LV Thạc sỹ_Account receivable management in Viglacera packings and brake JSC

Structure: My thesis includes three main chapters, as follows: Chapter 1: Theoretical framework of account receivable management Chapter 2: The current situation of account receivable ma

ADVANCED EDUCATIONAL PROGRAM

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BACHELOR’S THESIS IN FINANCE

Account Receivable Management

in Viglacera Packings and Brake Linings Joint Stock Company

My thesis is completed with support of Dr…., Mr…, all employees in ViglaceraP&B Co, my friends in Advanced Finance Intake 50 and my family.

First of all, I would like to give special thanks and deepest gratitude to mysupervisor, Dr …, for her advices and instructions They are very helpful for me inbuilding the frame of my report And her comments help me completed this report inthe best way

I also want to thank Mr … – chief accountant in the company I internshiped

He is very enthusiasm for providing me all data and information I needed His guidesabout professional knowledge are really supportive for me

My gratitude is also sent to all officers in Finance-Accounting Department fortheir guides Thanks to them, I get lots of useful working experiences through thisinternship period And it is my honor to work with them

I highly appreciate all opportunities that I have been provide to practice andlearn about real business operations, as well as apply what I got from university tosolve real problems

I want to thank all my classmates in Advanced Finance Intake 50 for their greatadvices and creative ideas

Finally, I offer my regards to my family for the support and encouragements

TABLE OF CONTENTS ii

ABSTRACT v

ABBREVIATION vi

LIST OF TABLES vii

LIST OF FIGURES viii

INTRODUCTION 1

CHAPTER 1 THEORETICAL FRAMEWORK OF ACCOUNT RECEIVABLE MANAGEMENT 5

1.1 Account receivable: 5

1.1.1 Definition: 5

1.1.2 Content of account receivables: 6

1.1.3 Roles of account receivables for an enterprise: 7

1.2 Account receivables management: 10

1.2.1 Definition: 10

1.2.2 Roles of account receivables management: 11

1.2.3 Account receivables management processing: 11

1.2.3.1 Trade credit policy: 12

1.2.3.2 Analysis of customers’ prestige (6 C’s of credit): 16

1.2.3.3 Analysis of the proposed credit amount: 19

1.2.3.4 Monitoring account receivable: 19

1.2.3.4.1 Days sales outstanding (DSO): 20

1.2.3.4.2 Aging schedules: 21

1.2.3.4.3 Credit ratings: 22

CHAPTER 2 THE CURRENT SIATUATION OF ACCOUNT RECEIVABLE MANAGEMENT IN VIGLACERA P&B CO 24

2.1 Overview of Viglacera Packings and Brake Lining Joint Stock Company: 24

2.1.1 The process of establishment and development of Viglacera P&B Co: 24

2.1.1.2 The history of establishment and development: 24

2.1.2 Major business activities: 26

2.1.3 Organizational structure: 29

2.1.4 The market situation and competitors: 30

2.1.5 Business results in three recent years: 31

2.2 The current situation of account receivable management in Viglacera P&B Co: 34 2.2.1 Account receivables in Viglacera P&B Co: 34

2.2.2 Account receivable management in Viglacera P&B Co: 37

2.2.2.1 The current trade credit policy of Viglacera P&B Co: 37

2.2.2.2 Monitoring account receivables: 39

2.2.2.2.1 Days sales outstanding: 39

2.2.2.2.2 Aging schedule: 40

2.3 Achievements and shortcomings of account receivable management in Viglacera P&B Co: 41

2.3.1 Achievements: 41

2.3.2 Shortcomings: 42

2.3.3.Reasons for shortcomings in Viglacera P&B Co’s account receivable management:.43 2.3.3.1 Subjective reasons: 43

2.3.3.1.1 The company’s selling policy: 43

2.3.3.1.2 Human resource: 44

2.3.3.1.3 Technology: 44

2.3.3.1.4 Credit policy: 44

2.3.3.1.4.5 Monitoring account receivable: 49

2.3.3.2 Objective reasons: 45

2.3.3.2.1 Business environment: 45

2.3.3.2.2 Dishonesty of customers: 46

CHAPTER 3 SOLUTION TO IMPROVE ACCOUNT RECEIVABLES MANAGEMENT IN VIGLACER P&B CO 47

3.1 Development orientation of Viglacera P&B Co in following years: 47

3.1.2 Financial objectives: 47

3.1.3 Account receivable management objectives: 47

3.2 Solutions to improve account receivable management in Viglacera P&B Co : 47

3.2.1 Human resources: 47

3.2.2 Technology: 48

3.2.3 Credit policy: 49

3.2.4 Monitoring account receivable: 56

3.2.4 Other solutions: 51

CONCLUSION 52 REFERENCES

APPENDIX A Income Statement

APPENDIX B Balance Sheet

INTERNSHIP REPORT ASSESSMENT

As a student of National Economics University and especially as a year student, I want to practice all my knowledge about economy, market, finance,etc that I learned from my lecturer and by myself And in the internship period, Ihave opportunity to practice in Viglacera Packings and Brake Linings Joint StockCompany (Viglacera P&B Co) – a small and medium company to carry out myknowledge to reality.

