fastest growing economies in the world in recent years thanks to the largeinvestment capital from abroad combined with favorable human resources.Integration is both an opportunity and a challenge for domestic enterprises Thanks

to external capital sources, the cost of using capital become cheaper, creatingchances for enterprises to invest and develop as well as learn methods to improvethe efficiency of using working capital

e Science and technology development

The improvement of science and technology in recent years is also a factorcontributing to the development of corporations and companies all over theworld The application of scientific and technological advances helps enterprises

to increase productivity, shorten the time of almost any stage, whether it is aservice or production enterprises, industry or agriculture, etc These advancedtechnologies require a large initial investment but save costs in the operationprocess It means the enterprises are required more long- term capital and lessworking capital

f Payment method

Payment methods (terms, habits, payment instruments, legal regulations,efficient cash withdrawal) vary from geographical region to country The time forpayment in Asia is often longer than that of the US and European countries.Moreover, cash is a popular choice for payment in Vietnam Although payment viacard / bank transfer is increasingly popular in Vietnam and other Asian countries,payment in our country still has some limitations compared to developed countries.There are still many differences in the level of delay and non-acceptance ofpayment (contingency policy and managing bad debts ) This often comes fromdifferent payment methods, and local habits as well as credit management policiesand related legal procedures

g Logistics infrastructure and distribution channels

According to Vietnam Logistics industry report 2017 by Biinform,Vietnam logistics industry is not effective with operating costs accounting for20.8% of GDP compared with Malaysia and the US with 11% and 8%, respectively.Thereby, it can reflect the loss of costs related to the stages of transportation,logistics, distribution along with a lack of synchronization in the investment of roadinfrastructure, seaports, and integrated logistics systems

In addition, more than 90% of logistics enterprises in Vietnam are stillusing the systems and infrastructure from the previous decades It makes thetransport industry is unable to meet the development requirements compared toother industries As a result, a number of industries such as Engineering &Construction, Healthcare, Industry & Chemical have to store a larger amount ofinventory than usual, leading to the difficulties in handling inventory.

The cost per production unit increases by 4-12% per year for enterprises providinglogistics services due to the lack of sustainable development policies to meet thegrowth needs of the domestic market However, enterprises have not clearlyidentified the source of the cost overrun , resulting in the longer cash flow for somesectors and the capital deficit for other investment activities

1.3.2 The subjective factor

a Human resources of the enterprise

Among the subjective factors that have an impact on the efficiency of usingworking capital by the enterprises, human resources is probably the mostimportant factor Human resources of an enterprise include management board,director, and personnel departments and employees All positions in a companyhave some effect on the efficiency of using the working capital If the Board ofDirectors can make a rational direction, managers can manage the activities in thecompany effectively and all employees have high sense of work, they can help thecompany to increase productivity with low cost and optimize the capital that thecompany has

b Managing the categories of working capital

- Cash

Cash reserves include cash in the fund at the company and currency deposit

in bank accounts This reserve is an indispensable item for any enterprise no matterhow big or small it is Cash reserves help enterprises to pay for small dailytransactions Proper management of this item helps enterprises keep a sufficientamount, not too much to waste the capital but not too little in order to not affectpayment ability, reduce prestige, lose opportunities get discounts thanks to quickpayments or profitable investments and reduce the potential for profitability of theenterprises Proper cash management also avoids loss due to fraud, dishonestemployees or a third party

- Inventory

This is also an important item for manufacturing enterprises Inventory is

an expression in kind of working capital in the enterprise, contributing to both

production, circulation process and sometimes in management activities.Looking at the inventory data and comparison, analysts can evaluate theenterprise status and the part of the business plan in the period of the enterprise.

