Ineffective accounts receivable management at vietnam airport ground service company limited

With this solution, the company hopes to tighten the conditions to apply credit to customers, thereby reducing the working capital needed to finance accounts receivable, reduce costs to

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

Duong Xuan Phuong

INEFFECTIVE ACCOUNTS

RECEIVABLE MANAGEMENT AT VIETNAM AIRPORT GROUND SERVICE COMPANY LIMITED

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2020

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

Duong Xuan Phuong

INEFFECTIVE ACCOUNTS

RECEIVABLE MANAGEMENT AT VIETNAM AIRPORT GROUND SERVICE COMPANY LIMITED

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: DR TRAN PHUONG THAO

Ho Chi Minh City – Year 2020

TABLE OF CONTENT

LIST OF FIGURES 1

LIST OF TABLES 1

EXECUTIVE SUMMARY 2

1 PROBLEM CONTEXT 3

1.1 Company overview 3

1.2 Problem context 5

2 PROBLEM IDENTIFICATION 7

2.1 Possible problems 7

2.1.1 Poor account receivable management 10

2.1.2 Poor account payable negotiation 11

2.1.3 Overinvestment in equipment 11

2.2 Main problem validation 13

2.3 Main problem definition and its consequences 16

2.3.1 Main problem definition 16

2.3.2 Consequences 17

3 CAUSE VALIDATIONS 18

3.1 Possible causes 18

3.1.1 Poor credit policy 18

3.1.2 Weak credit assessment ability 19

3.1.3 Poor communication with customers on receivables 20

3.2 Cause validation 21

3.2.1 Real causes 21

3.2.2 Main cause 23

4 SUGGESTED SOLUTIONS 24

4.1 Alternative solutions 24

4.1.1 Credit standard issuance 24

4.1.2 Apply discount to payment of customers 26

4.1.3 Using bank guarantees to secure the debt collection process 27

4.2 Solution justification 29

4.3 Action plan for the organization 29

5 SUPPORTING INFORMATION 32

5.1 Summary of research methods in the study 32

5.3 Interview transcripts 33

References 40

APPENDIX 1 43

APPENDIX 2 44

APPENDIX 3 45

LIST OF FIGURES

Figure 1 Organization structure of VIAGS in December 2019

Figure 2 Fluctuations in DSO, DIO and DPO of VIAGS and SAGS over the years Figure 3 The initial cause-effect map

Figure 4 Fluctuations in short-term trade receivables of customer groups over the years Figure 5 The cause and effect map

LIST OF TABLES

Table 1 Categories of service provided by VIAGS

Table 2 Net revenue and net profit after tax of VIAGS

Table 3 Cash flow from operations of VIAGS

Table 4 Net working capital of VIAGS

Table 5 Net working capital of SAGS

Table 6 Cash conversion cycle of VIAGS

Table 7 Cash conversion cycle of SAGS

Table 8 Fixed assets of VIAGS

Table 9 The account receivables aging of VIAGS

Table 10 Short-term trade receivables structure by customer groups

identified as the inefficiency in receivables management The receivables of company mainly comes from credit sales However, customers' payment periods for credits tend to be

extended Going further to find out the causes of the problem, the three most prominent ones are the ineffective credit policy, weak credit assessment ability and poor communication with customer After analysis, the main cause was determined by the company's lack of effective credit policies to control credit issuance and monitor customer payments To address this cause, the best solution is to issue a strict set of credit standards With this solution, the company hopes to tighten the conditions to apply credit to customers, thereby reducing the working capital needed to finance accounts receivable, reduce costs to maintain accounts receivable, and especially reducing the risk of bad debt The global economy has many fluctuations, especially in the coming years, after the Coronavirus pandemic occurred in the early months of 2020 and showed no signs of stopping until now Airlines - customers of VIAGS - suffered heavy losses unprecedented in history Within the last 2 months, many airlines in the world have fallen into financial exhaustion and even went bankrupt And so, for VIAGS, the risk of bad debt from customers is likely to increase and be unpredictable in the near future Faced with these difficulties, tightening credit standards is expected to help the company maintain safety and stability

