LUẬN VĂN TIẾNG ANH "Hiệu quả quản lý vốn lưu động" - Working capital managementefficiency at Son Ha International Corporation

Luận văn viết bằng tiếng anh đề tài: Working capital managementefficiency at Son Ha International Corporation (năm 2015)This study investigated the factual state of working capital managementefficiency at Son Ha International Corporation from the viewpoint of a fourthyear student of Faculty of Foreign Language, Academy of Finance. The paperaims at finding out the drawbacks in the company‟s working capitalmanagement and the reasons, and more importantly suggesting main methodsto improve the efficiency of working capital management in the company. Inachieving these aims, the graduation paper surveys the current situation ofworking capital management and assess that whether it is effective or not.From received results, the study argues the most practical implications at SonHa International Corporation to improve the efficiency of working capital ofthe company in the year to come.

DECLARATION

I hereby declare that this thesis is my own work and effort It has not been submitted anywhere for an award Where other sources of information have been used, they have been acknowledged

Graduation thesis author

Phạm Thị Hồng Ngân

ACKNOWLEDGEMENT

I would like to express my deep gratitude to all those who have given

me the possibility to complete this graduation thesis In preparing this graduation thesis, I have had generous help and advice from my teachers, my colleagues, my family and my friends I would like to express my great thanks

to all of them

First of all, I would like to express my deepest gratitude to my

supervisor, Tran Thi Thu Nga, lecturer of Academy of Finance, who has

given immeasurable help, constant guidance with many careful instructions, comments and valuable advice to me whenever I need Without her support, I

am not able to have a complete thesis And I really appreciate her patience in reading and correcting my thesis

Second, I wish to show my sincere thanks to all my teachers at

Academy of Finance, who have provide me with worthy lessons throughout 4 years of study

Moreover, I have furthermore to thank the staffs of Son Ha International Corporation for their valuable supports during the internship period Without their helps, it would be impossible for me to finish this work

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

ABSTRACT

This study investigated the factual state of working capital management efficiency at Son Ha International Corporation from the viewpoint of a fourth year student of Faculty of Foreign Language, Academy of Finance The paper aims at finding out the drawbacks in the company‟s working capital management and the reasons, and more importantly suggesting main methods

to improve the efficiency of working capital management in the company In achieving these aims, the graduation paper surveys the current situation of working capital management and assess that whether it is effective or not From received results, the study argues the most practical implications at Son

Ha International Corporation to improve the efficiency of working capital of the company in the year to come

LIST OF ABBREVIATIONS

1 VND: Viet Nam dong

2 Son Ha International Corporation: SHI

Figure 2: Board of Son Ha International Corporation 23

Table 2.2: Working capital structure at SHI in 2014 and 2013 (million

TABLE OF CONTENTS

DECLARATION i

ACKNOWLEDGEMENT i

ABSTRACT iii

LIST OF ABBREVIATIONS iv

LIST OF TABLES ……… …v

1 INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Aims of the study 2

1.3 Methods of study 2

1.4 The scope of the study 3

1.5 Organization of the study 3

CHAPTER 1: THEORETICAL BACKGROUND OF WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT 4

1.1 OVERVIEW OF WORKING CAPITAL 4

1.1.1 Definition of working capital 4

1.1.2 Chracteristics of working capital 6

1.1.3 Classification of working capital 7

1.1.3.1 On the basic of concept 7

1.1.3.2 On the basic of time 8

1.2 WORKING CAPITAL MANAGEMENT IN BUSINESS 9

1.2.1 Definition of working capital management 9

1.2.2 Objectives of working capital management 10

1.2.3 Assessment criteria 11

1.2.3.1 Cash management 11

1.2.3.2 Inventory management 12

1.2.3.3 Accounts receivables management 13

1.2.3.4 Some ratios assess the efficiency of working capital management 15

1.2.4 Efficiency of working capital management 17

1.3 FACTORS AFFECTING WORKING CAPITAL MANAGEMENT EFFICIENCY 17

1.3.1 External factors 18

1.3.2 Internal factors 19

CHAPTER 2: CURRENT SITUATION OF WORKING CAPITAL MANAGEMENT AT SON HA INTERNATIONAL CORPORATION 21

2.1 OVERVIEW OF SON HA INTERNATIONAL CORPORATION 21

2.1.1 General information of Son Ha International Corporation 21

2.1.2 Foundation and development of the company 21

2.1.3 Logo‟s meaning 22

2.1.4 Organization of management of Son Ha International Corporation 23

2.1.5 The company main business activities 23

2.2 CURRENT SITUATION OF WORKING CAPITAL MANAGEMENT AT SON HA INTERNATIONAL CORPORATION (SHI) FROM 2011 TO 2013 24

2.2.1 Business result at Son Ha International Corporation 24

2.2.2 Structure and sources of working capital at Son Ha International Corporation (SHI) 26

2.2.2.1 Working capital structure at Son Ha International Corporation 26

2.2.2.2 Sources of working capital at Son Ha International Corporation (SHI) 29

2.2.3 The practical of working capital management at Son Ha International Corporation 31

2.2.3.1 General Working capital Management at Son Ha International Corporation 31

2.2.3.2 The current situation of cash management of Son Ha International Corporation 34 2.2.3.2.1 Overview of cash and cash equivalents in total working capital from

