Poor accounts receivable collection at Binh Minh plastics joint stock company

LIST OF TABLES Table 1: Days sales outstanding of Binh Minh Plastics Table 2: Analysis the possible solutions of Binh Minh Plastics Table 3: Binh Minh Plastics Joint Stock Company Action

UNIVERSITY OF ECONOMIC HO CHI MINH CITY

International School of Business

-

PHAN THI THANH TRAM

POOR ACCOUNTS RECEIVABLE

COLLECTION AT BINH MINH

PLASTICS JOINT STOCK COMPANY

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City - 2017

UNIVERSITY OF ECONOMIC HO CHI MINH CITY

International School of Business

-

PHAN THI THANH TRAM

POOR ACCOUNTS RECEIVABLE

COLLECTION AT BINH MINH

PLASTICS JOINT STOCK COMPANY

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: Prof Pham Phu Quoc

Ho Chi Minh City - 2017

SUPERVISOR’S REPORT ON THE FINAL THESIS SUBMITTED

FOR DEGREE OF MASTER of BUSINESSADMINISTRATION

The final thesis title: POOR ACCOUNTS RECEIVABLE COLLECTION

AT BINH MINH PLASTICS JOINT STOCK COMPANY

Student Name: PHAN THI THANH TRAM

Supervisor: Prof Pham Phu Quoc

EXECUTIVE SUMMARY 1

CHAPTER 1: INTRODUCTION 2

1 Company background 2

2 Company symptom 4

CHAPTER 2: PROBLEM IDENTIFICATION 7

2.1 Potential problems 7

2.2 The central problem 12

CHAPTER 3: CAUSE VALIDATION 15

3.1 Possible causes 15

3.2 Central cause validation 17

CHAPTER 4: SOLUTIONS 19

4.1 Possible solutions 19

4.2 Suitable solutions 21

CHAPTER 5: ACTION PLANS 23

CHAPTER 6: CONCLUSION 27

APPENDICES 28

REFERENCES 51

LIST OF TABLES

Table 1: Days sales outstanding of Binh Minh Plastics

Table 2: Analysis the possible solutions of Binh Minh Plastics

Table 3: Binh Minh Plastics Joint Stock Company Action Plans

LIST OF FIGURES

Figure 1.1: Binh Minh Plastics organizational structure

Figure 1.2: Days sales outstanding of BMP, NTP and industry Figure 2.1: Aging of BMP’s accounts receivable in 2016

Figure 2.2: Overdue debt ratio of BMP in 2016

Figure 2.3: Initial cause and effect map

Figure 3: Final cause and effect map

EXECUTIVE SUMMARY

Days sales outstanding of Binh Minh Plastics Joint Stock Company in the period 2013

- 2016 tends to increase and be higher than competitors and the industry which shows signs of bad working capital situation tied up in accounts receivable In addition, there

is an increase in the risk of bad debts if it can not be recovered, and increased costs associated with receivables monitoring and receivables collection This thesis aimed at investigating practices adopted by Binh Minh Plastics in the management of accounts receivable to find out the central problem to make high days sales outstanding over the years and to recommend ways to solve this problem

Follow-up investigations revealed three possible problems: ineffective trade credit policy, poor credit collection and late payment from customer In particular, the

problem of poor credit collection is defined as the central problem, which has the great influence on the increase high days sales outstanding and can be solved in the present situation

After considering all the aspects that affect the central problem, the thesis has found the main reason caused the poor credit collection is poor credit collection policy

Besides that, the thesis finds and proposes alternatives solution and practices for

effective credit collection policy to improve this issue Binh Minh Plastics should improve a credit collection policy by setting out the procedures and practices to be used by the company to collect overdue or delinquent accounts receivable In addition, the company should automate their electronic invoicing system to cut down on the time taken to present invoices to customers

materials According to the BMI predicted the average real growth of Vietnam's

infrastructure will be 6% per annum in 2016 - 2024 The demand for plastic pipes is increasing, creating a momentum for the growth of the construction industry in the future

Market share and competitors

Construction plastics are mainly domestically under more severe competitive pressure Binh Minh Plastics (BMP) leads the market in the South with a market share of nearly 50% and 25% of the national market share While Tien Phong Plastics (NTP) holds about 60% of the northern plastic pipe market share and 29% of the national market share However, Binh Minh Plastics recently faced market penetration by competitors such as Hoa Sen, Europipe and Tan A Dai Thanh…As you can see, competition in the construction plastics market is becoming much more intense and market share slice may have to be broken up for these new businesses The domestic plastic industry is still dominant thanks to its large scale and strong brand So if BMP are no reasonable policies to adapt to the competitive market, market share will be affected