final-In a more and more complicated business environment as nowadays, a goodmanagement will help the company be more successful than its competitors Afterresearching Viglacera P&B Co’s business performance in recent years and receivingconsultants from many people, I decide to choose the topic about account receivablemanagement Through my thesis, we will know achievements and shortcomings inViglacera P&B Co’s account receivable management And in conclusion, I give myown solutions and recommendation to help Viglacera P&B Co solve its problem inaccount receivable management

This thesis might get into inevitable issues and lead to further questions due tolimited knowledge, therefore I would be grateful to receive any constructive comments

to help my thesis better and have more practical value

CFO: Chief Financial Officer DSO: days sales outstandingACP: average collection periodADS: average daily sales

Table 1: Example of aging schedule 21

Table 2: Viglacera P&B Co’s quantity and price of goods sold from 2009-2011 32

Table 3: Key financial indicators of Viglacera P&B Co 33

Table 4: Structure of account receivables in Viglacera P&B Co 35

Table 5: Structure of account receivables from customers 36

Table 6: Viglacera P&B Co’s days sales outstanding 39

Table 7: Viglacera P&B Co’s aging schedule 40

Figure 1: Principle of account receivable management processing 11

Figure 2: The process of analyzing the customers’ prestige 16

Figure 3: Organizational and managerial structure 29

Figure 4: Sales and profit growth 31

Figure 5: Value of account receivables compared to total assets 34

1 Rationale:

Vietnam is integrating more and more deeply into world economy This isexpressed through the active participation of Vietnam in economic forums in theworld Vietnam has commercial relations with more than 165 nations and diplomaticrelations with over 171 countries in all continents It is also the place where havehosted many conferences of organizations like ASEAN, APEC, ASEM, etc Andbecoming the 150th member of WTO in 2007 is a major turning-point for Vietnam.This opened many development opportunities for home enterprises such as expandingthe market, accessing to modern technology and investment capital sources fromforeign countries However, it also brings difficulties like increasing competitionpressure for Vietnamese enterprises because of entering of many foreign brand names;increasing risk of bankruptcy for weak companies, etc In general, as integrating,Vietnamese economy will be more influenced by fluctuations of the world economy

In the last months of 2008, we witnessed what is being called the worstfinancial crisis since the Great Depression of 1929-30 In 2009 and 2010, the worldeconomy still suffered repercussions of that crisis; just some economies had sign of

recovery And in 2011, again, the world experienced another economic crisis We can

see its influences clearly on Vietnamese enterprises though media channels andnewspapers There are so many enterprises having difficulties, stopping production oreven going bankrupt Hard economic conditions like high interest rate, inflation,increases in the price of raw materials, petrol, gas, etc make business environmentmore arduous As one of results, debts between enterprises and banks or betweenenterprises are growing Sometimes customers – are individuals or most are otherenterprises - buy products on credit Especially with the current situation, because oflacking capital, customers mainly buy on credit Then, this transaction creates debtsamong enterprises and those debts are recorded as account receivable in asset side ofbalance sheet of the enterprise that is seller Managing debts means managing accountreceivables With huge amount, account receivables have large effect on business

results In many cases, damages due to increasing arrears by customers can lead tobankruptcy However, if managing well, account receivables can become competitiveadvantages for enterprise to attract customers So, account receivable management isreally important for an enterprise.

Through the internship period in Viglacera Packings and Brake Linings JointStocks Company, I realized some problems in account receivable management Withthe practical significance is finding solutions to improve account receivable

management, I decide to choose the topic: “Account receivable management in Viglacera Packings and Brake Linings Joint Stock Company” for my thesis.