2012 to 2014 34 2.2.3.2.2: Analyzing financial ratios for cash management at Son Ha International Corporation 36 2.2.3.3 The current situation of account receivable management of Son Ha International Corporation 38 2.2.3.3.1 Overview of account receivable management from 2012 to 2014 38 2.2.3.3.2 Analyzing financial ratios for account receivables management 42 2.2.3.4 The current situation of inventory management of Son Ha International Corporation 44 2.2.3.4.1 Overview of inventory management from 2012 to 2014 44 2.2.3.3.2 Analyzing financial ratios inventory management 46

2.3 ASSESSMENT OF CURRENT WORKING CAPITAL MANAGEMENT AT SON HA INTERNATIONAL CORPORATION 47

2.3.1 Company‟s achievements in managing working capital 47 2.3.2 The shortcomings in managing working capital and the reasons 48

CHAPTER 3: SOME SOLUTIONS TO IMPROVE EFFICIENCY OF

INTERNATIONAL CORPORATION 52 3.1 ORIENTATIONS AND OBJECTIVES FOR FUTURE DEVELOPMENT OF SON HA INTERNATIONAL CORPORATION 52

3.1.1 Prediction of Economic-Social context in 2015 52 3.1.2 Orientations and objectives for the future development at Son Ha International Corporation 54

3.2 SOME SOLUTIONS TO IMPROVE EFFICIENCY OF WORKING CAPITAL MANAGEMENT AT SON HA INTERNATIONAL

CORPORATION 56

3.2.1 Precisely determining the working capital requirement of the company 56

3.2.2 Accurately finding the reasonable sources to finance working capital and balance the working capital structure 58

3.2.3 Managing the payment process more effectively 61

3.2.4 Improving the management of inventories 63

3.3 Recommendations to improve the efficiency of working capital management at Son Ha International Corporation 66

3.3.1 Some proposals to State Level 66

3.3.2 Some proposals to Son Ha International Corporation 67

CONCLUSION 69 REFERENCES

1 INTRODUCTION

1.1 Rationale of the study

In the market economy, working capital plays an essential role to maintain smooth running of a business No business can run successfully without an adequate amount of working capital because it is considered as the flesh and blood of an enterprise Enterprises that have paid a lot of attention in managing capital and using them efficiently gain a lot of opportunities to generate much more working capital internally, thereby lowering costs, improving their performance and boosting their competitive position

However, in fact, because of remnants of the global financial crisis, geopolitical challenges and negative effects of the Ebola epidemic in West Africa, domestic enterprises have to face a lot of difficulties as well as the shortage of capital for many years The challenge of efficiently managing and using working capital becomes an urgent problem of all businesses More and more enterprises make losses because the ways they manage their working capital is inefficient This not only affects the survival and development of enterprises but also adversely affects the whole national economy stability The waste of capital, using capital inefficiency and overlapped capital has limited competitiveness and development among businesses Therefore, to get rid of this bad situation, businesses should ask themselves “How to improve the efficiency

of working capital management?.” This is not a simple question, but a hard question that enterprises can not deal with immediately They should have an appropriate, proper and reasonable strategy that can draw different ways to improve the efficiency of working capital management, simultaneously focus on

capital management activities in utilization to gain optimum profitable target and keep sustainable development

To be aware of the importance of working capital and be inspired of the necessity of effectively managing working capital of during training time at SON

HA International Corporation, as well as based on knowledge and practical

experiences I got during the internship, I‟m going to choose the topic: “Some solutions to improving the efficiency of working capital management at Son Ha International Corporation” as my graduate thesis title

1.2 Aims of the study

- To provide the knowledge and information of working capital management activities at Son Ha International Corporation

- To understand the situation of working capital management activities at

Son Ha International Corporation

- To identify and analyze the causes of the drawbacks of Son Ha International Corporation‟s working capital management

- To suggest main methods to improve and strengthen the efficiency of working capital management

- Inductive, deductive and statistical method

- Figure comparison, data evaluation, judgment and conclusion

- Method of analyzing, summarizing, synthesizing materials and books from the theoretical background

1.4 The scope of the study

The research focuses on the efficiency of working capital management at Son Ha International Corporation from 2012 to 2014 and suggestions to improve this activity