Company background

Binh Minh Plastic, which was established on November 16th 1977, is a leading

company in Vietnam manufacturing and trading in plastic pipes and fittings for water supply and drainage, telecommunication, electricity, industrial and civil construction The Company has four factories in Ho Chi Minh City, Binh Duong, Long An and

Hung Yen provinces with capacity of 150,000 tons/year, entirely meeting domestic demands and preparing for international exports in the future

On the other hand, Binh Minh Plastics has applied sale model of distribution system through stores The store systems of the company include main stores and branch stores Currently, the company has a total of nearly 1,500 stores across the country ensuring supply of goods quickly and timely at demands of customers In addition, the company also has engaged in key national projects with government as the role of supplier for the water supply and construction buildings

Company name: CÔNG TY CỔ PHẦN NHỰA BÌNH MINH

English name: BINH MINH PLASTICS JOINT - STOCK COMPANY

The internal structure of the company is showed in the graphic as follow:

Figure 1.1 : Binh Minh Plastics organizational structure

(Source: BMP’s annual report in 2016)

2 Company symptom

After deep analysed the company's annual report and investigated the financial ratios

in the period from 2013 to 2016, the symptom of the problems had been revealed is high in days sales outstanding (DSO) during the period of four years

Table 1: Days sales outstanding of Binh Minh Plastics

Net credit sales (1) 1,276,043,760,135 1,119,039,841,368 1,068,879,615,018 1,033,005,969,909 Average Accounts Receivable (VND) (2) 297,203,614,064 294,615,362,613 322,413,279,111 405,097,125,465

Days sales outstanding (4)=365/(3) 85 96 110 143

(Source: BMP’s financial data 2013-2016)

In order to increase revenue and diversify its distribution channels, beside its

traditional distribution system, forced the company to apply the policy of lenient credit policy So, the days sales outstanding of BMP tend to increase over the years, rising sharply by 2016, with 30% higher than in 2015 and 68% higher than in 2013 In 2013, the days sales outstanding is 85 days, the trend is to increase gradually over the years

2014, 2015, and especially in 2016 with 143 days Meanwhile, the credit term of the company is from 7 to 90 days It means that in 2016, in BMP, days sales outstanding is higher than credit term for collection customers 53 days (compared to the highest level), equivalent more than 59% This shows a symptom of days sales outstanding of accounts receivable is much higher than the previous years its and the credit term for customers

Figure 1.2: Days sales outstanding of BMP, NTP and industry

(Source: BMP, NTP’s Balance Sheet 2013-2016)

In comparision to the construction plastics and the formidable competitor NTP, BMP’s days sales outstanding are the highest While NTP's days sales outstanding is always lower than that of the industry, BMP’s days sales outstanding is always higher than the industry Comparing to the ratio of rival NTP, the days sales outstanding of BMP is nearly double in 2016, nearly 1.5 times compared with the industry It is notable that in

2016, it increased sharply while NTP and the industry still controlled the growth rate This is a significant gap between BMP’s days sales outstanding and the others The comparisions with the industry and NTP, it shows a bad sign for the ineffective in accounts receivable from customers of BMP in 2013-2016 periods

Conducting interviews with members of BMP, this situation has made the manager of BMP try to research a best way to reduce days sales outstanding as soon as possible The increase in the number of days sales outstanding has a great impact on the

business, financial and profits of BMP A large amount of money is tied up in the accounts receivable, which increases the cost of capital, increases the cost of managing receivables and, in particular, the high risk of bad debts and not recovering the debts According to Mr Hoang Ngan, the Chief Executive Officer of BMP, “We are facing very trouble challengings, one of those is high days sales outstanding from trade

receivables Days sales outstanding tend to increase over the years as working capital flow decrease, the risk of bad debts increases, attached is the cost of receivables

collection increases” This great trouble is recognized as the symptom that the central problem and potential causes need to be found and analyzed to solve this situation

CHAPTER 2: PROBLEM IDENTIFICATION

2.1 Potential problems

From the symptom of high days sales outstanding, combining literature and evidence from in-depth interviews with professional staffs, management personel, Board of Management of the company, there are three potential problems that the company is facing following:

- Ineffective trade credit policy

- Poor credit collection

- Late payment from customer

Ineffective trade credit policy

A trade credit is an agreement where a customer can purchase goods on account

(without paying cash), paying the supplier at a later date Credit policy is important for three main reasons First, it has a large impact on sales, secondly, it affects the amount

of funds tied up in receivables and lastly it affects bad debts (1) Pandey(2)stated that credit policy is determined in the manner as the combination of such terms as credit period, credit standards, collection period, cash discounts and cash terms Accroding to Kalunda, Nduku & Kabiru (3), a lenient credit policy tends to provide credit to

customers under very liberal terms and standards such that credit is granted for longer periods even for creditworthy customers is not well known

With the strategy of developing the distribution system, expanding the market share, and to compete with other rivals, BMP has applied lenient credit policy However, the issue of ineffective trade credit policy has been identified as attention problem, which increase significantly the days sales outstanding Conducting interviews with to Mr Ngan, Chief Executive Officer of BMP, “The company has to deal with big risk of long time debt and difficult to recover situation in accounts receivable from

customers” According Mr Viet, the Chief Accountant, “an amount of working capital tied up in this account for long time” This is a sign that the company is having

difficulty in implement sales on credit “The company applies long credit term to

guests For those stores in the province the credit term is longer than stores in Ho Chi Minh city, with guests up to 60 days As for project clients, depending on the

relationship that the sales department proposes to approve for up to 90 days” This shows that credit policy is not effective with current company situation

According to Ms Nga, sales manager, “BMP’s customers have two major customer groups that are distribution store system and water supply and drainage and

construction companies In addition to maintain the distribution system as the

foundation, BMP implemented a strategy to expand its customer base to the project through the lenient credit policy” According to Mr Thanh, the receivables accountant,

“for groups of customers of water supply and constructions who purchased debt by trust and relationship, the company will accept the limit of sale of debt and time debt

as approved by the Chief Executive Officer Different customers will be issued

different credit term and credit limit” The noteworthy thing here is, “Although

customers of water supply or constructions have overdue debt, the sale of debt will continue with the approval of the Chief Executive Officer and the decentralized

Because of the relationship with guests, most credit sales will be done despite having overdue debts or overdue large amounts or long periods of time” BMP has not yet developed a strong credit standard for this group on the company's debt finance

appraisal to set a limit on the amount of owed This lenient credit policy can attract customers but also lead to non-payment due to weak customer finance

Mr Viet, the Chief Accountant, revealed that “To ensure the quality of receivables of the stores system, BMP secured by mortgages such as deposits, houses, land, etc., following the customer receivables control regulations, so as to minimize the risk of non-recovery receivables However, for project clients, BMP can only assess

contractors's repayment ability based on reputation, capacity of contractors and

investors, etc to make decisions for purchase credit This trade off between risk and profitability in business makes accounts receivable increased over the years from 2014

to now, expressed most clearly by the days sales outsanding increased dramatically in 2016.”

According to Maria Groczynska (4), particularly, if the DSO exceeds a company’s credit terms, this may indicate that a company is ineffective in collecting its credit sales or is granting credit to marginal customers It is true when now BMP company is suffering the high DSO status that caused by inefffective credit policy when stuck in ineffective accounts receivable It imposes high risk into bad debts, doubtful debts

Poor credit collection

Poor credit collection has led to an increase in outstanding receivables, including overdue receivables According to the figure of aging of BMP's accounts receivable in

2016 (Figure 2.1), the majority of accounts receivable are in the range of 45 days to 90 days (accounting for 44% ), the range of 6 months to 12 months (accounting for 37% ) and over 2 years - consider as default (accounting for 14%) While, the credit terms usually range from 7 to 90 days It shows that, otherwise ineffective credit policy problem has made increasing many outstanding receivables that affects high days sales oustandings, the remaining receivables is the problem of ineffective credit collection The remaining 55% of the outstanding receivables are over 90 days of maturity,

including restructured debts or overdue debts with the majority is from 6 months to 1 year (37%) and default debts (14%)

Figure 2.1: Aging of BMP’s accounts receivable in 2016

(Source: Accounts receivable of BMP in 2016)

Figure 2.2: Overdue debt ratio of BMP in 2016

(Source: Accounts receivable of BMP in 2016)