1 PROBLEM CONTEXT

1.1 Company overview

Vietnam Airport Ground Services Company (VIAGS) is a subsidiary of Vietnam Airlines, which was established on January 1, 2016, on the basis of merging 3 ground service

enterprises in Hanoi, Da Nang and Ho Chi Minh City including: NIAGS, DIAGS, and

TIAGS VIAGS provide synchronous and international standard ground services to nearly 70 airline customers at 04 international airports from North to South of Vietnam After more than 25 years of development of enterprises and 4 years of establishment of VIAGS, the company currently has more than 4,500 skillful staff who are professionally-trained from basic to advanced levels along with modern equipment system which is operated according to the highest safety and quality standards, meeting ISO 9001: 2015 and ISAGO standards The head office of company is located at Tan Son Nhat airport, HCM city Currently, the company has 3 branches including VIAGS Noi Bai, VIAGS Da Nang, VIAGS Tan Son Nhat, and one affiliated company, which is Aviation Ground Services Co Ltd, (AGS) with a 25% stake

The company's vision is to be the top of Vietnam in the field of airport ground services in the short-term, then become the leading ranking organization providing consistent and accordant solutions in South East Asia in 2022 and in Asia in 2027 After ten years, VIAGS will be the leading organization for providing innovative solution in the field of ground transportation services and business development

The mission of the company is to provide quality aviation services in accordance with

international standards meeting the ever-increasing needs of our clients through an effective corporate governance system and advanced resources In addition, as a comprehensive

community, VIAGS provides innovative solutions in the aviation service industry to bring a differentiated experience to organizations, customers, communities and society

The organization structure is presented as following:

Figure 1 Organization structure of VIAGS in December 2019 (Source: company

documents)

Services are offered by the company as follows:

Core services - Passenger and baggage handling services

- Ramp services

- Load control and flight operation services

- Station management services

- Cargo and mail warehouse services

- Executive aviation services

Pa rty Orga nis a tion

& Union Office

VIAGS NOI BAI

(VIAGS - NBA) BRANC H

VIAGS TAN S ON NHAT

(VIAGS - TS N) BRANC H

VIAGS has two types of services provided to customers The first type is core services, which are ground services that directly serve customer flights Core services create the main revenue source for the company The second type is additional services, which are related services and support for customer

(Income statement of VIAGS)

Table 2 Net revenue and net profit after tax of VIAGS

However, the growth rate of them has shown a negative sign as it decreases over the years In details, the revenue increased from 1,633,127 million VND in 2016 to 2,204,771 million VND in 2019 During this period, the growth rate of revenue decreased gradually from 113%

to 108% Similarly for profit after tax, although the value increased from 105,331 million VND to 159,850 million VND, the growth rate has decreased sharply from 125% to 107% Assessing the cash flow from operating activities of the company, in general, cash flow has grown in the last 3 years thanks to the growth of profit before tax However, the fluctuations

of cash flow from receivables shows the bad signs that the company needs to assess Unlike cash flow from inventory and accounts payable, inventory cash flow has continuously

decreased over the years, reflecting that customers are tying up more capital from the

company and so the company owned less cash

Decrease in trade receivables (48,074) (41,609) (29,153) 16% 43%

Decrease in trade payables (35,521) 75,136 (13,504) -147% 656%

Cash generated from operations 177,753 141,491 98,651 26% 43%

(Cash flow statement of VIAGS)

Table 3 Cash flow from operations of VIAGS

Changes in the working capital of company over the years have shown signs that need to be concerned which is illustrated at below table:

Table 4 Net working capital of VIAGS

After the first year the company was officially put into operation, the working capital

decreased rapidly The working capital of 2018 has decreased by 22% compared to that of

2019 In 2019, working capital has decreased by 46% compared to 2018 Compared to

Saigon Ground Service JSC (SAGS), VIAGS's main competitor, the working capital SAGS are larger than VIAGS and tend to increase over the years from 2016 The figures are shown

in the following table:

Table 5 Net working capital of SAGS

The negative trend of VIAGS's working capital for 3 consecutive years has indicated the bad symptoms that the company needs to be considered in managing it According to the

literature, net working capital is defined as the difference between current assets and current liabilities [1] Another definition of net working capital is part of a company's long-term capital financing current assets [1] Positive working capital exists in a situation when the current assets are higher than current liabilities Overall, the operational security of a

company is ensured by positive net working capital Management of working capital is very important because it impacts directly on profitability of a firm [1] Working capital

management is defined as financing current assets and managing current assets and current liabilities of firm [2] Working capital management is a company's short-term financial requirement In general, if working capital is insufficient, it leads to liquidity problems and then it can disrupt the production process and ultimately reduce profits [3] But on the other hand, holding excess working capital result reduces profit because idle funds that do not generate any return for the firm [3] As such, effective working capital management is the company's goal as it helps the company maintain appropriate working capital and pay off obligations promptly On the contrary, the inefficiency in working capital management will bring some undesirable consequences for the company such as liquidity risk, lack of

attraction to investors, difficulty in expanding the business and risk of financial tightening from suppliers or banks [4] In summary, company needs to maintain an optimal level of the components of its working capital to maximize its financial health To gain a deeper

understanding of the cause of symptom, a working capital analysis will be conducted

2 PROBLEM IDENTIFICATION

2.1 Possible problems

According to the working capital management definition mentioned, it involves management decisions about important components of financial management for a firm including cash, inventory, account receivables and payables According to Raheman and Nasr (2007), the cash conversion cycle (CCC) is a popular measurement of working capital management [5] CCC is defined as the time lag between purchase of raw materials to collection of cash from sale of good or service rendered [1] Cash Conversion Cycle is a useful technique by which firm can easily and quickly assess its liquidity [6] Compared to the evaluation of liquidity through liquidity ratios such as current ratio and quick ratio in the traditional way, CCC is a dynamic measure of continuous liquidity management, which comprises both balance sheet and income statement data with time dimension [6] A longer CCC will result in greater investment in working capital and vice versa [7] Thus, a positive cash conversion cycle

indicates that the time the company is borrowing is less than the waiting time for payment from customers [7] In other words, the smaller cash conversion cycle is expected because it indicates the organization has quickly recovered cash from the sale of its products The more cash in hand, the more liquidity the company has [6] In contrast, negative CCC implies the time the company receives cash from sales before they have to pay its suppliers [8] It means

a high cash conversion cycle indicates that the company takes more time to collect cash And

so a high cash conversion cycle is undesirable because it points to liquidity issues In

summary, the relationship of CCC with profitability is a significant negative correlation [9] The lower CCC is, the better for the company In other words, the goal of firm is to minimize its CCC, because the shorter the CCC indicates the more effective the company is in

managing its cash flow [6]

CCC has three components including days sales outstanding (DSO), days inventory

outstanding (DIO) and days payable outstanding (DPO) Cash Conversion Cycle is calculated

by deducting the payable deferral period from adding inventory conversion period and

receivable collection period [6] So, the formula is: CCC = DIO + DSO - DPO

The analysis results of company’s CCC and its components are shown in the following table:

Unit: days

Cash conversion cycle

Table 6 Cash conversion cycle of VIAGS

Figures show that CCC has increased significantly in the last 3 years In 2017, the average time for money conversion was 20 days, but by 2019, the time was 34 days, an increase of 70% compared to 2017 Thus, the time for the company to recover money has increased sharply year by year That shows a bad sign in the company's working capital management

To explore further, CCC components, including DIO, DSO and DPO, will be analyzed The figures shows that all three components have all changed that significantly leading to the increase of CCC In particular, based on the correlation between CCC and its components as

well as the fluctuations of these components, it can be seen that the fluctuations of DIO has a positive impact on CCC while the fluctuations of DSO and DPO have a negative impact The efficiency ratios of the company's main competitors and graphs comparing these

indicators between the two companies over the years are shown in the following:

Unit: days

Cash conversion cycle

Table 7 Cash conversion cycle of SAGS

Figure 2 Fluctuations in DSO, DIO and DPO of VIAGS and SAGS over the years

The figures and graph indicate that the fluctuations of competitors' days sales outstanding, days inventory outstanding and days payable outstanding are quite stable, most of which are lower than that of VIAGS in each year Accordingly, DIO is defined as the time taken to convert inventory held into sales [1] Cost of inventory tends to increase if inventory period (DIO) increases [10] Therefore, the purpose of inventory management is to minimize these costs without causing disruption in the production [1] The DIO of VIAGS has been steadily declining for the past 3 years, from 12 days in 2017 to 9 days in 2019 This is a good signal in

inventory management However, the proportion as well as the fluctuations of DIO for CCC

is relatively small compared to the other two components Therefore, although having a positive impact on CCC, DIO cannot compensate for the negative impact from these two indicators

2.1.1 Poor account receivable management

Receivables management is defined as the actions of sellers to balance the attraction of new customers by loosening trade credit policies and limiting the risk of allowing late payments from unreliable buyers [11] The management decisions of the seller shape the level and quality of receivables [11] The accounts receivable management must be based on three main factors including the trade credit term which is the maximum delay possible in the payment of customers; time of payment by cash discount of customers; and the cash discount rate In particular, the maximum time to delay payment for customers is also the maximum period of the account receivable cycle for the company The management of accounts

receivable directly affects firm performance When accounts receivable are kept at a level that offers an advantage over a drawbacks, the company's performance will increase

Receivables management requires a careful consideration In the event that the seller has too much money bound in accounts receivable due to an extreme free trade credit policy, it will cause a burden on the company due to higher costs of accounts receivable service It is the additional cost generated by bad debts from risky customers [11] However, the benefit it brings is increased capital inflows from cash revenue In contrast, more restrictive policies have lower costs due to smaller operating costs for managing receivables, but they carry a higher operational risk

In term of the DSO, which is defined as the average number of days from the moment that firm issues the sales invoice until receiving of the payment [9] Dhar, Saptarshi (2018) stated that increase in DSO generally reflects poor collection efforts [1] In other words, a negative association between the account receivables and profitability of the firm indicates that a higher level of accounts receivables lead to an increase of the cash gap, and then reduce the working capital [15] Therefore, it’s favorable for the companies to minimize the level of the receivables collection period to maximize the shareholder’s wealth [15] The days sales outstanding in 2017 was 51 days, this number has increased sharply to 71 days in 2019 Within 3 years, the average time to collect payment from customers after sales of the

company has increased to 39% Thus, the company's fluctuations in DSO have shown

inefficiencies in account receivable management

2.1.2 Poor account payable negotiation

Payable accounts represent a company's obligation to pay a short-term debt to its creditors or suppliers [12] Thus, the account payable is a payment of short-term debt that the company needs to pay to avoid default In fact, accounts payable is often seen as a secondary action when businesses seek to develop or build a competitive advantage That is, it is not a central issue, but instead, it is only ranked behind in management's competing priorities of the

company [13] However, when optimizing working capital, increasing payables should be considered as a core strategy [13] Many businesses tend to extend the maturity of their accounts as long as possible because this has the obvious benefit for businesses that

maximize the free cash flow However, this approach is not always effective The reason for this is that delaying payments may reduce supplier goodwill, leading to supplier troubles such

as tight payment terms, longer delivery times and the longer respond to the requirements [13] On the contrary, early payment can bring significant benefits such as a discount applied

by the supplier for early payment

The third component of CCC is DPO, which is defined as the time lag between arrival of stock to the company and payment of cash to suppliers for the materials [1] A higher value

of DPO implies that the company takes longer to pay its bills, so it can retain the available funds for a longer duration, meaning the company can hold more working capital [16]

However, if payment period is too high, it may cause suppliers dissatisfaction, leading to loss

of good suppliers In addition, the company may lose trade incentives applied when the company pays early Therefore, the management of reasonable payment times is the goal of companies to balance between fulfilling payment responsibilities to suppliers and optimizing working capital In the case of VIAGS, DPO has gradually decreased over the years: 34 days

in 2017 and 24 days in 2019 Within 3 years, the average time to take payment to suppliers has decreased by 29% One of the main reasons for this decline is that in 2019, the company terminated a high-value contract with the supplier The value of the contract accounts for about 11% of the total short-term trade accounts payable The decline of the short-term trade accounts payable has led to a decline in DPO

2.1.3 Overinvestment in equipment

An organization that wants to make a profit needs investment Investment is presented

through the purchase of an asset or an item for the purpose of generating income Investing is not about trading goods or services today, but about making a profit in the future Thus,

investment is defined as spending money to buy an asset or to work to start a project, and put them into operation with the goal of generating income and increasing value over time [14].