1.5 Organization of the study

Besides the Contents, Introduction, Conclusion and References, the thesis consists of 3 chapters

 Chapter 1: This chapter provides a general overview of working capital

and the necessary of improving the efficiency of working capital management

 Chapter 2: The main part of the thesis It gives the overview of the

development of Son Ha International Corporation and the current management of working capital in this corporation

 Chapter 3: This chapter gives the orientations for the future development

of Son Ha International Corporation and provides some practical recommendations and solutions to improve the efficiency of working capital management of this company

CHAPTER 1:

THEORETICAL BACKGROUND OF WORKING CAPITAL AND

WORKING CAPITAL MANAGEMENT

1.1 OVERVIEW OF WORKING CAPITAL

1.1.1 Definition of working capital

Every enterprise is regarded as a cell of the economy Enterprises conduct business activities in order to create products and services for the society and maximize profits

To carry business activities, enterprises need an adequate amount of business capital and it is broadly divided into two groups: Fixed capital and Working capital Fixed capital refers to the funds invested in fixed assets of a firm in the form of land, building, machinery etc Working capital refers to the funds invested in the current assets of a firm such as raw materials, work-in-progress, finished goods, receivables, cash etc

From the viewpoint of manufacturing process, working capital means a part of capital, which is required to keep the flow of production smooth and continuous

Working capital also refers to the „circulating capital‟ which is required to meet the day to day operations of a business firm Working capital may be defined by various authors as follows:

According to Weston & Brigham: “Working capital refers to a firm’s investment in short term assets, such as cash amounts receivables, inventories etc” (1)

Mead, Baker and Malott also state that: “Working capital means current assets”(2)

Pham Thi Hong Ngan CQ49/51.03 5

J.S.Mill also acknowledged: “The sum of the current assets is the working capital of the business” (3)

Last but not least, the accounting principles of board of American Institute

of Certified Public Accountants has defined the working capital as under:

“Working capital is represented by the excess of current assets or 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”

Thus, we can understand working capital as the funds available to use for day-to-day operations of an enterprise In other words, the capital invested into the business to carry on the continuous operational activities is called the

„working capital.‟ It is undeniable that working capital is considered as flesh and blood of an enterprise and lack of working capital in a business will result in interruption or discontinuation of its day-to-day operational activities

Working capital of a business is invested in its current assets and current liabilities It is defined as the difference between current assets and current

liabilities Current assets are the most liquid of your assets, meaning they are

cash or can be quickly converted to cash Current liabilities are any obligations

due within one year

Working capital (WC) is calculated by subtracting a corporation‟s current liabilities from its current assets as follow:

Working Capital = Current Assets - Current Liabilities (1)

Whenever the total current assets exceed the total current liabilities, it

results in a „positive working capital.‟ Positive working capital is essential for

your company to meet its continuous operational needs The availability of

working capital influences your company's ability to meet its trade and term debt obligations, as well as to remain financially viable

short-Whenever the total current liabilities exceed the total current assets, it

results in a „negative working capital.‟ The danger of having negative working

capital is that a corporation may be unable to meet its short-term liabilities Negative working capital may also be a sign of trouble ahead If negative working capital remains over a long period of time, this may be an indication that sales volumes are on the decline

1.1.2 Chracteristics of working capital

Working capital takes part in all production cycles and to be used

completely in the production process Therefore, it can not keep the originally physical form According to the Article “Current Assets and Their Key Features

in Working Capital Management” - eFinanceManagement.com and Corporate Finance Syllabus, Academy of Finance, working capital can have following characteristics:

- Working capital in the rotation process always changes the forms of expression

- Working capital transfers all the values right in a time and get a full refund after each business cycle

- Working capital completes a circuit after a business cycle

- Working capital is very liquid for it can be converted as cash any time without losing anything

- Investments in current assets such as working capital come with less risk for it is just for short term

Pham Thi Hong Ngan CQ49/51.03 7

- Since working capital is a short term asset that will last for a year only,

there will be no need for adoption of a special accounting system

1.1.3 Classification of working capital

Working capital can be classified on the basic of concept and on the basic

of time which are shown in figure 1.1:

Figure 1.1: Classification of working capital (1)

Classification of working capital

Gross Working

Capital

Net Working Capital

Permanent Working Capital

Temporary Working Capital

Seasonal Working Capital

Special Working Capital

Regular Working Capital Reserve Working

Capital

1.1.3.1 On the basic of concept

From the conceptual point of view, working capital is classified into two parts

They are gross working capital and net working capital

Gross working capital refers to the amount which the company has

invested into the current assets; current asset includes cash, stock, debtors or anything which can be converted into cash within a year It should be neither excessive nor inadequate asset According to this concept, working capital means Gross working capital, which is total of all current assets of a business It can be represented by the following equation:

Gross Working Capital = Total Current Assets (1)

Net working capital is the difference between current asset and current

liabilities It explains the management of financing working capital through the financing of long term and short term funds Net working capital can be positive and negative A positive net working capital will arise when current assets excess current liabilities A negative net working capital occurs when current liabilities are in excess of current assets

Net Working Capital = Current Assets – Current Liabilities (2)

1.1.3.2 On the basic of time

From the timely point of view, working capital is classified in two kinds:

permanent working capital and temporary working capital

Permanent working capital is also called fixed working capital It is the

minimum level of current assets which is continously required by a firm or carrying out its business activities and that cannot be converted into cash in

normal course of business The level of permanent working capital depends on the business cycle as well as the growth of a firm

Permanent working capital can be further divided into the following categories:

 Regular working capital: minimum level of working capital required to

circulate from one form to another: from cash to inventory, inventory

to receivables, receivables to cash, and so on

 Reserve working capital: permanent working capital in excess of

regular working capital Reserve working capital arises from such contingencies as union strikes, recession, etc

Temporary working capital is the difference between actual level of investment

in short-term assets and the permanent working capital investment Temporary working capital is needed for shorter period Two types of temporary working

capital are seasonal working capital and specific working capital

 Seasonal working capital: required to meet the seasonal demands of

the enterprise is called seasonal working capital

 Specific working capital: is that part of working capital which is

required to meet unforeseen contingencies like slump, strike, flood, war…

1.2 WORKING CAPITAL MANAGEMENT IN BUSINESS

1.2.1 Definition of working capital management

It is undeniable that in the market economy, working capital plays an essential role to maintain smooth running of a business No business can run

successfully without an adequate amount of working capital because it is considered as the flesh and blood of an enterprise Hence all enterprises definitely need to find ways to manage their working capital on their own effectively and efficiently

According to Corporate Finance Syllabus, Academy of Finance, copyright

© 2014, page 208: “Working capital management is the process of managing and monitoring activities related to working capital”

Therefore, it is obvious to understand that working capital management involves management of different components of working capital such as cash, inventories, accounts receivable, creditors etc… In other words, it involves in managing the relationship between a firm‟s short-term assets and its short-term

liabilities

1.2.2 Objectives of working capital management

In today‟s economy, if enterprises want to maximize profits, one of the important tasks they have to do is managing working capital efficiently Thus, efficiency working capital management becomes a significant issue that every business needs to concern about The concept of efficiency of managing working capital must be understood as the objectives of working capital management on two aspects (According to Corporate Finance Syllabus, Academy of Finance, copyright © 2014, page 208)

 First, effectively manage the day-to-day activities of the business to firstly improve the firm‟s profitability

 Second, ensure the firm has sufficient liquidity to meet its short-term

obligations

1.2.3 Assessment criteria

Working capital management is concerned with the problems how to manage effectively current assets, current liabilities and the relationship between them The intention is to have optimum investment in working capital The level

of current assets to be maintained should be sufficient enough to cover its current liabilities with a reasonable margin of safety Significant amounts of working capital can be invested in inventories of raw materials, work-in-progress and finished goods or account receivables Moreover, the company also needs an adequate amount of working capital to carry out day-to-day activities The various sources available for financing working capital requirements should be properly managed to ensure that they are obtained and utilized in the best possible manner Therefore, when assessing the efficiency of working management, we should study three main criteria: Cash management, Receivables management and Inventory management

1.2.3.1 Cash management

Cash is regarded as the business's lifeblood If managed well, the company remains healthy and strong Vice-versa, the company goes into bad situation Companies need to carry sufficient level of cash in order to ensure they can meet day-to-day expenses Cash is also required to be held as a cushion against unplanned expenditure, to guard against liquidity problems It is also useful to keep cash available in order to be able to take advantage of market opportunities

Cash management is one of the key areas of working capital management Cash management is important for any new or growing business Every firm should have adequate cash, neither more nor less Inadequate cash will lead to

production interruptions, while excessive cash remains idle and will impair profitability

So what is cash management?