2 Research objectives:

2.1 Systematize the basic theories of receivable management:

Based on knowledge I learned in university about receivable management, officialtextbooks published by NEU and other reliable information from different sources, I willclarify some basic theoretical issues of receivable management in enterprises in general.Every theory has accurate basis and is associated with my research

2.2 Analyze the current situation of receivable management in Viglacera P&B Company:

Based on information collected, I have overview of receivable management inViglacera P&B Co Then I analyze and evaluate to find out strengthens, weaknesses,successes or limitations on receivable management of company

2.3 Propose recommendations to enhance efficiency of receivable management in Viglacera P&B Co:

Based on reasons for inefficiency of receivable management that I summarized,also based on current business situation as well as the changes in the future, I forecastfluctuations can happen to receivable management of company and give solutions andrecommendations to improve efficiency of this mission

3 Research questions:

To fit with my research objectives, through my paper, we will find the answersfor the following questions:

1 What is the theoretical framework of receivable management in an enterprise?

2 What is the current situation of receivable management in Viglacera P&B Co?

3 How to improve efficiency of receivable management in Viglacera P&B Co?

 Face-to-face interviews: I’ve had opportunities to interview Director – KieuBach, Accounting – Finance manager – Truong Do Tan, as well as other

employees in Accounting - Finance department and Sales department Throughthis kind of collecting data, I clarify my doubts and understand more about thereality and problem in receivable management of company.

5.2 Method of analyzing data:

5.2.1 Quantitative analysis:

For numerical data, I use them to calculate ratios and indicators Then, in order

to assess more accurate and to see the trend or fluctuations, I show these data undertable or graph Average industrial and economic levels are also applied to comparewith the current situation of the company

5.2.2 Qualitative analysis:

Data related to management, marketing or product’s quality, etc cannot beassessed quantitatively, therefore they are analyzed qualitatively

6 Structure:

My thesis includes three main chapters, as follows:

Chapter 1: Theoretical framework of account receivable management Chapter 2: The current situation of account receivable management in

Viglacera P&B Co Chapter 3: Solutions to improve efficiency of account receivable

management in Viglacera P&B Co

CHAPTER 1 THEORETICAL FRAMEWORK OF

ACCOUNT RECEIVABLE MANAGEMENT 1.1 Account receivable:

When evaluating the financial situation of an enterprise, investors, bankers, orbusiness partners look at not only business results but also its debts It must emphasizethat any enterprise or any economic organization always have amounts of money need

to be collected from debtors, or in accounting term, those amounts are called accountreceivables Account receivables never separate from business and production process

of an enterprises; it reflects the enterprise’s financial situation And in the followingsections, we will study the concept and roles of account receivables for an enterprise

1.1.1 Definition:

Account receivable is defined as an asset of the enterprise It is calculated based

on all debts that the enterprise can’t collect whether it matures or not, and based onunpaid transactions or any monetary obligation that other firms or individuals haven’tpay for the enterprise yet

Account receivables are recorded in asset side of balance sheet by accountantsbecause they reflect the sum will be paid in the future The long-term receivables thatmature only after a relatively long period of time are long-term assets And other short-term receivables are treated as part of the current assets of the company In accounting,

if the debts are paid within a period of less than one year (or in a business cycle), theywill be classified as current assets, but if more than one year or over a business cycle,they are considered as long-term assets

In reality, receivables is divided more detail in balance sheet into trade and trade receivables Trade receivables arise from providing goods or services forcustomers in the normal business cycle Trade receivables may be account receivables(short-term) or notes receivables (long-term) Non-trade receivables arise from othertransactions rather than providing goods or services and from promissory notes of

non-buyers For example, advance amounts for employees, refunding amounts like taxrebate, insurance indemnity, deposits and financial receivables like interest, dividends,etc However, in this paper, for simplicity, we use only “account receivable” term.

Account receivables often include the following items:

 Receivables from customers

 Advanced payments to suppliers

 Intercompany receivables

 Advances to employees

 Mortgages, collateral, and deposits

 Other receivables

1.1.2 Content of account receivables:

1.1.2.1 Receivables from customers:

Receivables from customers (also known as trade-account receivables) are thedebts owed to the enterprise by customers during the sales of goods and services in thenormal course of business When a firm makes an ordinary sale of goods or servicesand does not receive payment, the firm grants trade credits and creates accountsreceivable which could be collected in future And in this case, we say the firm sells oncredit to customers Customers can rely on funding through the form of deferred-payment sales of enterprises to have goods, raw materials for production This form ofdeferred-payment sales is an important short-term funding for almost all enterprises,especially for commercial companies

In developing economy, buyers often purchase goods or services that they canpay immediately for cash or defer payments for a specific period of time with seller’spermission And seller of goods or services can collect cash immediately or must wait

a while Sellers often extend credit than financial institutions - that is a form of credit

to customers An account receivable is created when the enterprise grant credits to itscustomers

In condition of market economy, appropriating each other’s capital in businessand production activities of enterprises is a commercial feature Even it is considered

as an effective business ‘tactic’ of enterprises operating in the market but not having

enough capital Thus, account receivables management become particularly importantfor enterprises that are appropriated capital at a high rate compared to venture capital.