If inventory has a large balance, it can be deduced that the production scale ofthe enterprise is increasing Moreover, considering the inventory turnover canhelp analysts know whether the circulation of goods is favorable or is limited Ifinventory is small, it means that enterprises are diminishing the scale orenterprises import not enough inventory for the demand of consumption, whichcan increase the cost of goods import

- Receivables and payables

Receivables are also a large category in the balance sheet of manufacturingenterprise Because of the competitiveness in the market, enterprises often havecredit policies to create long-term relationships with customers Enterprises withexpansion policies tend to have higher average receivables in the period This oftenlead to an increase in revenue due to attracting more customers under the conditionthat other competitive factors are equal to other suppliers However, it is not alwayssuitable for selling on credit , managers need to consider the cost, profit and long-term benefits when implementing trade credit as well as evaluate prestige and theability to repay of customers to ensure not to reduce potential profits, or even lead

to irrecoverable debts

In contrast to receivables, enterprises with high payables means that they canacquire capital from other organizations In terms of capital management, this is abeneficial thing because enterprises can use this capital in a short time with low cost

or even without cost However, in terms of production operation, the longtime pay adebt to suppliers will lose prestige and even cause being cut the supply and affectthe business process Therefore, this is also a category that requires reasonable plan,combining with other categories in the working capital to pay a debt in time as well

as bring benefit to the enterprises

c Business development stage

The financial situation of the enterprises is affected by many externalfactors, but at different stages of development in the enterprise's plan, the financialsituation reflected in the Balance Sheet is entirely due to the allocation of the board

of directors and managers For example, when an enterprise is just established,long-term capital will account for a large part of the company's capital due to theneed of investing in factories and machines On the contrary, when the enterpriseexpands its production scale without buying long-term assets, the working capitalwill increase Therefore, when evaluating these funds, the analyst should alsoconsider the roadmap development in the company's plan

d Credit supply

The enterprises in our country have two main types of credit loans: loansfrom banks, purchases on credit and trade credit from suppliers Bank loans oftenhave high costs and enterprises often borrow these amount in the long term soenterprises often borrow it to buy fixed assets or serve for long-term investments

In contrast, Capital tie-up from suppliers has short-term, low-cost or without cost,and are regular The selection of credit supply, loan interest rate determination isalso one of the contents of capital management in enterprises

CHAPTER 2: THE STATUS OF THE EFFICIENCY

OF USING WORKING CAPITAL AT LILAMA 10

JOINT STOCK COMPANY

2.1 Overview of LILAMA 10 Joint Stock Company

2.1.1 History of establishment and development

-Name of the Company: LILAMA 10 Joint Stock Company

-International transaction name: LILAMA 10 Joint Stock Company

-Abbreviated name: LILAMA 10 JSC

-Address: LILAMA 10 Building, Pho To Huu, Trung Van ward, Nam Tu Liem district, Hanoi

-Phone number: 043 8649 584

-Website: www.lilama10.com.vn

-Tax code: 5400101273

- Current charter capital: 98,900,000,000 VND

First trading day

buy

4.725.362(48,27%)

(1,23%)

Figure 2.1: Ownership structure of Lilama Company 10

State Shares Treasurry shares Domestic Shareholders Foriegn Shareholders

LILAMA10 Joint Stock Company, formerly known as Hanoi MachineryJoint Stock Company No 1, which was established in December 1960 On January

25 1983, it was transformed into an Union installation 10 under Decision No 101 /BXD-TCCB of the Union of assembly factories (now was known as the VietnamMachinery Installation Corporation) The company was renamed to MachineryInstallation and Construction Company No 10 under Decision No 05 / BXD-TCLD of the Minister of Construction on January 2, 1996

From January 1, 2007, Company moved into the form of a joint stockcompany, which was granted a business license by the Department of Planning andInvestment of Hanoi City on December 29 2006

On December 11 2007, Company received a decision of securities listing at

Ho Chi Minh Stock Exchange On December 25 2007, Company officially listed9,000,000 shares at the Ho Chi Minh City transaction office with trading code L10

On October 19, 2008 in Hanoi, Company was honored to be awarded theAward and Gold Cup "Prestigious Trademark Brand" & "Vietnam's leading JointStock Company"