Mr Thanh, the receivables accountant, “There is no effective cooperation between sales staff and accountant Salespeople are not concerned about the due or past due receivables Therefore, they often ask for approval of the sale even if the customers are overdue receivables and the receivables time is too long” The views between the business and accounting department are not consistent due to unclear and inefficient collection policy The combination of sales and accounting departments in the

collection receivables of customers are more constrained Meanwhile, “When

receivables are due or overdue, because of customer relationships, the receivables accountant does not notify directly to the customer but through the sales staff These employees will contact customers to request for repayment of old receivables to be can purchase” Mis Lan, sale staff, “With the approval of the director, and more of

important customers who have a special relationship with BMP, so these orders can not sold to customers Receivables management is the work of accounting, also about sales only sells goods when the approval of the director”

According to Mr Thanh, the receivables accountant, “the receivables collection policy

is not clear, because the customer relationship, when the overdue receivables arisen,

Overdue debt ratio of BMP in 2016

Debt in the term Overdue debts in 0 -45 days Overdue debts in 45 days - 3 months Overdue debts in 3 months - 6 months Overdue debts in 6 months - 12 months Overdue debts in 1 years - 2 years Overdue debts in over 2 years - consider

as default

receivables accountant does not call or send a written reminder to customers That's just, at the end of each month, the debt notification to customer” “The collection of money is also through intermediaries is sale department, when the need to notify the customer about receivable is sent through the sales to transfer debt notification to guests” Company is not set up debt collection rules, resulting in many overdue debts but the company still has no way to collect more money

For any overdue or delinquent accounts, a reminder form, letter, telephone call or visit may facilitate customer payment At minimum, the company should generally suspend further sales until the delinquent account is brought current Should these actions fail

to generate customer payment, it may be necessary to negotiate with the customer for past-due amounts (5)

Late payment from customer

Although trade credit has played an important role in business’s growth and profit goal, there is still a possibility that a regular trade credit develops into a delayed

payment and forces the creditor to undertake certain (usually undesired) economic actions The most critical ones are a consequence of the fact that problems with

receivables are usually the reason for accumulation of overdue payments and can finally lead to insolvency (6) Additionally, delays in receivables influence investment

in plant, inventories, machinery and other assets So the problem of delayed customer payments has been identified as noteworthy issue, which might not only influence the market decisions of enterprises but also affect market structure by spreading

differently among different kinds of enterprises

According to Mr Thanh, the receivables accountant, “project customer and water supply customers delayed their debt for longer time” and “there are bad debts from customer agents who can not afford to pay” So it accounted an amount of working capital locked up in this accounts receivable

From a macroeconomic point of view, the issue of late payment will be influenced by the economic conditions, the development of the financial system Garcia et al (7)

states that level of accounts receivable is affected by the economic situation Credit collections depend on the industry (8), and effects of negative macroeconomic shocks (9) In a worsening economic and market conditions, the ability to generate cash from

a company's operations decreases As a result, some customers are unable to pay their debts on time and postpone payment, causing the company increases their receivables Besides, there is more risky when the customer goes bankrupt

According to Mr Viet, the chief accountant, “In the economic and market conditions

in the plastic industry is gradually recovering Construction companies have great demand in this industry but the ability to generate money from the operation of

companies is very long, due to project completed by each progress As a result, some customers can not pay their debts on time and postpone the payment to increase the company's receivables” Mr Thanh, the receivables accountant, “They only pay when handing over the works to the investor, which is often late in comparison with the payment time” Large amount of accounts receivable became doubtful debts due to customers lose their ability to pay, or bankruptcy

2.2 The central problem

After investigating some of the financial ratios and interviewing all the responsible members of the company, there are three problems are analyzed and identified as the barriers lead high days sales oustanding in BMP in the period 2013 - 2016 Ineffective credit policy makes the days sales outstanding of receivable increasing due to long credit period as long credit collection time Adding to that is low credit standards that lead to companies not properly filtering out customers who are not qualified to sell credit This has made the days sales outstanding tend to increase over the years But in general, in terms of current business conditions, in order to maintain and expand

market share, the company takes risks from this policy to attract customers Therefore, this is not a central issue to address As for customers paying late, through analysis and understanding, this is the problem comes from the economic difficulties Due to

difficult business conditions, the customers did not pay on time or these were the debts

of companies unable to pay, went bankrupt Therefore, this is a problem outside the enterprise so solving this problem is hardly feasible