Forms of investment include assets, credit, real estate and financial markets The investment

is aimed at future income, so it also carries risks Specifically, the risk comes from the

investment not pan out or falls short

With more than 25 years of existence and development, along with long-term vision and goals, after being incorporated and officially put into operation in 2016 the company has focused on investing in equipment that directly serves its business to increase productivity and competitiveness In 2019, the company's net working capital was negative, indicating that the company used working capital to invest in long-term assets In particular, equipment procurement accounted for the largest proportion Within 3 years, the value of equipment has increased by 149% The residual value of the equipment at the end of the years from 2016 to

2019 is shown in the table below:

Unit: million VND

Table 8 Fixed assets of VIAGS

From the above analysis, it can be seen that there are three possible problems leading to a decline in working capital that the company is facing They are ineffective management of account receivables, non-optimization of paying suppliers, and unsuitable investment in equipment

Figure 3 The initial cause-effect map 2.2 Main problem validation

Overinvestment in equipment

At VIAGS, strong investment in equipment over the past 3 years has adversely affected the

company's working capital To find out the reason for this investment, an in-depth interview

with the Mr Hung – the General Manager of Planning and Investment department - was

conducted He said the establishment of the company has restructured the operation model of

the three enterprises before Thereby also changing the relationship between the parent

company - Vietnam Airlines and VIAGS Including the provision of equipment for business

operation Specifically, in the past, the parent company was in charge of procurement and

then handed over the equipment to factories for use Therefore, this cost belongs to the parent

company After VIAGS was established, the parent company did not purchase equipment for

VIAGS anymore, instead the company had to make the purchase by itself That explains the

significant investment in equipment in recent years In order to ensure service provision,

long-term development and increase competitiveness, this investment is considered

mandatory and prerequisite Therefore, overinvestment is not considered as one of the

problems causing the decrease in working capital

Poor accounts receivable management

Decreasing in working capital

Bad debts Ability to assess

Difficulty in expanding business

The risk of financial tightening from suppliers / banks

Poor account payable negotiation Ending a big

Poor account payable negotiation

As mentioned, the company's days payable outstanding decreased over the years In 2018 compared to 2017, the average payment time for suppliers decreased by 8% In 2019, the decrease was 23% compared to 2018 The main reasons for this decline is that in 2019, the company terminated a high-value contract with the supplier The value of the contract

accounts for about 11% of the total short-term trade accounts payable The decline of the short-term trade accounts payable has led to a decline in payable accounts, and thereby

reducing the days payable outstanding In addition, the fluctuation of days payable

outstanding within 24 - 34 days is consistent with the payment time agreed in all contracts with suppliers, usually from 20-30 days The decrease in days payable outstanding also shows the efforts of company in fulfilling payment obligations to suppliers Therefore, the decline of days payable outstanding, although affecting cash conversion cycle, is not

considered as a problem of the company

Poor accounts receivable management

Currently, in the company's customer structure, there are two main customer groups The first group consists of the parent company – Vietnam Airlines and the companies that are

subsidiaries or afiliates of VNA The second group is the foreign airlines that VIAGS is providing ground services for

Assessing the age of account receivables of each group at December 31, 2019, the figures are shown in the table below:

Unit: million VND

1 to 30 days 31 to 60 days 61 to 90 days 90 days to

6 months

Over 6 months Total

Table 9 The account receivables aging of VIAGS

The figures indicated that the company is having difficulty in controlling the time to collect money from account receivables of both customer groups The age of accounts receivables of the two groups is most concentrated at 31 to 60 days level: 57% of group 1 and 60% of group

2 The second largest age group is 1 to 30 days level In this, group 1 has 40% accounts and group 2 has 33% Age from 61 to 90 days has 2% of group 1 and 6% of group 2 In addition, while group 1 has no account receivables from 90 days to 6 months level, group 2 has 2% at this In summary, receivables from customers in group 2 are older than group 1