1.1.2.2 Advanced payments to suppliers:

Advanced payments to suppliers are the amounts that enterprise must collectfrom sellers, suppliers because enterprise paid in advance for sellers to purchase rawmaterials, finished goods or services but haven’t received yet

1.1.2.3 Intercompany receivables:

Intercompany receivables arise between companies with independentaccounting system and its subsidiary companies with separate accounting system orbetween subsidiary companies

1.1.2.4 Advances to employees:

Advances to employees are amounts of money or materials delivered toofficials or employees by company in order to perform the assigned tasks or to dosome jobs such as buying goods, paying costs, etc

1.1.2.5 Mortgages, collateral, and deposits:

Mortgages often occur in relation to loans With a mortgage loan, the borrowermust deliver his asset to lender in lending period

Collateral is the amount of money that enterprise pays for owner when it rentmachines, equipments in order to bind and increase responsibility of renter in usingand returning leased property in time Collateral amount is stipulated by owner andmay be higher than the value of leased asset

Deposit is the amount of money or property paid in advance as security inrelations to trade, become sales agency, etc

1.1.3 Roles of account receivables for an enterprise:

The more economy develops, the more diversified and complicate creditrelations are We can say debt is unavoidable factor in business Most enterprises whenconducting business activities have account receivables They necessarily exist in an

enterprise However, each enterprise has different value of receivables, from negligible

to uncontrollable level

Account receivables can come from customers It represents the amount thatcustomers owed enterprise in the process of selling goods or services under form ofpresold-postpaid This amount is essentially the capital appropriated by customers ofenterprise In other cases, as purchasing materials, the enterprise must prepay tosuppliers and receive materials later This transaction creates advances that are alsorecorded as account receivables from suppliers Besides, there are advances toemployees and other account receivables In short, when an account receivable arises,the enterprise paid cash for what will be received in the future If this situation happens

in long-time, with large amount and high risk of un-recovery, it may be bad forenterprise And in this case, the enterprise will want to limit the size of receivables

However, existence of account receivables also brings many benefits.Especially in strict condition of trading in the market as nowadays, lending customersand creating trade credit are good methods to broaden markets, increase competitionability with rivals, and seek for new potential customers

In the following parts, we will discuss in details the roles of account receivablesfor the enterprise that is seller in a sales transaction

1.1.3.1 The benefits of increasing account receivables:

To be able to stand firm and be competitive in the market, all enterprises musttake full advantages of their capabilities, resources as well as tools they are having Inthose things, credit policy is a ‘sharp weapon’ to help enterprise achieve sales goals.Because when company loosens its credit conditions, it will have more customers,more goods or services were sold Trade credit can make company more prestigious,create reputation in the market and make customers purchase the company’s productsmore frequently On the other hand, when loosening credit policy, the company canclear away inventories, and costs related to inventory Basically, trade credit is trustbetween the party granting credits and the party receiving credits Customers canobtain a credit amount with more simple procedures Because these are procedures to

grant credits, not procedures to lend, so loosening credit policy will stimulate thepurchasing demand of customers and expand business scale of company Besides, italso helps customer have more strong attachment to company, help to maintainrelationship with traditional customers and seek new customers.

In brief, the benefits of increasing account receivables are:

 Increase sales

 Reach sales potentials

 Increase competitive position

 Increase market share and expand the market

 Attract more customers

 Be a advertizing tool to promote consumption for manufactures

1.1.3.2 The disadvantages of increasing account receivables:

Besides the above benefits, increasing account receivables means looseningcredit policy, it leads to increase investment capital, and the enterprise will loseopportunities to earn profits from other activities On the other hand, as looseningcredit condition, it increases ability of loss and default risk Moreover, the companymust suffer more debt administrative costs as well as transaction costs, notificationcost, etc

In brief, the disadvantages of increasing account receivables are:

 Increase investment capital, leading to increase cost of capital

 Cause more damages for enterprise when it can’t collect debts or bad debtsincrease

 Increase costs of maintaining debtors, they are:

- Capital cost: It is the cost on the use of additional capital to support

credit sales which alternatively could have been employed elsewhere

- Collection costs: Administrative costs incurred in collecting theaccounts receivable Costs of additional steps to increase the chances foreventful payment

- Delinquency cost: Cost of financing the debtors for extended period, andcost of additional steps to collect over-due debtors

- Default costs: Amounts which are to be written off as bad debts, which cannot be collected in spite of serious efforts

1.2 Account receivables management:

1.2.1 Definition:

Along with cash management and inventory management, account receivablesmanagement is related to decisions about working capital management of ChiefFinancial Officer (CFO) And decision on receivables management is basically based

on examining the trade-off between costs relevant to account receivables andincreasing revenue as selling products on credit

Account receivables management requires answers for the following five set ofquestions:

 For what conditions does enterprise sell its goods or services? How long doesthe enterprise allow customers to pay their bills? Does the enterprise discountfor customers who pay quickly?