The problem of poor credit collection that great impact on the increase in receivables, leading to high days sales outstanding in BMP In addition, with the limited resources

do not allow solving all the problems at the time Therefore, the problem of poor credit collection is a central problem that is not only ensures to reduce days sales outstanding but also ensures control of business operations Through investigation, the cause of the increase in receivables is higher due to the collecttion of poor receivables The

company has no clear receivables collection policy, no departmental cooperation and unsuitable receivables enforcement policy has made bad credit collection This is an issue that needs to be addressed as receivales collection is an important task for

businesses to quickly recover their cash inflows

Based on the above developing, the following initial cause and effect tree has been developed:

Symptom

High days sales outstanding

Ineffective credit policy

Late payment from customer

Low credit standards

Long credit terms

Poor credit collection

policy

Ineffective coordination between accounting and sale department

Ineffective overdue debt penalty

Difficult economic conditions

Central problem

Poor credit collection

Figure 2.3: Initial cause and effect map

CHAPTER 3: CAUSE VALIDATION

3.1 Possible causes

To find out the potential cause this problem, the theory combined with the deep

interview is conducted with the Gerneral Manager, Chief Accountant, the receivables accountant and some employees who are working in Binh Minh Plastics There are four potential causes for the poor credit collection problem in accounts receivable:

Poor credit collection policy

Receivables collection policies are the procedures a company uses to collect overdue

or delinquent accounts receivables A company must determine what its purchasing policy is and how it will be implemented Just like credit standards and credit terms, the approach may be a function of industry and competitive environment (5)

According Brigham et al (1), a company can improve cash flow by reducing days sales outstanding (DSO) achieved by training customers to pay on time This requires

constant attention and monitoring Company should be solid, but excessive pressure can lead to profitable business customers to do business elsewhere Thus, the costs and

benefits of different collection policies must be balanced

According to Mr Thanh, the receivables accountant, said that “BMP has poor

collection policy” “Due to the customer relationship, when the maturity date of the company does not send documents or carry out the notification of debt due to

customers but only waiting for new orders arise, the new debt status” In addition, “In the case of overdue debt, at the end of every month, the company sends a notification

of account receivables in the month, information debt overdue to the client” These methods are not enough pressure to force the payer immediately so that the receivables are often delayed Although the statutory receivables collection policy and the penalty interest rate for late payment are stated in the purchase contract and sales regulation,

the company does not apply this method fully

Ineffective coordination between accounting and sale department

Conflicts in communication and working views between the sales department and the finance department are one of causes lead to reduce effective in the collecting of

receivables, leading to poor credit collection Sales staffs try to sell to customers

without regard to the customer's debt status as well as the debt collection of the

accounting department Therefore, the collection of debt is not effective due to the lack

of cooperation debt collection between these two parts According Burez and

Vandenpoel (10) stated that the financial department reviews customer credit as the most important condition when entering into a credit agreement They do not want the company's working capital tied up in overdue debts or loss of irrecoverable debts In contrast, the sales department wants the total sales as high as possible regardless of whether the customer is creditworthy or not To achieve the goal of increasing sales, the sales department tries to sell as many orders as possible, including overdue and bad debts by applying for sale approval Meanwhile, the finance department must deal with these high and overdue debts with restrictions on how to reclaim debt to avoid

affecting customer relationships, so it has led to poor credit collection

Ineffective overdue debt penalty

Mr Thanh, the receivables accountant, also revealed that “Although the company has imposed an overdue debt penalty of 1% per month on the value of outstanding debt, the application of the loan is not effective It is almost impossible to enforce the

charge, but wait for the customer to pay interest, or unless there is a discount” It

shows the poor in receivables collection at BMP The application of overdue debt has been ineffective debt collection Firstly, the penalty rate for overdue debt is much lower than the discount rate applied by the company As well as, there is no binding when customers receive discount while being fined Secondly, when the interest rate for overdue debts arises, the company shall not apply the methods of collecting these amounts but only monitores separately and depend on the customer's active payment

Penalizing delinquent accounts can be an effective way to ensure timely payments This can be done by calculating interest on overdue balances (11) Where the goods

are sold together with the mortgage, the mortgaged property has been pledged against the account or the supplementary guarantee for the company or individual, then the company should use these options to obtain the payment (5)

Lack of credit control and monitoring

According to Mr Viet, the chief accountant, “the finance and accounting department has not set up a credit control and monitoring function, which is considered part of the work of receivables accounting Therefore, this function does not clearly show the role

of credit collection”