The accounts receivable structure of the two groups of customers over the year is shown in the following table:

Table 10 Short-term trade receivables structure by customer groups

Figure 4 Fluctuations in short-term trade receivables of customer groups over the years

Figures and graphs show that the proportion of group 2's account receivables to total term trade receivables has increased over the year (26%, 29%, 35%) In contrast, the

short-proportion of group 2 has decreased (74%, 71%, 65%) Thus, along with the increase in short-term trade receivables, it can be seen that the account receivables of group 2 had a higher growth rate than group 1 so it has increased faster than group 1 Moreover, the

increased value after 3 years of group 2 is also greater than that of group 1 (61,471 vs 52,297 million VND)

In summary, the company is having difficulty in managing and controlling the amount of accounts receivable and the time to recover money from customers, especially the customer group is foreign airlines This is the main problem that causes inefficiencies in working capital management

2.3 Main problem definition and its consequences

2.3.1 Main problem definition

Accounts receivable is the amount owed to a company as selling its goods or services to customers on credit [17] Typically companies sell goods and services to customers in both cash and credit In particular, cash is always preferred because when paying cash means customers have fulfilled their obligations to the company In contrast, when selling with trade credit, the company will not receive money from the customer immediately unless and until the account is collected However, competitive pressure forces the companies to provide credit to attract customers In other words, although handling receivables need to cost more, it also brings an important benefit that is increasing sales [17] The application of trade credit requires the establishment of receivables Receivables represent credit sales that the company has not yet collected from customers Only when customers complete these payments, the company can settle this account, if customers do not pay, a bad debt will occur

Thus, when a receivables is created, there will be both good and bad points The good point is the company has more sales and customers The bad point is that the company cannot collect the money immediately and there is a risk that it cannot be collected That requires the

company to have a system to manage the accounts receivable The objective of receivables management is to maximize the company's profitability by achieving a balance between liquidity and risk [18] Cash flow is very important for the company because it is the engine that drives the business to operate and grow, but overdue accounts can act as the brakes that stop the engine [18] Therefore, it requires accounts receivable should be managed efficiently

so that the business of the company would not be constrained Effective receivables

management and the ability to collect credits are a prerequisite for a company to sell on credit without compromising its liquidity

As such, a poor management of accounts receivable is the activity in the process of handling receivables of the company which leads to liquidity risks including neglect of overdue

account, sharply increasing the cost of bad debts and the cost of recovering debts

2.3.2 Consequences

Inablility to pay short-term obligations

Cash is considered as the “life blood” of any company [19] Therefore, all revenues from receivables need to be managed and collected Ineffective management of receivables often leads to disruption of daily operations of the company The consequence of this is the

inability to pay suppliers of goods and services, inability to pay employees and the inability

to meet statutory obligations The overall effect is the inability to provide materials and services resulting in disruptions in production, demotivating staff and penalties from the authorities [19]

Poor firm performance

Poor management of receivables has a significant negative impact on profitability in both indirect and direct directions Firstly, bad debts that have to be written off will reduce the company's profits directly in the profit and loss account [19] Secondly, if there are many funds which are tied up in accounts receivables, the company may be forced to borrow

money for financial operations [19] Interest on these loans will also reduce the company's profits Interest on these loans will also reduce the company's profits In addition, debt

Lower credit rating from by financial institutions

When the company manages its accounts receivable inefficiently, it can be subject to poor credit ratings by financial institutions [19] As a result, this will make it harder to obtain loans from institutions In case the company can still borrow, it may be subject to a high interest rates because it does not have good conditions to negotiate In the most extreme situation, when the company is unable to improve the management of its accounts receivable, it can lead to a complete collapse in production or the company is insolvent and no longer has be able to meet the financial obligations [20] At that time the company will be placed under receivership of financial institutions and eventually it may be wound up

