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MINISTRY OF EDUCATION ACADEMY OF FINANCE ---œ--- TA DINH HOA A STUDY ON IMPROVING WORKING CAPITAL MANAGEMENT EFFICIENCY OF STEEL COMPANIES IN VIETNAM Major : Finance - Banking Cod

MINISTRY OF EDUCATION

ACADEMY OF FINANCE -œ -

TA DINH HOA

A STUDY ON IMPROVING WORKING CAPITAL MANAGEMENT EFFICIENCY OF

STEEL COMPANIES IN VIETNAM

Major : Finance - Banking

Code : 9.34.02.01

DOCTORAL THESIS SUMMARY

Hanoi, 2020

This thesis was completed

at the Academy of Finance

Academic supervisor: Assoc Prof., Dr Bui Van Van

Reviewer 1:

Reviewer 2:

Reviewer 3:

Thesis defense is held in front of the Academy-level examination committee at the Academy of Finance At 2020

Information regarding the thesis could be found at the National Library

And the Academy of Finance Library

As a typical characteristic of the steel industry, working capital (WC) of these companies often accounts for a large proportion in the total business capital Therefore, the efficiency of working capital management (WCM) has significant influence on the efficiency of business capital management and the performance

of steel enterprises In Vietnam, steel is one of the key economic sectors, the total production the steel industry in 2016 accounted for approximately 5% of the country's GDP However, in the past few years, the efficiency of WCM of steel enterprises in Vietnam is both low and unstable: the return on WC has decreased for three consecutive years, while the cash conversion cycle has an increasing trend and is always higher than the average of Vietnamese enterprises This has

a negative impact on the efficiency of capital management and the performance

of enterprises in the steel industry in Vietnam The above situation requires a comprehensive and systematic study on the WCM efficiency of steel enterprises

in recent years, thereby, specifying the shortcomings and causes to the efficiency

of WCM, and proposing solutions to improve the WCM efficiency of steel

enterprises in the coming time That is why I choose the topic "A study on

improving working capital management efficiency of steel companies in Vietnam" for my Doctoral Thesis

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2 Research Objective

The research is conducted in order to propose solutions to improve WCM efficiency of steel companies in Vietnam

3 Scale and Scope of the study

- The study focuses on: WCM efficiency of steel companies

- Sample of the study includes: 26 companies in Vietnam which operate

in manufacturing and trading steel

- The study period is from: 2009 to 2018

4 Literature review

There have been researches on working capital, working capital management, and efficiency of WCM in the world and Vietnam Accordingly, international scholars study WC on two main aspects: (1) Research on the relationship between the efficiency of WCM and the profitability of companies (2) Research on determinants of WCM efficiency of firms

In Vietnam, researchers also follow two trends, in which the first is similar

to studies in the world, that is to find out the relationship between the efficiency

of WCM and the profitability of Vietnamese firms And the second trend is to study solutions to enhance the WCM ability in enterprises of some industries or

in a specific company

5 Research gap

First, most of the studies focus on the relationship between the efficiency of

WCM and the profitability of enterprises through Cash Conversion Cycle, Days Inventory Outstanding, Days Sales Outstanding, Days Payable Outstanding, but the research results or comments do not completely match, even contradict each other

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Second, studies are conducted on either determinants of WCM of enterprises

in different countries and industries or solutions to enhance WCM efficiency

enterprises in a specific industry, or group of industries, over a specific period

Third, most previous studies are usually based on a sample of all enterprises

in a country or research on solutions to improve the efficiency WCM of enterprises in other industries in Vietnam Up to now, there have been no in-depth studies on the determinants of WCM efficiency, as well as solutions to improve the WCM efficiency of steel enterprises in Vietnam Therefore, the topic chosen ensures the independence, does not overlap with any of other thesis topics, or any researches that have been conducted and published that I know

6 Main findings and contribution

First, systematize theoretical fundamentals of WC and efficiency of WCM

In which, WCM efficiency is approached in two aspects: (1) Combined efficiency

of WCM; and (2) Efficiency of WCM in each stage

Second, compile the experience of improving WCM efficiency of

enterprises around the world, from various perspectives: the government, the US, South Korea, and from international financial consulting firms This helps summarize important lessons for Vietnamese enterprises