We can understand the term “cash management” as the way to achieve the objectives of the firm: maximum profitability with maximum liquidity of the firm It is the management's ability to recognize cash problems before they arise,

to solve them when they arise and having made solution available to delegate someone carries them out

Cash management is a critical activity for companies of all sizes Assuring that a company has sufficient funds when and where they are needed is

a challenge for financial managers

Especially, to assess the cash management efficiency, we usually use a

formula called “liquidity ratios” Liquidity ratios are used to determine a

company‟s ability to meet its short-term debt obligations Investors often take a close look at liquidity ratios when performing fundamental analysis on a firm Since a company that is consistently having trouble in meeting its short-term debt is at a higher risk of bankruptcy, liquidity ratios are a good measure of whether a company will be able to comfortably continue as a going concern

1.2.3.2 Inventory management

Inventory plays an important part in the working capital of many business concerns Inventory is a major item of current assets This includes raw materials, work-in-process and finished goods Raw materials consist of those units or input which are used to manufactured goods that require further processing to become finished goods Finished goods are products ready for sale Thus, inventory may be defined as “Stock of goods that is held for future use”

Since inventories constitute about 50 to 60 percent of current assets, the management of inventories is crucial to a successful working capital management Working capital requirements are influenced by inventory holding Hence, there is a need for effective and efficient management of inventories

Inventory management helps business maintain a trade off between carrying costs and ordering costs which results into minimizing the total cost of inventory It also facilitates maintaining adequate inventory for smooth production and sales operations Moreover, it helps avoids the stock-out problem and suggests the proper inventory control system to be applied by a firm to avoid losses, damages and misuses

A good inventory management is important to the successful operations of most organizations Inventory management refers to an optimum investment in inventories It should neither be too low to effect the production adversely nor too high to block the funds unnecessarily Excess investment in inventories is unprofitable for the business Both excess and inadequate investments in inventories are not desirable The firm should operate within the two danger points

The purpose of inventory management is to determine and maintain the optimum level of inventory investment

1.2.3.3 Accounts receivables management

Besides cash and inventories, receivables are one of the three primary components of working capital Receivables mean the book debts or debtors and these arise, if the goods are sold on credit Receivables occupy second important place after inventories and thereby constitute a substantial portion of current assets in several firms The capital invested in receivables is almost of the same

amount as that invested in cash and inventories Receivables provide protection

to sales from competitions Company that manages efficiently receivables will avoid losses and gain lots of profits Thus, management of accounts receivable is one of the most important tasks that every enterprise should pay attention to achieve the goals they set up

As mentioned above, accounts receivables management is very important and complicated because it is related to the organization and preservation of

working capital It includes two main tasks: determining the credit policy and monitoring accounts receivables

(i) Determining the credit policy means that manager must first decide on

its credit standards The decision of how much credit risk to assume plays a large role in determining how much money a firm ties up in its receivables While a restrictive policy can result a lower sales volume, the firm will have a smaller investment in receivables After a firm decides on its credit standards, it must next establish its credit terms The firm decides the length of the period before payment has been made (the “net” period) and chooses whether to offer a discount to encourage early payments If it offers a discount, it must also determine the discount percentage and the discount period The last step in the development of the credit policy is to decide on a collection policy The content

of this policy can range from doing nothing if a customers is paying late, to sending a polite letter of inquiry, to changing interest on payments extending beyond a specified period, to threatening legal action at the first late payment

(ii) Monitoring accounts receivables is after establishing a credit policy A

firm must monitor its accounts receivables It is aimed to analyze whether its credit policy is working effectively or not Two tools that firms use to monitor

the accounts receivables are the Days Sale Outstanding (DSO) (or average collection period) and the aging schedule

Days Sale Outstanding (DSO) = (Receivables) / (Average Sales Per Day) (1)

The “accounts receivable days” are the average number of days that it takes a firm to collect on its sales A firm can compare this number to the payment policy specified in its credit terms to judge the effectiveness of its credit policy

- Aging schedule

An aging schedule categorizes accounts by the number of days they have been

on the firm‟s books It can be prepared using either the number of accounts or the dollar amount of the accounts receivable outstanding

1.2.3.4 Some ratios assess the efficiency of working capital management

(i) Liquidity Ratios:

These ratios are probably the most commonly used of all the business ratios

 Current ratio: the current ratio shows the ability of your business to

generate cash to meet its short-term obligations

(2)

 Quick ratio: also known as acid test ratio It gives users a better picture of

their ability to meet their short-term obligations, regardless of your sales levels

(3)

Current assets

Current liabilities

= Current ratio ratio

Quick ratio = Current assets – Inventory

Current liabilities

 Cash ratio: As the name implies, this ratio is simply the ratio of cash and

equivalents compared to current liabilities This ratio looks only at assets that can be most easily used to pay off short-term debt, and it disregards receivables and short-term investments

(4) Cash Ratio =

(ii) The efficiency ratios:

Efficiency ratios measure how effectively the company utilizes these assets, as well as how well it manages its liabilities

 Inventory turnover ratio: illustrates how well a company manages its inventory levels

(5) Inventory turnover ratio =

 Days’ sales in inventory: It tells the business owner how many days, on average, it takes to sell inventory