3 CAUSE VALIDATIONS

3.1 Possible causes

3.1.1 Poor credit policy

Receivables management begins with establishing a credit and collections policy [17] Credit policy is considered as a key determinant of the account receivables and sales of every

company, therefore, the company needs to pay special attention to it [21] Kontuš (2013) mentioned that the credit and collection policy is one of the most important factors for the investment in the account receivable of the company, besides the industry and the level of total sales [19] The credit policy is defined as the actions taken by the firm to issue, monitor and collect cash for outstanding account receivables There are three reasons explaining the importance of credit policy to a company: its effect on sales, its impact on the amount of funds tied up in account receivables and its impact on bad debt losses [21] Specifically, this policy enables positive cash flow as well as keeps the receivables coming in [21] It also significantly reduces the amount of bad debt that a company will have to write off each year [21] In addition, it makes the relationship between customers and the company better

because they will be more likely to pay the debt when contacted by creditors in a

non-intrusive way than in an unorganized way A good credit policy allows the company to

operate more broadly because it generates revenues that were not possible before the credit was made [21] Credit policies are not set up to be restrictive but to create efficiency in credit management More specifically, it helps the company reduce risks, formalize procedures for

determining acceptable risk and deals with credit problems Due to the importance of credit policy, it is often set by the the firm’s executive committee When the policy has been

established, it must be implemented and monitored by the credit manager by collecting, analyzing, and storing information of customers

There are four variables that constitute credit policy including credit standards, credit terms, discounts, and debt collection policies [21] Meanwhile, Adusei (2017) mentioned that there are four main factors that constitute a credit policy including credit standards, credit terms, credit limits, and debt collection processes [18] Although there is a slight difference in the use of credit limit and discounts, the remaining contents of the two theories are similar The first variable, the credit term or credit period, stipulating how long from the invoice the customer has to pay for their purchases [18] Customers prefer longer credit periods [22] Therefore, the advantage of a long credit period is to boost sales However, the disadvantage

is that it extends the cash conversion cycle; from there, it makes more expensive to ties up capital in the receivables [23] In addition, the longer the receivables, the more likely the customer will default and increase the possibility of bad debt [24] The second variable is the discount, which is the incentive that credit customers receive when paying early [21]

Discounts boot sales, encouraging customers to pay earlier than other ways, this shortens the cash conversion cycle, however, discounts reduce revenues [21] The third variable is credit limit, which is the amount accumulated from credit purchase transactions that customers have reached [18] The forth variable is credit standards, which are the tools that firms use to determine whether each credit applicant exceeds the standard of credit and therefore are eligible to receive credit from the seller Lower credit standards boost sales, but also increase bad debts [18] The last variable is debt collection policy, which is measured by the firm's

toughness or laxity when collecting late payments from customers [18]

3.1.2 Weak credit assessment ability

When selling in credit, the seller acts as a creditor while the customer is a debtor Credit assessment and approval is the process by which the creditor evaluates a credit request for goods and services for a long period of time by the debtor [25] Credit extension depends on the confidence of the creditor in the credit worthiness of the debtor Credit worthiness is one

of the key factors that creditor determine credit policy It assesses a debtor's ability and willingness to pay Creditor must use a variety of financial instruments to assess the credit worthiness of a potential debtor Obviously, creditors always expect debtors to generate net

income in excess of debt obligations and any contingencies that may arise [26] Weakness in the ability to assess and control credits carries a lot of risks of bad debt to the creditor

3.1.3 Poor communication with customers on receivables

Communication is the key activity for company to operate smoothly The firm needs to communicate well with its partners, suppliers, employees and especially its customers The company needs to communicate well with customers not only in the process of attracting them, but in all the time that two parties cooperate This is because it not only helps the company to improve and promote relationships with customers, but also helps the company

to know the status of their customers' activities, even the bad signs that do not appear

Therefore, communication is one of the major factors affecting credit management and control Lack of level of communication with customers about their debt and company’s expectations of payment reduces the control over receivables as well as the customer's

motivation for payment

Similar to the organization of customer debt management among departments, the

communication with customers of VIAGS is facing some organizational problems The branches are directly in charge of keeping relationships with customers Branchs are directly responsible for keeping the communication with customers instead of the centralized

management by company Therefore, this leads to inefficiencies in communication with customers, thereby indirectly affecting the monitoring and control of customer debts

The cause and effect map:

Figure 5 The cause and effect map

Ineffective accounts receivable management

Profit ‘s decline

Interruption of term payment obligations