Third, assess the current status of WCM efficiency of Vietnam's steel

enterprises over a 10-year period from 2009 to 2018, thereby pointing out the basic limitations including: (1) Apart from the group of Large-scale firms, WCM efficiency in the remaining groups of enterprises in Vietnam's steel industry has shown signals of deterioration; (2) The efficiency of inventory management of Stainless steel firms and Galvanized steel - Steel pipes firms has not been improved; (3) The efficiency of receivables management has shown notable concerns; (4) The efficiency of cash management has been negative in most groups of firms in the steel industry in Vietnam

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Fourth, by using panel data regression method, the thesis has identified

determinants of WCM efficiency of Vietnam’s steel enterprises, namely: economic growth, firm size, profitability, proportion of tangible fixed assets, and industry characteristics

Fifth, propose two specific groups of solutions to improve the efficiency

of WCM of Vietnam's steel enterprises in the socio-economic context of 2020 -

2025, vision to 2035

7 Methodology

7.1 Qualitative methods: The thesis uses a combination of interpretation,

induction, analysis, combination and comparison methods to describe statistical data on the efficiency of WCM of firms in the steel industry in Vietnam

7.2 Quantitative method: The thesis uses a panel data regression model to

evaluate the determinants of the WCM efficiency of Vietnam's steel enterprises

over the period 2009 - 2018

8 Thesis structure

Besides the introduction, conclusion, and appendix, the thesis consists of 3 chapters as follows:

- Chapter 1: Theory about working capital and the working capital

management efficiency of companies

- Chapter 2: Current situation of working capital management efficiency

of steel companies in Vietnam

- Chapter 3: Solutions to improve working capital management

efficiency of steel companies in Vietnam

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CHAPTER 1: THEORY OF WORKING CAPITAL AND

WORKING CAPITAL MANAGEMENT EFFICIENCY OF

COMPANIES 1.1 OVERVIEW OF WORKING CAPITAL OF COMPANIES

1.1.1 Working capital and roles of working capital in companies

1.1.1.1 Working capital concepts and characteristics

Working capital (WC) of a business is the amount of advance capital to form working assets, ensuring the process of production and operation in the company on a regular and continuous basis

The main characteristics of WC are as follows:

(1) WC participates in a business cycle, and always change the manifestation form through the stages in the business and production process, from the initial monetary capital form to materials, inventory reserve, to become unfinished products, semi-finished products, finished products and finally returns

to monetary capital form;

(2) At the end of each business cycle, the value of WC is transferred wholly and once to the value of produced goods and services and compensated when the enterprise receives money from selling goods and services

(3) The WC rotation is associated with the end of a business cycle The above process takes place regularly, continuously, and is repeated after each business cycle, forming a WC cycle

1.1.1.2 Roles of working capital in the business

Firstly, WC is the prerequisite material condition of the production and

business process

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Second, analyzing and evaluating the movement of WC through stages

helps business administrators to control the entire business activities of

companies

1.1.2 Working capital classification

According to the manifestation form, WC can be divided into: cash, receivables, and inventory

According to the role of WC in the production and business process, WC

is divided into the following main categories: WC in production reserve, WC in

production, WC in circulation

1.1.3 Working capital structure and factors affecting working capital structure of enterprises

1.1.3.1 Working capital structure

Working capital structure is the proportion of each component of the WC

in the total amount of WC in the enterprise Working capital structure varies from companies to companies

Working capital structure also varies among companies in the same sector Even one company could have different working capital structure in different periods of development

1.1.3.2 Factors affecting working capital structure of the business

- Factors in terms of material supply:

- Factors in terms of production:

- Factors in terms of circulation:

1.1.4 Working capital requirement of the business

In order that production and business activities to operate regularly and continuously, companies always need a certain amount of WC This amount of

WC is called the working capital requirement (WCR) of the firm Based on the

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nature (or time of arising), it is possible to divide the WCR of the business into 2 categories: regular WCR and irregular WCR (short demand term, temporary needs) In the scope of the thesis, the author focuses on the necessary regular WCR of enterprises, so the term WCR is understood as the necessary regular WCR of enterprises