(6) Days‟ sales in inventory =

 Accounts Receivable Turnover The accounts receivable turnover ratio

measures how effective the company's credit policies are

(7) Accounts Receivable Turnover =

 Days Sales Outstanding (DSO): It presents the average length of time

that the company must wait after making a sale before receiving cash, which is the average collection period

Cash and Equivalents Current Liabilities

Cost of sales Average stock held through the year

360 days Inventory turnover

Net sales Accounts receivables

(8) Days Sales Outstanding (DSO)= =

1.2.4 Efficiency of working capital management

As we can see, working capital management plays an important and essential part in production control activities Thus, to improve productivity and boost the profit margin as expected, enterprises have to try their best to manage working capital in the proper manners to achieve the objectives they had set up Many enterprises failed in managing working capital that leads their businesses into loss and bankruptcy Effective working capital management is similar to the hard process of climbing on the high tree to get the juiciest fruit The higher a tree is, the sweetest its fruit will be And a successful CFO or capital manager is a great climber who will definitely realize that the fruit up there is indeed much juicer than the stuff down low that everyone else is picking

1.3 FACTORS AFFECTING WORKING CAPITAL MANAGEMENT

EFFICIENCY

Working capital is as important to a business as blood to a human being The firm must estimate its working capital very accurately because excessive working capital results in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affects the smooth flow of operating cycle and business fails to meet its commitment So finance manager must estimate right amount of working capital Many internal as well as external factors can influence corporate decisions relating to the optimal level of current assets and current liabilities Finance manager must keep in mind following

factors before estimating the amount of working capital

360 days Receivables turnover

Receivables Average sale per day

1.3.1 External factors

When determining an adequate amount of working capital to carry out day-to-day business activities, finance managers have to make decisions about capital structure depending on the external factors of the business environment These external factors play important roles in how to propose effective and proper strategies when estimating the amount of working capital There are many external factors that can influence working capital management efficiency such as: inflation, taxation policy, market conditions, conditions of supply, seasonal factors, level of competition etc

Among those above factors, the most important ones that influence

working capital management efficiency mainly are inflation and market conditions

Inflation means rise in prices In such a situation more capital is required

than before in order to maintain the previous scale of production and sales Therefore, with the increasing rate of inflation, there is a corresponding increase

in the working capital Possibility of using cheaper substitute raw material, without affecting the quality should be explored

Besides, market conditions also influence the efficiency of working capital management, when competition pressure is intense, a large inventory of finished

goods is required to serve promptly their customers who may be inclined to wait because other manufacturers are ready to meet their needs Further, generous credit terms may have to be offered to attract customers in a highly competitive market Thus, working capital needs to be high because of greater investment in finished goods inventory and account receivables

1.3.2 Internal factors

Beside above external factors, enterprise‟s working capital is also affected

by many internal factors which come from their own There are many internal factors such as: nature and size of the business, profitability, business cycle, operating efficiency, dividend policy, etc

Among those above factors, the most important ones that influence working capital management efficiency mainly are nature and size of the business and operating efficiency

Nature and size of the business is the most important factor The

requirement of working capital depends on the nature of business The nature of business is usually of two types: Manufacturing Business and Trading Business

In the case of manufacturing business it takes a lot of time in converting raw material into finished goods Therefore more working capital is required On the contrary, in case of trading business the goods are sold immediately after purchasing or sometimes the sale is affected even before the purchase itself

Therefore, very little working capital is required It is the same as size of business In very small companies, the working capital requirements are quite

overheads, higher buying and selling costs etc As such, the medium sized companies positively have an edge over the small companies But if the business starts growing after a certain limit, the working capital requirements may be adversely affected by the increasing size

Besides, operating efficiency means efficiently completing the various

business operations Operating efficiency of every organization happens to be different A company which has a better operating efficiency has to invest less in

stock and the debtors Therefore, it requires less working capital, while the case

is different in respect of companies with less operating efficiency

CHAPTER 2:

CURRENT SITUATION OF WORKING CAPITAL MANAGEMENT

AT SON HA INTERNATIONAL CORPORATION

2.1 OVERVIEW OF SON HA INTERNATIONAL CORPORATION

2.1.1 General information of Son Ha International Corporation

Vietnamese name: Tập đoàn quốc tế Sơn Hà/ Công ty cổ phần quốc tế Sơn Hà International transaction name: Son Ha International Corporation/ Son Ha Mechanical Metal Company Ltd

Abbreviated name: SHI

Address: Lot 2, CN1, Tu Liem Small and Medium Zone, Minh Khai

Certifications: ISO9001, PED EU

Yearly accounting period: From January 1st to December 31st of fiscal year

Accounting currency: VND

2.1.2 Foundation and development of the company

Officially established on 17th November 1998, Son Ha International Corporation was formerly known as Son Ha Mechanical Metal Company Ltd Over a period of unceasing effort, Son Ha has transformed itself from an inox water tank fabrication facility to a full-fledged leading stainless steel manufacturer in Vietnam Son Ha branded products have successfully confirmed

its solid position in the market, winning the heart of each and every consumer and the company itself proved to be a reliable partner of domestic and international businesses, including Stainless steel water tank; plastic water tank; Solar water heater; stainless steel basin, stainless steel pipe/tube, etc

