Working capital and some solutions to increasing capital in utilization at Petrolimex Asphalt commercial limited company

In the market economy, capital plays an important part for enterprises. It has a significant meaning to identify its following steps in the process of producing.

FOREWORD 1

CHAPTER 1: THEORY OF WORKING CAPITAL AND ITS EFFECTIVE UTILIZATION IN ENTERPRISE 2

1.1 Theory of working capital 2

1.1.1 The notion of working capital 2

1.1.2.Working capital and the classification 3

1.1.3 Working capital’s structure and driving factors behind 4

1.1.4 Working capital resources 4

1.1.5.Working capital demand and the driving factors behind 5

1.2 Working capital and its importance in increasingly effective utilization 6

1.2.1 Working capital and norms to reflect its cycle speed 6

1.2.2 The main factors have influences on the utilization effects of working capital 8

1.2.3 Some solutions aiming to increase the utilization effects of working capital 9

CHAPTER 2: THE REAL STATE OF WOKING CAPITAL MANAGEMENT AND UTILIZATION IN THE COMPANY 10

2.1 Overview of producing activities in Petrolimex Asphalt commercial limited company 10

2.1.1 Back ground and developing process 10

2.1.2 Business sectors and main products 10

2.1.3 Organization of management 11

2.1.4 Accounting’ s structure 11

2.2 The real state of working cappital’s utilization at Petrolimex Asphalt commercial limited company 14

2.2.1 Overview of assets and capital resources of the company 14

2.2.2 The real situation of working capital’s utilization at the company 16

2.2.3 In summary 26

CHAPTER 3: SOME SOLUTIONS TO INCREASING EFFECTIVE OF WORKING CAPITAL IN MANAGEMENT AND USTILIZATION AT

PETROLIMEX ASPHALT COMMERCIAL LIMITED COMPANY 27

3.1 Advantages and challenges in operation of the company 27

3.1.1 Advantages 27

3.1.2 Challenges 27

3 2 Oriented developing of the company in the coming years 27

3.3 Some primary sollutions to improve the effective utilization of working capital 28

3.3.1 Actively work out plans in mobilising and using working capital efficiently 29

3.3.2 Push up effectively the use of cash capital and specify clearly resonable reserves 30

3.3.4 To strengthen investment and enlarge market to push up goods consumption 31

3.3.5 Investment satandar to workers and officials 32

3.3.6 Other solutions 33

CONCLUSIONS 34

In the market economy, capital plays an important part for enterprises It has

a significant meaning to identify its following steps in the process of producing.Therefore, enterprises want to exist for developing sustainably have to focus oncapital management activities in utilization to gain optimum profitable target.Business capital is divided into 2 parts : Fixed capital and working capital.Enterprise management in increasing effectively In fact, Petrrolimex Asphaltcommercial limited company is a enterprise which is doing business in tradingfield have been making efforts in capital using and management, especiallyworking capital occupied a large proportion in the total capital

Stem from appreciating of working capital in reality as well as to meetincreasing demand effectively in every enterprise, for the past probrationaryperiod, I’ve decided to chose this subject for my thesistation

“Working capital and some solutions to increasing capital in utilization

at Petrolimex Asphalt commercial limited company”

The graduation thesis’s content consists of 3 chapters :

Chapter 1 :The theology of woking capital and woking capital’s effects in enterprises.

Chapter 2 : The real state of working capital management and utilization

in the company

Chapter 3: Some main solutions to increasing the effects of woking capital

in utilization and management

CHAPTER 1 THEORY OF WORKING CAPITAL AND ITS EFFECTIVE

UTILIZATION IN ENTERPRISE

1.1 Theory of working capital

1.1.1 The notion of working capital

Any enterprise wants to carry out its produce and business process, it needs a combination of 3 factors : labour force, tools and materials

Difference between tools for working and materials for working(materials, fuels, semi- unfinished products …) It only take part in oneproducing process and does not come back its initial form, all its value willchange into in product’s value