1.1.5 Sources of working capital

WC of a business is the amount of advance capital to form working assets, ensuring the process of production and operation in the company on a regular and continuous basis Companies need to exploit WC from different sources in order

to have enough WC for production and business activities Each types of business

at different times would have different sources of WC It is possible to classify

sources of WC according to many methods, but mainly according to the time of

mobilizing and using capital Specifically: WC is taken from two sources: the

permanent WC source and the temporary WC

1.2 WORKING CAPITAL MANAGEMENT EFFICIENCY

1.2.1 Concept of working capital management efficiency

Efficiency of WCM is an economic category reflecting the ability to optimize the amount of WC used in production and business activities to create the maximum amount of profits Efficiency of WCM has a great influence on the entire efficiency of business capital management of an enterprise, and especially,

it has a decisive effect on the ability to pay off due debts of the enterprise

1.2.2 Working capital management and working capital management efficiency

1.2.2.1 Inventory and efficiency of inventory management

* Inventory and inventory management

In manufacturing enterprises, inventory (also known as capital in terms of materials - goods, or capital in terms of inventory) is the value of raw materials,

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fuels, tools (collectively referred to as manufacturing reserve), value of work in progress and semi-finished products (collectively referred to as work in progress) and value of goods and finished products in stock In manufacturing enterprises, inventory often accounts for the largest proportion in the amount of WC Therefore, the management and use of inventory in general, the efficiency of inventory management in particular has a great impact on the efficiency WCM

of enterprises

* Efficiency of inventory management

Efficiency of inventory management could be assessed by two ratios: Inventory Turnover and Days Inventory Outstanding

Average Inventory

Inventory Turnover

1.2.2.2 Receivables and receivables management efficiency

* Receivables and receivables management

Receivables, also known as accounts receivable, are the corporate capital that is used by organizations and individuals inside or outside the enterprise in the form of appropriation or being provided with commercial credit that the company is responsible for collecting Receivables include: Value of goods and services provided by the enterprise but the customer has not yet paid; Prepayments to sellers for supply of goods or services; deductible taxes; advances for officers, employees and employees in enterprises; other receivables such as damages of individuals or collectives that the company has not yet collected, etc

In which, receivables from customers often account for the largest proportion At the same time, in most businesses, receivables accounts for a relatively large proportion of the total WC

* Receivables management efficiency

1.2.2.3 Cash and cash management efficiency

* Cash and cash management

Cash is the most important and most liquid part of the working assets in a business, directly impacting the solvency of the business and contributing to the regular and continuous business operations Cash exists directly in the form of cash in hand, deposits at the bank and cash-in-transit

* Cash management efficiency

To evaluate the efficiency of cash management, it is necessary to consider the ratio of Cash Conversion Cycle (CCC):

Cash Conversion Cycle

− Days Payables Outstanding

In which, Days Inventory Outstanding and Days Sales Outstanding have

been presented in sections 1.2.2.1 and 1.2.2.2, Days Payables Outstanding ratio

in the long term is to maximize profits, so the ROW could comprehensively

evaluate the WCM efficiency of the enterprise, also known as Combined

efficiency of WCM

Moreover, efficiency of WCM could be assessed through a number of effectiveness ratios which show the rate of WC rotation The faster WC rotates, the higher the effectiveness is and vice versa The rate of WC rotation could be reflected through the ratios of Working Capital Turnover and Days Working Capital

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1.2.3.2 Subjective determinants

In addition to the above objective determinants, there are many subjective determinants created by the enterprises themselves that affect the efficiency of capital use, including: firm size, proportion of tangible fixed assets, financial leverage, profitability, sales growth, age of the business, corporate governance and leadership characteristics Moreover, many other subjective determinants are also considered factors affecting the efficiency of WCM such as: Financial management regulations of the company, vision and strategy of the company, relationship between the company and its customers and suppliers, qualifications

of officials and employees in enterprises, expenditure capital, etc

1.3 INTERNATIONAL EXPERIENCE IN WCM EFFICIENCY AND LESSONS FOR COMPANIES IN VIETNAM

With experience from many different perspectives, from state management

to specific enterprises of countries in the world, businesses in Vietnam can learn

many lessons, as follows:

First, CFO takes the main responsibility for the management of WCM Second, improving the efficiency of WCM should be in the long-term strategy of businesses

Third, businesses need to focus on minimizing the cash conversion cycle Fourth, technology should be modernized to improve the efficiency of WCM

Fifth, the government's state capital management committee should develop a manual on WCM for state-owned enterprises