Son Ha member companies include: Son Ha Energy Development JSC (Son Ha Dre), Son Ha SaiGon joint stock Company, Minh Tan Joint Stock Company; Hiway Vietnam Joint Stock Company, etc and over 1000 employees

Son Ha products are qualified with the quality system of ISO 9001 - 2008 and certificate of DAS-the world prestige certification organization Moreover, Son Ha stainless steel pipe is awarded with Certificate of PED – which is one of significant standards to ensure its eligibility to be launched in the especially demanding markets like Europe and America

Thanks to the international standard quality products, Son Ha products are successfully exported to 17 countries in the world such as USA, Brazil, Argentina, Mexico, Indonesia, Ecuador, Singapore, etc

2.1.3 Logo’s meaning

The logo‟s meaning: The symbol part is inspired by the S (the first letter

of Son Ha) The “S” is stylized as a solid Rubik‟s cube implying the integrity and sustainable development The round dot at the center entails essence and core value

2.1.4 Organization of management of Son Ha International Corporation

The following is the diagram of the company‟s organization which is shown at

Figure 2 Board of Son Ha International Corporation (1)

Figure 2: Board of Son Ha International Corporation

Organization structure of Son Ha International Corporation is run in complying with the business trades as regulated law Board of Son Ha International Corporation includes chairman, vice chairman, and members of board

Chairman of the board (COB): The most powerful member on the board of directors who provides leadership to the firm's officers and executives

Vice chairman: a member designated as immediately subordinate to a chairman and serving as such in the latter's absence; a person who acts for and assists a chairman

Mr Le

Van Nga

Member

Mr Vi Cong Khanh Member

Mr Phan The Rue Member

Mr Le Huy Con Member

Board

Mr Le Vinh Son Chairman

Mr Le Hoang Ha Vice Chairman

Mr Dam Quang Hung Member

2.1.5 The company main business activities

Son Ha International Corporation is a leading manufacturer and exporter

in Vietnam of stainless steel products The company provides stainless steel welded industrial pipes and ornamental tubes which can be used for industrial purposes (such as drilling rigs, oil refineries, food factories, high buildings etc)

or decorative purposes (stations, airports, interior designs) Son Ha has mills and factories (60,000m2) equipped with modern machines and technology with more than 500 workers, producing about 2000 MT of goods per month

With the strong competitiveness such as international standard quality, time delivery and reasonable prices, Son Ha products have created a firm position in both domestic and international market Son Ha stainless steel welded pipe has been exported to various countries in the world such as USA, Canada, Brazil, Russia, Turkey, and India After more than 10 years of development, Son

on-Ha has really become a leading growth company in the stainless steel industry The prestige and position of Son Ha trademarks has been asserted on the domestic market and internationally

2.2 CURRENT SITUATION OF WORKING CAPITAL MANAGEMENT AT SON HA INTERNATIONAL CORPORATION (SHI) FROM 2011 TO 2013 2.2.1 Business result at Son Ha International Corporation

Business result is one of the most effective criteria to assess the capital management efficiency of enterprises The chart 2.1 below will show us the business result of SHI form 2012 to 2014 (according to SHI Financial statement):

0 500000

Net Profit

2014 2013 2012

Chart 2.1: Business result of SHI form 2012 to 2014 (million VN dongs)

The chart 2.1 obviously illustrates the results of SHI business performance through comparing some criteria such as net sales, cost of goods sold, financial revenue, financial expenses from 2012 to 2014

According to the given information, we can see that sales of 2014 increased by 9,6% compared with 2013 and decreased by 6.97% compared with

2012 figures The sales decreased in 2013 but in 2014, it started to recover It can

be said that this increase is a positive signal Along with the increase of sales, there was a rapidly upward trend in cost of goods sold which increased by 9.13% compared with 2013 but stayed lower compared with 2012 As we can see, the increase of sales was faster than the cost of goods sold one, which means that Son Ha International Corporation managed their money very well in order to increase profit of 2014 (profit= sales – cost of goods sold)

Moreover, net profit of 2014 climbed up to 37,342 million VN dongs, that means net profit increased dramatically by 228.5% in comparison with 2013 and grew approximately by 56.6% compared with 2012 This proves that the company‟s business is running smoothly and effectively This might due to the wise management of the financial manager Whereas, total operating expenses decreased slightly by 3.13% in comparison with 2013 and it also increased by 3.02% compared with 2011 figures It can be seen that, SHI got a jump in profit

and there is a decrease in costs for business activities Although the company has

gain more profits than the last year, SHI still should consider some better management tools to reduce those expenses to save money and increase the profit