Materials for working : as in kind form it is called working assets As forvalue form, it is called Working capital of enterprise

Working Assets included : Working assets for manufactoring andworking capital for circulating

Working Assets for manufactoring included such as : raw materials, fuels,materials, alternative accessories, half of products, unfinished products … are allbeing in process of reserve or manufactoring

Working Assets for circulating included : finished products are waitingfor consumption, capitals in cash, capitals in payment, prepaid costs … Inproducing and businessing process, working Assets for manufactoring andworking assets for circulating are always mobilising, transforming to each otherand at last aiming to ensure non-stop produce and business process

It is also an expressed form of working assets, so the characters ofworking capital exercises are always affected by working assets’s characters.Working capital will be transformed and repeated consecutively So, they willcreate repeated cycle of working capital One cycle starts since investing capitalunder the monetory form then finishing at the production cycle to come back itsinitial state

To the manufacture enterprises, the cycle of working capital processalways mobilises under the following formula :

Therefore, Working capital is under the monetory, it is an expressed form

of working capital or in other words, it is monetory on prepaid account to takeshape of working assets for producing and working assets for circulating toensure process of produce and business are going on smoothy

1.1.2.Working capital and the classification

1.1.2.1 The classification under expressed form

According to the classification, working capital is divided into 2 parts :

- Capital in cash and accounts receivable : It consists of monetory infunds, bank’s deposit, capital in payment, short-term investment in securities …

- Capital in materials, goods : They are working capitals which are underthe expressed forms such as raw materials and materials, unfinished products,semi-finished products, finished products …

The classification will help enterprises to evaluate the level of inventoryand ability of payment

1.1.2.2 The classification under the working capital’s role in produce and business process

Under the classification, working capital are divided into 3 parts :

- Working capital in producing reserved : Including of prime materials,sub materials, fuels, alternative marterials, tools

- Working capital in producing process : Value of unfinished products,semi-finished products and other costs

- Working capital in circulating process : Value of finished products,capital in cash, short-term investment, mortgages, pay a security, pay earnestmoney in short-term and accounts capital in payment.

1.1.3 Working capital’s structure and driving factors behind

There are many factors that have influences on capital’s structure, includingmany parts There can be divided into 3 main groups below :

- The factors related to supply materials such as : The distance betweenenterprise and supplier places, market and ability of supply materials, materialprices, the scale of production

- The factors related to production : Character, technology, producingtechnology of the enterprise, the complexion of produced products, the lengh ofproduce cycle, the level ability of producing process organization, professionalskills of Workers

- The factors related to payment method : payment methods and theexecution of payment principles between enterprises

1.1.4 Working capital resources

1.1.4.1 The classification with the relation of ownership

According to the classification, it is divided into 2 parts :

- Loan Accounts : It is the capital resource of borrowing from commercial banks

or financial organizations, Customer ccounts receivable enterprise is entitled

to use them in a given temporary

- Owner’s equity : This is account capital which is under enteprise ownership,including

* Mobilised capital inside : left benefit, funds.

* Mobilised capital outside : From the members of enterpsie, joint-venture

capital, State budget capital, Share capital is mobilised by issuing shares to thepublic

1.1.4.2 Classification of working capital following to mobilising time and utilization methods

According to the norm, enterprises’working capital included : regularcapital and current capital

- Regular capital : Including the Owner’s equity and long-term debts Thecapital is stable and can use for along time Enterprises use it for investment,buying Fixed assets or using all or part of regular working capital which isnecessary for business activities

- Current capital : Including of short-term loans from banks and othercredit organizations, long-term debts fall due, Accounts receivable fromsuppliers, Accounts payable for workers, Accounts payable for the State budget

… This is short term capital that enterprise can use it to meet the temporaryworking capital demand in produce and business activities

The classification will help managers to evaluate the mobilised capitalwhich is suitable to quality and in the time to use necessary factors for businessactivities

1.1.5.Working capital demand and the driving factors behind

Working capital demand always changes and depend on many factors In

there, we need to care about following the fomula and the main factors :

- The factors related to Business features such as : Business period,Business scale, it is temporary Business activities, The changes of producingtechnology … The factors have affected directly to the level of working capitalthat enterprise has to meet the prepaid capital with a required time demand

- The factors related to buy materials and product consumption :

+The distance between enterprises and suppliers

Suppliers accountsprepaid

+ The fluctuations of goods and material costs which are being used inproduce and business of the enterprises.