 Which guarantee of the amount owed by customers does the enterprise need?

Do the customers have to sign a receipt or other official kind of debenture?

 Classify customers: which type of customer can repay the loan instantly? Tofind out, does the enterprise study past records or financial statements ofcustomers? Or does the enterprise rely on bank’s certification?

 What credit limit does the enterprise give for each customer in order to avoidrisks? Does the enterprise refuse to grant credit for suspected customers? Or itwill accept risks of having bad debts and this is considered as cost of creating agroup of large and regular customers?

 Which methods does the enterprise apply to collect mature debts? How does itmonitor the payment? What does it do to customers who cannot pay their debts?

Or it will give up those customers

1.2.2 Roles of account receivables management:

 Account receivables often hold a significant proportion of total assets in theenterprise Thus, if managing account receivables is good, capital turnover will

be high and then it motivates development of business activities

 If system of monitoring account receivables is professional, opportune, quick,and provides adequately information, it will help enterprises limit risks ofirrecoverable debts at the smallest level, and lower cost of collecting debts.

1.2.3 Account receivables management processing:

Figure 1: Principle of account receivable management processing

In financial relationship among enterprises, the enterprise that plays role ofseller often has to sell on credit in specific period of time and the enterprise that isbuyer often tries to extend period of payment Each enterprise has items of buying andselling on credit and then account receivables are created Most of enterprises have thisaccount but at different levels, from negligible to uncontrollable level Receivablesmanagement is related to the trade-off between profits and risks If the enterprisedoesn’t sell its goods or services on credit to customers, it can lose sales opportunities,hence lose profits On the contrary, if the enterprise sells on credit too much, accountreceivables and costs relevant to them (such as administrative costs, costs of collectingdebts, etc.) will increase greatly, it leads to reduce profit Risk of arising bad debts or

Sell on credit

Increase revenue

Increase profit

Increase account receivables

Increase costs related to account receivables

Opportunity cost of increasing account receivables

Compare between profits and incremental costs

Decide appropriate credit policy

unrecoverable debts is higher And the enterprise will lack capital in the form of cash,its solvency decreases, and then financial capacity decreases too.

Opportunity cost of increasing in account receivables is the loss of capital that

is appropriated by customers or other partners of the enterprise This capital will createbigger opportunity for profitability if the enterprise can have the amount thatcustomers owed Allowing customers purchase on credit increases sales but losesopportunity for another profit

To decide if the enterprise should increase amount of credit sales, CFO need toexamine whether incremental profit is greater than costs related to account receivablesand opportunity costs, or in other words, whether saving costs are sufficient to offsetdecreasing profits or not And then the enterprise will establish an appropriate creditpolicy for customers

1.2.3.1 Trade credit policy:

The success or failure of a business depends primarily on the demand for itsproducts – as a rule, the higher its sales, the larger its profits and the higher its stockprice Sales, in turn, depend on number of factors, some exogenous but others underthe enterprise’s control The major controllable determinants of demand are salesprices, product quality, advertising, and the firm’s credit policy

Trade credit policy has large effects on magnitude as well as effectiveness ofaccount receivables on the basis of considering risks and profitability It is under theadministrative control of the CFO Trade credit can make the enterprise stand firm inthe market and become wealthier, but also bring risks for business activities of theenterprise CFO is able to change credit standards and limits to monitor accountreceivables so that suitable with the trade-off between profits and risks Loweringcredit standards and limits can motivate demand of purchasing, and then leads toincrease sales and profits, but it also creates account receivables And because thereare always costs relevant to account receivables, CFO should investigate carefully thischange Moreover, when applying long-term sales credit policy, debts need to becollected will be higher than in the period of applying short-term sales credit policy

Since credit policy has close relation with the quantity of goods sold and is considered

as a method to promote sales, so sales and marketing executives are concerned withthis policy as well as CFO And when examining the amount of account receivablesarising, CFO also needs to care about the quantity of goods sold to assess exactly Inconclusion, setting up an appropriate credit policy for each customer is very necessarybecause it helps manage account receivables from customers more efficiently andbesides, it is closely related to inventory of the enterprise

Contents of a trade credit policy include credit standards, credit periods,discount, collection policy and credit risks which are discussed more details in thefollowing parts

1.2.3.1.1 Credit standards:

Credit standards refer to the required financial strength of acceptable creditcustomers With regard to credit standards, factors considered for business customersinclude ratios such as the customer’s debt and interest coverage ratios, the customer’scredit history (has the customer paid on time in the past or tended to be delinquent),and the like For individual customers, their credit score as developed by credit ratingagencies is the key item In both cases, the key question is this: Is the customer likely

to be willing and able to make the required payment on schedule?