To sum up, profit moved upward taking it to the record level of 37,342 million VND, corresponding to a record rate of 228.5% in comparison with

2013 Net income of SHI in 2014 showed an upsurge because the manufacturing market is on growth momentum The company had more projects than usual that lead to a gain of revenues and profits However, company needs to take actions

to solve remaining difficulties to make more profits in the next years

2.2.2 Structure and sources of working capital at Son Ha International

Corporation (SHI)

2.2.2.1 Working capital structure at Son Ha International Corporation

Working capital plays a vital part in the company, especially to enterprises which have activities in business trading, working capital always accounts for high ratio in all business capital Therefore, understanding carefully and thoroughly the structure of working capital at Son Ha International Corporation will help us point out the strengths and weaknesses, as well as propose right

strategies for improve the efficiency of working capital management According

to SHI Financial Statements from 2012 to 2014, Chart 2.2 will show us the density of working capital from 2012 to 2014 and Chart 2.3 will give us a comparison among working capital, fixed capital and total capital

Chart 2.2: Density of working capital from 2012 to 2014

Chart 2.3: Comparing Working Capital with Fixed Capital and Total Capital (million VN dongs)

2014 2013 2012 Working capital 1,167,263 950,506 1,056,121

Fixed capital 508,258 473,282 558,129

Total capital 1,675,521 1,423,788 1,614,250

Look at the two charts above, we can see that working capital at Son Ha International Corporation raised considerably from 1,056,121 in 2012 million VND to 1,167,263 million VND in 2014 This is a good signal which proves that the company has managed and mobilized their working capital effectively Working capital occupies more and more amount of total capital In 2014, working capital played a majority in total capital of the company It grew faster than fixed capital and occupied a large amount of total capital It proved that the company was expanding the business to gain more profits as well as step-by-step

on growth momentum dominate the manufacturing market

Looking at the business capital structure, the business capital increased with high speed, the company was expanding for a larger scale to control the market Especially, in 2014, the total of capital reaches a peak at 167,552 million VND This means the company wanted to develop business activities by improving new technology, hiring qualified staff, improving the quality of the products… or tried to search for new market segments In reality, the company has a head office in Ha Noi city and one branch in Ho Chi Minh city, so the company need more machines, tools, equipments, materials, staff… Therefore, it

is necessary to raise capital for smooth running of day-to-day business activities

Besides, there was a slight difference between the proportion of working capital and fixed capital from 2012 to 2014 In 2012, the proportion of fixed capital occupied 34.6% in the total capital In 2014, it declined, only accounted

for 30.3% of total capital Moreover, working capital tended to increase steadily That means the company has been focusing on financing current assets The fixed assets of the company become more and more stable, so the resources that are used for these assets reduce steadily

In brief, through analyzing asset and capital situation of the company, we realize that the company has changed the company‟s capital structure And this

change is really reasonable However, we need to determine sources for every

kind of capital in order to assess whether it is safe or unsafe for the company

2.2.2.2 Sources of working capital at Son Ha International Corporation (SHI)

Working capital sources can be regular working capital and temporary working capital Regular working capital provides a steady base for overall business objectives and temporary one is used for facilitating the day to day business operations Son Ha International Corporation has the same working capital sources according to table 2.1 below

Table 2.1: Working Capital Sources

Criteria 31/12/2014 31/12/2013 Differences

Million VND

Proportion (%)

million VND

Proportion (%)

WC 898,560 161,949 (3.68) (Source: SHI Financial Statements in 2014 & 2013)

Look at the table above, we can see total working capital in 2014 increased dramatically by 22.8% in comparison with 2013 The capital came from 2 sources: regular working capital and temporary capital This figure proves that the company has been focusing on expanding the business activities

to gain more profits and dominate the market

From the table we can see that in 2014 regular working capital increased 3.68% compared with 2013 However, all the value of regular working capital in both 2013 and 2014 were positive It means that current assets were more than current liabilities

Temporary working capital is liabilities including short term debt, taxes to the State, payables to suppliers and payables to employees The table shows that there was a decrease in temporary working capital, which has a very important meaning to the company because the company did not need to pay expenses for using that capital The temporary working capital in 2014 went down considerably by 3.68% compared with 2013, equal to the proportion raised in regular working capital This means the company has decreased the costs to pay for short-term debts

To sum up, Son Ha International Corporation has some sources of finance for working capital including bank loans, retained earnings, long term loans These are the important capital sources to help the company run business smoothly as well as to increase the equity