A company sells on credit to increase sales and credit sales creates the need for a credit department to investigate credit ratings, approve credit extensions and try to collect delinquent accounts (12) If a company decides to sell on credit and establish a credit department, it must install an effective internal control system to handle credit sales and cash collection

Credit monitoring involves the ongoing review of a business "accounts receivable to determine whether the customer is paying under the terms of the credit” If they fail to pay in time, this will alert the company to this issue (5)

Companies must monitor credit on an individual basis and on an aggregate basis Individual monitoring is required to determine whether each customer is paying on time and whether the customer is within the credit limit Customer refinement must be continuous, not just a one-off and one-off evaluation (13) Prosperous companies can quickly become very risky and if sellers are unaware of this, they may be overcharged

3.2 Central cause validation

From the analysis above, poor credit collection policy is a main factor that influences

strongly on the poor credit collection in accounts receivable at BMP now Poor credit collection policy leads to no clear guidelines for relevant departments to coordinate effectively This has led to conflict views in the sale department and accounting

department, leading to this ineffectiveness in receivables recovery Excessive overdue

debt payments were also affected partly by the poor debt collection policy, which did not perform well in recovering overdue interest The lack of credit control and

monitoring functions at BMP has not really been the main reason for poor credit

collection causes it is function part of the liability of the liabilities accountant

Based on the previous initial cause and effect map and the above developing, map has been developed updated as below:

Ineffective overdue debt penalty

Central problem

Poor credit collection

Lack of credit control and monitoring

Figure 3: Final cause and effect map

CHAPTER 4: SOLUTIONS

4.1 Possible solutions

Binh Minh Plastic has implemented a credit policy to increase revenue, expand market share and compete with competitors However, because poor credit collection has made days sales outstanding increase over the years in the 2013 - 2016 period which leads to increase high related costs and risk of bad debts The analysis and study have

identified the main reason is poor credit collection policy what has impacted the

problem of poor credit collection in Binh Minh Plastics A credit collection policy is the procedures a company uses to collect overdue debts or delinquent accounts

receivables (5) A credit collection policy manual is the procedure used to collect past due accounts, including the degree of toughness or laxity used in the process

Implementing this policy effectively helps the company to recover debt efficiently, reduce the risk of bad debts, passive cash flow in receivables and reduce the associated costs with monitoring and debt recovery In order to solve the above problem,

applying the literature has been studied previously, there are three solutions proposed below:

Improve credit collection policy

For overdue or delinquent accounts, reminder forms, correspondence, phone calls or visits may facilitate the payment of the customer At a minimum, the company should suspend sales until the temporary account is released If these actions do not generate customer payments, it may be necessary to negotiate with customers about overdue debts (5) For customers with late payment history, start charging before maturity When a company identifies a customer with an overdue account, it can take the

following steps: The company sends a letter informing the customer about the overdue account; calling for the customer to discuss the payment; may agree to extend the payment period if the customer has a good reason; may also send a representative to respond to delinquent customers (14)

irrecoverable, the accountants will set up a provision for follow-up and write off the debt in the end of fiscal year

Convert to electronic invoice form

The company should also consider switching to electronic invoicing to improve

invoice accuracy as well as invoice time to customers sooner From there, customers will receive faster, more convenient billing information that will lead them to pay sooner

Electronic invoice is a form of invoice where the buyer can receive the invoice quickly and conveniently via the network The company will register the use of electronic invoices with management agencies and apply information technology solutions to implement this form of invoice Buyers will receive quick, accurate invoices, which will help to make sales as well as faster debt collection

Hiring a collection agency or selling of receivables

If any effort that the company can not collect, it should send the account to a collection agency These agents are very experienced and quite effective in their collection

efforts Generally, receivables collection costs are based on the amount of money collected so the company does not need to pay cash in advance

Form of selling of receivables to credit institutions is also a way to collect account receivables This way the business accepts to take a cost in exchange for secure

receivables recovery But this is usually the case when the business determines that it does not want to debt collection, accepts costs, and is not afraid to affect customer

relationships

4.2 Suitable solutions

Through the above solutions, based on an analysis of the benefits and costs, as well as the current situation at Binh Minh Plastics, there are two appropriate solutions to solve poor credit collection policy: improve credit collection policy and convert to electronic invoice form The first solution is improving the credit collection policy, implement this solution to help company reform comprehensively and effectively credit collection policy It leads to the simultaneous resolution of the related cause that making the receivables collection is strong, detailed and clear Estimated cost is about VND100 million for cost of personnel implementation In addition, there are other costs incurred for discounting and bad debts provisioning The benefit is to help strengthen collecting receivables, reduce large outstanding balances receivables