+ The gap between enterprises and selling market

+ Conditions and means of transportation …

- Enterprise’s policies in consumption activities and credit with paymentorganization impact on payment term and scale of Accounts receivable.Consumption activities organization and carry out the payment activitiesorganization of selling goods have strongly affected to enterprise’s workingcapital demand

1.2 Working capital and its importance in increasingly effective utilization.

1.2.1 Working capital and norms to reflect its cycle speed

1.2.1.1 Payment ratios

* Short-term debts payment ratio

It is the relation between short-term assets and short-term debts( including: short-term debts in term and long-term debts fall due )

Value of current aassets

The current ratio = –––––––––––––––––––––––––––

Short-term debts

This ratio assesses changeable ability of short-term assets into cash in order

to pay Short-term debts in term of Enterprises

Short term Assets = Inventories + Cash and equivalent + Accounts receivable

Among them, Inventories is a part of working capital which has the lowestability to change into monetory

* Quick ratio

Value of current assets – Value of Inventories

The quick ratio = –––––––––––––––––––––––––––––––––

Short-term debts

This ratio reflects accounts debts in the fastest time.This ratio providesinformation regarding the firm’s liquidity and ability to meet its obligations Itindicates a company financial strenghts (or weaknesses) but this ratio can begood or bad, this depends on character of every business field.

* The cash ratio

Cash and cash equivalent

The cash ratio = –––––––––––––––––––––––––––––––––

Short-term debts

The cash ratio measures whether or not a firm has enough resources to pay itsdebts over the nest 12 moths It compares a firm’s current assets to its currentliabilities

A comparison with the industry of the firm’s current ratio, and acomparison with average, can help determine if the current ratio is high or low

at this period in the time’s comparison These comparisons do not indicate whythe current ratio is higher or lower than industry For some possible reasons ofthe current ratio is out of line, which can be found from analysis of theindividuals account that has been usually performed for Accounts receivable andInventories

1.2.1.2 The number of Inventory cycle

The number of inventory cycle are the times of average inventory, which

is mobilised in term

Costs of goods sold

The number of inventories cycle = ––––––––––––––––––––––––

Average InventoriesThe number of inventory cycles are more and more higher, the businesswill be better because enterprises only need to invest a small level ofInventories but they still achieve a high turnover

1.2.1.3.The number of accounts receivable cycle

The norm reflects ability of capital recovery for payment in enterprises

Accounts receivable

Net Sales Remainder average Accounts receivable

The cycle is more higher, the more better It proves that the fast speed ofrecovery of Accounts receivable Enterprises will needn’t to invest too much inAccounts receivable

1.2.2 The main factors have influences on the utilization effects of working capital

* Objective factors

+ Fluctuations of economy : If economy with its inflation causes therising of goods prices, including input material costs, produce costs will grow,product prices will be raised and of course to make the consumption willbecome ineffciently

+ The non-stop development of Science and Technology also contribute

to increasing effecient utilization of working capital Science and technologyare developing that it can be helpful factors or can be adverse factors toenterprise if enterprise produces redundant products and they can not beconsumed Therefore this will be negative factors

+ Business environment : The number of rising competitors, alternativeproducts, changed market demand … They will impact on the ability ofconsumption, even though leading to the situation of capital losing

+ The State with marcro policies : The state’s policies are very important

to enterprises’ operations In each policy has 2 effects, may be positive and may

be not positive to Business activities in their fields

* Subjective factors

+ We can recognize enterprises’ weak points in quality of management Itcauses the redundant or shortage of capital

+ Ability of penertration and enlargement the market of enterprise : thespeed of consumptionis better, the Working capital is higher, therefore itsefficient in utilization will grow.