Theoretically, the enterprise should lower credit standards to the extent thatprofit created from increasing credit sales is at least equal to costs arising from selling

on credit There is the trade-off between incremental profits and incremental costsrelated to account receivable due to lowering credit standards The problem is whenthe enterprise should or shouldn’t loosen credit standards If credit standards are settoo high, the enterprise loses too many sales and thus revenue will decrease andconversely, if credit standards decrease, revenue will increase However when creditstandards are lower, the enterprise can attract customers having weaker financialpotential Besides, when credit standards are set too low, bad debts losses will be toohigh So a balance must be struck between the costs and benefits of tighter creditstandards If loosening credit standards brings greater profits, the enterprise shouldmake that change, if not, it should remain

1.2.3.1.2 Credit period:

Credit period is the length of time buyers are given to pay for their purchase.For example, the credit period might be 30 days Customers prefer longer creditperiods, so lengthening the credit period will stimulate sales However, a longercredit period lengthens the cash conversion cycle; hence, it ties up more capital inreceivables, which is costly Also, the longer a receivables is outstanding, thehigher the probability that the customer will default and that the account will end

up as a bad debt

1.2.3.1.3 Discounts:

Discounts are price reductions given for early payment The discount specifieswhat the percentage reduction is and how rapidly payment must be made to be eligiblefor the discount For example, a 2% discount is often given of the customer payswithin 10 days Offering discounts has two benefits First, the discount amounts to aprice reduction, which stimulate sales Second, discounts encourage customers to payearlier than they otherwise would, which shortens the cash conversion cycle However,discounts mean lower prices and lower revenue unless the quantity of goods soldincreases by enough to offset the price reduction The benefits and costs of discountsmust be balanced when credit policy is being establishes

Enterprises generally publish their credit terms, defined as a statement of theircredit period and discount policy

Credit terms can be expressed in the general form as follows:

K%/ D net P days

In which:

 K%: discounted value stated as percent of selling price

 D: maximum number of days that customers are accepted the discount

 P: maximum number of days until that customers are allowed to delay theirpayment

Moreover, credit credits can include the time at which credit period starts if it is notinvoice date

 3/7 EOM net 30 - this means the buyer must pay within 30 days of the invoicedate, but will receive a 3% discount if they pay within 7 days after the end ofthe month indicated on the invoice date If an invoice is received on or beforethe 25th day of the month, payment is due on the 7th day of the next calendarmonth If a proper invoice is received after the 25th day of the month, payment

is due on the 7th day of the second calendar month

 2/15 net 40 ROG - this means the buyer must pay within 40 days of receipt ofgoods, but will receive a 2% discount if paid in 15 days of the invoice date.(ROG is short for "Receipt of goods.")

1.2.3.1.4 Collection policy:

Collection policy refers to the procedures used to collect past due accounts,including the toughness or laxity used in the process At one extreme, the firm mightwrites a series of polite letters after a fairy long delay; while at the other extreme,delinquent accounts may be turned over to a collection agency relatively quickly.Enterprises should be somewhat firm, but excessive pressure can lead customerswhose business is profitable to take their business elsewhere Again, a balance must bestruck between the costs and benefits of different collection policies

1.2.3.1.5 Credit risk:

Credit risk is not in the content of credit policy but financial managers need tocare about it: evaluating the level of risk and finding ways to limit it Credit risk is therisk arising when debtors can’t afford to repay debts

Credit policy relates to not only decisions on increasing or decreasing accountreceivables but also the ability of collecting them Loosening credit policy makesrevenue increase However it leads to increase in bad debts and days sales outstanding.

So as deciding whether the enterprise should loosen its credit policy or not, CFO alsohas to consider the level of credit risk

1.2.3.2 Analysis of customers’ prestige (6 C’s of credit):

To avoid the risks of unrecoverable debts, the enterprise needs to analyze thecustomers’ prestige before deciding whether sell on credit or not If after analyzing andevaluating, customers are consistent with the enterprise’s credit standards, they will begranted credit The process of analyzing the customers’ prestige includes three steps:

 Collect customers’ information

 Analyzed collected information to judge customers’ prestige

 Decide whether sell on credit or not

Figure 2: The process of analyzing the customers’ prestige

Types of information about customers need to be collected are based on the 6C’s of credit method They are:

prestige

Prestigious

Accept

to sell on credit

Refuse to sell on credit

1.2.3.2.2 Capacity:

Capacity is the ability to repay the loan It is assessed based on historicalpayment ratios, reserve funds, etc of customers In addition, the analyst will look atcustomers’ balance sheet and cash flow statement and then calculate some majorfinancial ratios like solvency, profitability ratios, debt ratios, etc to give assessment.Major information of customers’ capacity need to be clarified are:

 How will the loan money be used

 Cash Flow- will there be enough cash to repay the loan

 What other sources of money the customers have available to repay if they losetheir current source

1.2.3.2.3 Capital:

Capital is the measure of long-term financial strength or potential of customersbased on analyzing data in annual financial reports such as: total assets, equity, andprofitability from business activities It affects payment capacity of customers

1.2.3.2.4 Conditions:

Conditions refer to the development trend of business line and expansionpotential of the whole economy in general and development degree of relatedgeographic regions in particular These factors need to be analyzed because they haveinfluences on paying debts of customers Most of the other C's of credit look at

customers’ business from a microscopic view But the conditions represent the macroview of their business How is the economy currently affecting customers’ business?What do customers’ competitors look like? How does customers’ business fit in thecurrent environment? Are there any customers’ profiles that pose a potential risk to theloan repayment? These and other questions are examples of what the enterprise tries toanswer with respect to customers’ business performance And the informationcollected can help the enterprise determine how the loans will be structured

The reality shows that repayment capacity of customers decrease as theeconomy is in bad condition We can evaluate customers’ adaptability better throughunfavorable economic conditions Only customers having strong financial situation,high adaptability, good governance, etc can overcome the economic recession

1.2.3.2.5 Collateral:

Collateral is any asset that belongs to customers’ ownership and the customerscan use them as guaranty for their debts The collateral will need to be large enough tocover the losses if the customers fail to repay the loan

1.2.3.2.6 Confidence:

A customers’ inner ability to make wise decisions is often referred to asconfidence (also called as common sense) A loan officer or credit manager woulddetermine that the customers have good common sense based on how they answerquestions (either orally or in writing) A good credit and payment history, good debt toincome balance, an honest reputation and stable conditions will help provide theenterprise (the lender) with confidence in the customers (borrower) And a successfulborrower gives confidence to the lender by addressing all the lender's concerns

Because 6Cs’ of credit method help assessing customers’ prestige mainly based onsurmises, credit managers need to overcome subjectivity when collecting information

The enterprise can get customers’ information from the following sources:

 Financial statements

The enterprise may require customers to provide their financial reports to assesstheir performance in recent years

 Credit reports on debt payment history with other enterprises

The enterprise can conduct research or purchase information on repaymentsituation in the past of potential customers The customers often delays payment can

be reject to grant credit

 Banks’ data

The enterprise can ask banks to provide necessary information on credit status

of customers and banks often support the enterprises

Moreover, the enterprise can apply other methods to collect information such asinterview directly or visit customers at their own offices

1.2.3.3 Analysis of the proposed credit amount:

The analysis and evaluation of credit amount proposed by customers for thepurpose of deciding whether to grant or not is based on the NPV of cash flows TheNPV analysis help the enterprise know whether it should grant credits to customers ornot and what the credit terms will be

1.2.3.4 Monitoring account receivable:

Account receivables management begins with the credit policy, but amonitoring system is also important Corrective action is often needed, and the onlyway to know whether the situation is getting out of hand is with a good receivablescontrol system

The total amount of account receivables outstanding at any given time isdetermined by two factors:

1 The volume of credit sales and

2 The average length of time between sales and collections

Account receivables = Credit sales per day x Length of collection period

If either credit sales or the collection period changes, such changes will bereflected in account receivables

If management is not careful, the collection period will creep up, as goodcustomers take longer to pay and as sales are made to weaker customers, who tend to

pay slowly or not at all and thus create bad debts So it is necessary to monitor accountreceivables.

And the following sections will describe tools to support managers inmonitoring account receivables

1.2.3.4.1 Days sales outstanding (DSO):

One easy-to use monitoring technique employs the days sales outstanding(DSO), sometimes called the average collection period (ACP) It is calculated bydividing accounts receivables by the average daily sales (ADS) to find how manydays’ sales are tied up in receivables Thus, the DSO represents the average length oftime the enterprise must wait after making a sale before receiving cash

Receivables ReceivablesDSO = ACP

Average sales per day Annual sales/365

on time to take advantage of the discount, quite a few must be paying very late Oneway to check this possibility is to use aging schedule that will be described in the nextsection Late-paying customers often default, so their receivables may end up as baddebts that can never be collected The trend of the DSO over the past few years hasbeen rising, but the credit policy has not been changed

Based on calculating DSO, we can realize the enterprise’s trade credit policy and thequality of collecting debts When DSO increases but sales and profits don’t increase, itproves that the enterprise’s capital is stagnant in payment phase, and collecting accountreceivables is slow When this situation happens, manager need to have timely intervention.