On December 29, 2008, at the National Convention Center, LILAMA 10Joint Stock Company celebrated the 25th anniversary of its establishment andreceived the title of Hero of Labor This is a noble reward conferred by the Partyand the State for units with exceptional achievements in production

In 2008, the Company signed the contract of E1 package - Nam Cong 3hydropower factory project, which worth 2.6 million USD

LILAMA 10 Building Project was put into operation on December 31, 2010.Nam Cong 3 Hydropower factory project was put into operation from January 201.After more than 2 years of exploiting, LILAMA has carried out the reconstruction

in the form of transferring the whole factory, all bar procedures to new owner

LILAMA 10 Joint Stock Company is a member of Vietnam MachineryInstallation Corporation (LILAMA) With many years of experience and prestige inprocessing, manufacturing and installing industrial and civil equipment, LILAMA10., JSC has successfully installed many technological lines of large factories in thefield of hydropower, thermoelectricity, chemicals, food industry and constructionmaterials In addition, according to the socio-economic development strategy of theMinistry of Planning and Investment, LILAMA 10 Joint Stock Company aim todevelop the construction industry up to the advanced level in the region, meetingthe domestic construction demand and having capacity of bidding for abroadconstruction projects abroad The company will apply modern technology, improvethe quality of design and architectural aesthetic capacity

Through more than forty years of development and growth, LILAMA 10 JSChas affirmed its position in the machine installation and manufacturing market,especially in the field of hydropower Although there are many competitive corporationwith large investment capital and high technology, LILAMA 10 Joint Stock companyhas surpassed a significant market share but with proper development policies andguidelines of the Board of Management and employees They know how to exploittheir strengths and improve weakness According to the construction industry report,the construction value of the company in 2006 was VND 35,086 billion With the totaloutput value in 2006 of VND 214 billion, LILAMA 10 Joint Stock Company iscurrently occupying 0.61% of the market share

2.1.2 Characteristics of business activities of LILAMA 10 Joint Stock Company

2.1.2.1 The main business line of LILAMA 10 Joint Stock Company

Based on the business registration license No 0103015215 issued by HanoiDepartment of Planning and Investment on December 29, 2006, LILAMA 10 JointStock Company is allowed to operate in the following areas:

- Construction of industrial projects, transmission lines, assembly ofmachinery and equipment for construction works

- Producing and trading in materials, lamp, welding rod, oxygen, spare parts,metal components for construction

- Production of building materials

- Processing, manufacturing, installing, repairing heavy equipment, pressureequipment, mechanical equipment, electrical equipment, non-standard steelstructures, providing installation and maintenance of elevators.

- Clean and paint metal surfaces

- Import and export materials, equipment, technological lines, constructionmaterials

- Testing, adjusting electric system, automatic control, metal weld inspection

- Construction investment, real estate business, housing, interior decoration

- Structural design: for civil and industrial construction works for machineassembly industry

- Designing technology line system for manufacturing machines and installingmachines for machine assembly industry

- Design of thermoelectric control system for industrial projects

2.1.2.2 Organizational structure and Management System

Figure 2.2: Organizational structure diagram at LILAMA 10 Joint Stock

Company

 General Meeting of Shareholders: Is the highest authority of the company,including all shareholders with voting rights or who are entitled to vote byshareholders.

 Board of Directors ( 05 members ): Is an agency with full authority toperform all rights on behalf of the company, except for the authority of theboard

 Supervisory Board( 03 members) : Elected by the General Meeting ofShareholders They have the duty of supervising the board of directors andgeneral directors in managing the company The Supervisory Board is responsible

to the general meeting of shareholders and the law for the work performed andassigned tasks

Company leadership includes: 1 General Director, 3 Deputy General

Directors, 1 Deputy General Director in charge of technology, 1 DeputyGeneral Director in charge of thermoelectricity, 1 Deputy General Director incharge of hydropower and 1 Chief Accountant The company includes 10professional departments:

- Office of Administration – Health: Organize and assign responsibilities foreach employee to follow the state, duties and powers of people in the field ofassigned tasks, grasp the situation of life, accommodation, houses, land belts, sealmanagement, archives, health situation, purchasing health insurance, managing andusing office equipment

- Economics- Technology Department: Advising on the areas of monitoringproduction and business plan They take the responsible for engineeringmanagement and management of economic contracts

- Accounting- Finance Department: They help the Board of Directors toexercise the right to manage and use assets, capital, land and other resourcesassigned by the State, to regulate capital in production and business activities Theyalso analyze the financial situation of the company to plan the company's financialstrategy and choose the best financial plan Last but not least, they make statisticaland accounting work according to the State's regulations and prepare financialstatements, management reports for the Board of Director

Figure 2.3: Structure of accounting- Finance Department

- Material Equipment Department: Responsible to the Board of Directors ofthe company for delivery and settlement of materials, equipment, management ofprocurement of auxiliary materials, facilities and tools provided to units in theconstruction company

- Investment Department: Advising the Board of Directors on implementingbusiness activities, seeking jobs for the purpose of making profit for the company.Besides, the Investment Department also has the following tasks: Introducingadvertising to the company to customers, regularly improve the reputation andimage of the company

- Machine management board: Responsible for managing machine artifactand designing works

Table 2.1: SUBSIDIARIES AND SUBTITLES UNDER THE LILAMA 10 JSC

No Branches and affiliated units Address Main activity

Engineering Construction

Province

construction materialsand installation ofmachines

The total number of employees working at LILAMA 10 Joint Stock Company is 2,940 people with an average age of 32.

Figure 2.4: Employees structure at LILAMA 10 Joint Stock Company

In which, 2504 technical companies are distributed:

Graduate and Post Graduate colleges skilled labor

Figure 2.5: Labor Quality at LILAMA Joint Stock Company

2.1.2.3 Characteristics of technology production process at LILAMA 10 Joint Stock Company

As a company specializing in construction and installation field, the

Company's activities include:

- Designing and manufacturing equipment

- Install the machine

- Construction and installation of lines and transformer stations

 Designing and manufacturing equipment

LILAMA 10 specializes in providing pre-engineered steel buildings, steel structures for power projects, cement factories , breweries, freshwater factories , steel poles for power transmission lines

Processing and manufacturing tanks of gasoline, chemicals, food withlarge capacity, industrial equipment such as crane, lifting axis, ventilationsystem, dust filter

 Install the machine

LILAMA10 implements assembly lines, technology to manufacture

machines and install machines to serve the machine assembly industry, belonging tobig projects and factories

Design of thermoelectric control system for industrial projects, structural design for civil and industrial construction projects

The company has successfully installed many technological lines for largethermal power factories , hydropower factories , chemicals, food technology, chemicals,construction materials industry such as: Hoa Binh, Yali, Sesan 3 hydropower plants, PhaLai, Na Duong and Uong Bi thermoelectric plants, Hoang Thach, But Son, Nghi Son,Chinfon-Hai Phong cement factories , freshwater factory Coca Cola Ngoc Hoi, Lam SonSugar Factory, SSE Hai Phong Steel Rolling Factory,…

 Construction and installation of lines and transformer stations

LILAMA 10 has installed safely and accurately for important projects such asHoa Binh, Yali, Pha Lai, Uong Bi, Na Duong, Lai Chau, Ban Chat, Vung Ang ThermalPower Factories 1, Nghi Son 1, Mong Duong 1 Cement factories like Hoang Mai,Hoang Thach, But Son, Nghi Son Power transmission lines from 110 ~ 500KV suchas: 500KV Hoa Binh transformer station ,Ha Tinh, Thuong Tin, 220KV

 Process of organization, manufacture and installation:

Improving the electricity and water system

Conducting handover and acceptance of works

Bidding negotiation and signed a

contract

Assign tasksEstablishing the construction site

Construction and assembly

Technical supervision and quality inspection

Check and take over the buildings

Settlement and liquidation of contracts