1.2.3 Some solutions aiming to increase the utilization effects of working capital

1.2.3.1 Specification of the level necessary working capital demand for business operation

Specification of necessary working capital regularly, this will ensure the levelenough capital to meet the demand of business process amd avoid unliquidedcapital or short of capital, leading to interrupted production situation

Business activities have to ask for capital to come into operation When starting

to produce and do business, enterprise has to calculate the level of necessarycapital demand and one of the most important is that enterprise has to calculateaccurately in line with developing period in general and in produce process inparticular Because of this will help enterprise’s business operation go onsmoothy and efficiently

1.2.3.2 To push up the working capital’ s rotate speed highly

The effects of working capital are evaluated by its rotate speed Ifworking capital has a highly rotated speed, it shows that the effects of workingcapital utilization are very good So, it is necessary to hasten speed of liquidedworking capital in 3 processes : reserve , produce and circulation

1.2.3.3 Carry out of checking, analysing, surpervising business activities tightly and regulary

Executing of check activities regularly and consecutively will helpenterprises to evaluate their strong points and weak points Steming from there,enterprises can develop their advantages or prevent and modify shortcomings intime

CHAPTER 2 THE REAL STATE OF WOKING CAPITAL MANAGEMENT AND

UTILIZATION IN THE COMPANY

2.1 Overview of producing activities in Petrolimex Asphalt commercial limited company

2.1.1 Back ground and developing process

Enterprise name : Petrolimex Asphalt commercial limited company

Short name : Petrolimex Asphalt co.,LTD

Headquarters : At 1 Kham Thien _Dong Da district _ Ha Noi

Petrolimex asphalt commercial limited company, to be asubsidiary of Petrolimex Petrochemical - a member of Viet NamPetrolimex, head of company The company specialises in business withproducts related to asphalt in domestic market and regional South EastAsia countries

In order to meet the increasing demand of petrolimex asphalt products in thedomestic market The ministry of Trading officially approved the companybecame as a member of Petrolimex Petrochemical joint stock company andunder the name of Petrolimex Asphalt commercial limited company Thecompany deloyed “under the model of parents _subsidiary company ”

PLC is one of the most dynamic members of Petrolimex Petrochemical andapproved by the ministry of Trading

Presently, the company is representative partner of BPETCO to supplyhigh quality products of BP on market It has been the first doing business with60/70 hot solid asphalt products in Viet Nam since 1997

2.1.2 Business sectors and main products

 Do business sectors

Do business with import and export petrolimex Asphalt products, in theshort term, concluded 3 main sectors : lubricant , chemical, asphalt fields andsome sectors related to them

- Doing business with import and export material products, Asphalt equipments

- Doing business with services related to : Shipping, stocks, mixtrure,alnalysis, consultancy and technical services.

- In the coming time, the company will take part in doing business withbuildings and real estate

 Main products : Asphalt, chemical, lubricant.

2.1.3 Organization of management

Management’ structure : Including, chairman, director, duty director

- Chairman: cotrol Business activities as well as making regulations,priciples and the organization model and and have the authority to appointdirector of Petrolimex Asphalt limited company

- Director : Director is a person who is resposible for Business operations tochairman and directly running Business activities and has to report them tochairman

- Vice director : vice director is a person who is intitled to help director and

along with director to run Business operations and to take the regulations andpriciples of mother company given into practice Duty director is alsoresponsiblity to director and chairman for given responsibility

2.1.4 Accounting’ s structure

Accounting department : responsible to financial accounting activities todirector Always updating and giving accurated figures in time The departmenthas to give balance sheet, financial report … calculate expensives such as :profits, make loss, taxes, salary, bonus, other policies for staffs

At the being time, accounting department has 9 people concluded : 1 chiefaccountant, 2 deputy chief accountants and 6 accountants (accountant takeresposible for the whole company, accountant for departments, accountant fordetails) They are all up to the standard of graduated University