On the contrary, a short DSO means the enterprise don’t have stagnant capital in paymentphase However, DSO is not effective measure to assess trade credit policy and practicalaccount receivable collection In many cases, because the enterprise wants to control themarket through selling on credit or financing for its agents, DSO increases but it doesn’treflect delay in collecting account receivables

0 – 1516-3031-4546-6061-7576-90Over 90

Overdue account receivables

0-3031-6061-90Over 90

Total receivables

Table 1: Example of aging schedule

Aging schedules cannot be constructed from the type of summary data reported

in financial statements; they must be developed from the enterprise’s accountreceivable ledger However, well-run enterprises have computerized their account

receivables records, so it is easy to determine the age of each invoice, to sortelectronically by age categories, and thus to generate an aging schedule.

This method provides the manager with a picture of account receivablesclassified by time fluctuation Thus, the enterprise can know how large and howlong overdue debts are Then it will have timely vigilance for bad situations thatmay happen

In general, managers should constantly monitor both the DSO and the agingschedule to detect trends, to see how the enterprise’s collection experience compareswith its credit terms, and to see how effectively the credit department is operating incomparison with other enterprise in the same industry If the DSO starts to lengthen or

if the aging schedule begins to show an increasing percentage of past-due accounts,then the enterprise’s credit policy may need to be tighten

1.2.3.4.3 Credit ratings:

The enterprise also can monitor account receivables by the category ofcustomers Whereby, it will have an appropriate credit policy for each customer likegiving more incentives for customers with high rating or stopping cooperation withlow-rating customers The classification can be as follows:

 Type A: includes customers having high confident and qualified debts that arestill in maturity and can be collected them on time And the enterprises that arestable in finance, organization and have high prestige are usually classified astype A

 Type B: includes customers with debts that have low risk or need to be noticed.These debts are often loans overdue for less than 90 days and loans have beenadapted the payment dateline And the enterprises that have quite good financialsituation, are traditional and confident customers will be classified as type B

 Type C: includes customers with debts that are substandard or overdue but stillable to collect These debts are often loans overdue for 90 – 180 days and loanswere adapted the payment dateline but overdue for less than 90 days based onnew payment dateline The enterprises that have not good financial situation,but besides difficulties it still has development prospect are classified as type C

 Type D: includes customers with debts that are less likely to recover, are bad ordoubtful debts These debts are often loans overdue for 181-360 days or loanswere adapted the payment dateline but overdue for 90-180 days based on newpayment dateline The enterprises that have bad financial situation, no clearprospects and intentionally don’t repay debts are classified as type D.

 Type E: includes customers with debts that cannot be recovered The enterprisesthat were or are going to bankrupt, cannot repay debts or don’t exist areclassified as type E

Classifying customers based on kinds of debts is important basis to helpmanagers determine exactly the reality or effectiveness of the enterprise’s collectionpolicy If proportion of bad debts (type C, D, E) is too high, it proves that theenterprise’s account receivable management is weak and it need to quickly applyappropriate solutions Simultaneously, the enterprise also uses the result ofclassification to build credit policy in the next periods

CHAPTER 2 THE CURRENT SIATUATION OF ACCOUNT RECEIVABLE MANAGEMENT IN VIGLACERA P&B CO 2.1 Overview of Viglacera Packings and Brake Lining Joint Stock

Company:

2.1.1 The process of establishment and development of Viglacera P&B Co: 2.1.1.1 General information:

Company Name: Viglacera Packings and Brake Linings Joint Stock Company

Abbreviation name: Viglacera P&B Co

Logo:

Office Address: No 676 Hoang Hoa Tham Street, Tay Ho District, Ha Noi, Viet Nam Factory Address: Lien Co Village, Dai Mo Commune, Tu Liem District, Ha Noi Production Area: 30,156 m2

Number of workers:210

Tel Number: (04) 8391 067 – 8391 072

Fax Number: (04) 8390 976

Website: http://www.blc.com.cn

2.1.1.2 The history of establishment and development:

Precursor of Viglacera P&B Co is Hanoi Fibrocement Factory At start-up, thecompany was just a research group of 6 people that formed to produce Fibrocement roofing

According to Decision No 24BCN-KH dated January 8, 1958, signed byMinister of Industry Le Thanh Nghi, Hanoi Fibrocement Factory was establishedunder the authority of Mining and Metallurgical Department