The second solution is also a solution that needs to be implemented soon because before or after that the company also done when the development, is converting to electronic invoice form The transition to this form is also quite effective to help the debt recovery quickly and efficiently Invoices will quickly come to customers, and the policy of collecting money is also lightened by reducing paper documents procedures With existing informantion technology human resources and infrastructure, the

company only needs to invest about VND300 million for e-invoicing software and the training of personnel

As for the final solution of hiring a collection agency or selling of receivables, this solution is not feasible for the current situation of Binh Minh Plastics As BMP

attaches great importance the relationship with customers, so the application of the above solution may damage the relationship with the customers In addition, the

application of this solution will incur fixed costs of receivables collecting

- The cost of hiring personnel is monitored and implemented

- Costs incurred related

to the process of interacting with the customer

- About VND100 million for cost of personnel implementation

2 Convert to electronic

invoice form

Possible

- Easy to implement, in accordance with Ministry of Finance requirements

- Saving costs for storage, preservation, printing, invoicing

- Avoiding risks such as missing, torn, damaged, fire, slow bills to

customers

- Preparation of information technology infrastructure

- Improve the level of information technology users

- About VND300 million for e-invoicing software and the training of personnel

- It costs a fair bit of money

CHAPTER 5: ACTION PLANS

After analyzing the benefits and costs of the above solutions, it was found that there are two solutions to the optimal problem of poor credit collection policy in the current Binh Minh Plastics The following are the action plans for implementing these two options:

Plan A: Improve credit collection policy

Step 1: Evaluate and classify customer receivables

In order to collect receivables easily and conveniently, Binh Minh Plastics should classify, analyze and assess receivables in detail According to the classification of debt and provision for receivables that regulated by Ministry of Finance (38) and combination with the debt term applied at BMP, the company needs to classify

accounts receivable into 5 groups as follows:

Group 1 (Type A receivables): is a highly reliable or qualified receivables that

includes accounts receivable in the term that the company is able to collect in a timely manner These customers are usually strong financial and high reputation

Group 2 (Type B receivables): is low risk receivable or take note This group usually includes overdue receivables of less than 90 days and restructured receivable

Customers are usually those with good financial status, who are traditional customers, have credibility

Group 3 (Type C receivables): is recoverable or subordinated receivables that are overdue from 90 days to 180 days These customers are usually those with unstable financial status, but with improved prospects

Group 4 (Type D receivables): is receivable what is less likely to be recovered and overdue debt, often including debts that are overdue from 181 days to 360 days These customers usually have a bad financial situation, no clear prospects or the customer deliberately does not repay

24

Group 5 (Type E receivables): are irrecoverable receivables or capital-losing

receivables These customers are often bankrupt or unable to repay

Step 2: Encourage prompt payment

To encourage customers to pay quickly, Binh Minh Plastics should set out policies to attract customers The company should apply the form as payment discount,

promotional gifts In there, cash discount is the mostly used to encourage prompt payment because customers prefer this form of discount Specifically, the company should diversify the form of payment discount and discount rate to pay customers to purchase Specifically, for prepaid mode, the form of pre-purchase payment customers will be entitled to a discount of 2% on the purchase value For immediate payment, the form of customer payment at the time of purchase will receive a discount of 1.5% As for customers paying before the repayment period, they will receive a discount of 0.5% of the purchase value Although this solution encourages customers to pay early, but due to the breakdown of the various stages of discount, it is necessary to have support tools and monitoring staff

Step 3: Dealing with overdue accounts

Customers with overdue receivable are unable to pay or intentionally do not pay, so the company needs to apply a strict receivable collection policies The following

methods should be used to collect receivables same as sending a letter informing the customer about the overdue account; calling for the customer to discuss the payment; may agree to extend the payment period if the customer has a good reason or may also send a representative to respond to delinquent customers In addition, the company clearly implements the overdue receivables policy for customers who have overdue receivables

Step 4: Written off bad debts

For bad debts that can not be collected, company shall make provisions according to regulations and handle written off of these receivables The company should conduct periodic treatment to reduce the outstanding balance receivables