Accounting’s structure

Chief

Accountant

Deputy accountant about General

Deputy accountant about tax and finance statement

Fixed assetsAccountant

SalesAccountant

Cash Accountant

Salary Accountant

Internal auditPayment Accountant

DIRECTOR

DEPUTY DIRECTOR

Finance and accounting department

Quality center department

Asphalt business department

Branches

HAI PHONG

ĐA NANG SAI GON CAN THO

2.2 The real state of working cappital’s utilization at Petrolimex Asphalt commercial limited company

2.2.1 Overview of assets and capital resources of the company

Look at the table 1in the next pageet assets and capital resources of the company was higher than last year because of extending lager scale of produce and business

Within 2 years of 2006 and 2007 current assets of the company accouted for ahigh ratio in the number of assets Namely, in 2006 it was 93.2% and 94.1% in 2007among of all assets value which made the company’s fixed capital had only smalldensity in structure of assets For example, in 2006 it occupied 6.8% and reduced5.9% in 2007 This structure is entirely reasonable in line with enterprises doingbusiness in trading It proved that the current assets’s impotance and the floating

of working capital has a great meaning for the company in utilization andmanagement because if the company does not use it effectively, leading to thecompany has to borrow money from credit organizations even this way or thatway it is not good for the company

As for capital resourse, the company tended to use loans In 2006 theAccounts payable of 43.8% density and decreased slightly 42.1% density in

2007 Although reduced, it was still high in the total of the company’s capital.Owner’s equity accounts for a small density in capital resource structure of thecompany such as 12.4% and 15.7% in 2007

Business capital is an value expression of assets It included : Workingcapital, it is a form of its value and short term investment accounts; Fixed capital

is an expression of its value and long term investment Looking at business capitalstructure, showed that the business capital increased with high speed, the companywas expanding for a larger scale to control the market, namely : In 2006, businesscapital 954.698.725 thousand dongs Its value growed 199.592.549 thousand dongsand present at 1.154.291.274 thousand dongs It increased relatively of high speed,equivalent of 20.1%

Graduation thesis Faculty of finance and banking

Table 1 : Structure of assets and resources

( Unit : thousand dongs )

Density dispropotion (+-%)

(source of Accounting department at PLC)

Graduation thesis Faculty of finance and banking

To get the good results of growing business capital above, the companyused flexibly its financial resources included Owner’s equity and Accountspayable In 2006, Accounts payable were 743.176.105 thousand dongs, holding43.8% in the total capital Owner’s equity was 211.522.620 thousand dongs,equivalent of 12.4 % in the total capital In 2007, the scale of capital wasincreased both of Accounts payable and working capital : Accounts payableraised 96.970.509 thousand dongs, equivalent of 13.04% ratio Meawhile, Itsowner’s equity speed of 48.51%, equal to 102.622.041 thousand dongs Thisshowed that, the rising rate of Owner’s equity was higher than Accounts payable

in 2007, leading to ratio of capital resource changed, Owner’s equity increased

by 48.51 % and Accounts payable reduced to 42.1% Although, the density ofloans reduced but accounted for a large propotion of total capital The structrure

of the capital required to execute activities of management and use it efficiently

Because of business character, short term debt hold nearly entire in 2006and 2007 Long term obligation grew 192.432 thousand dongs, equal to 38.35%.Short term debt occupied over high rate, under which the company has to setplans to accomplish its accounts debt within required time, it would help thecompany to guarantee its prestige in payment

2.2.2 The real situation of working capital’s utilization at the company

2.2.2.1.Working capital’s structure

Working capital plays a vital part in the company since taken shape,especially to enterprises which have activities in business trading, workingcapital always account for high ration in all business capital Therefore, structure

of working capital in every company which is doing business in trading such asPetrolimex Asphalt limited company, it would impacted on its results ofprocessing line and business activitives

Look at the table 2, capital’s structure of PLC, we find out its Workingcapital scale in 2007 increased 223.080.993 thousand dongs higher than 2006,