Therefore, it is necessary to have a study to examine the factors affecting trade credit and analyze the impact of customer receivables on the performance of listed companies.. + Analyze
Trang 1INTRODUCTION
1 The necessity of research
In the current economy, in order to facilitate the business process, the companies often let
customers buy goods with deferred payment for a certain period This has nearly become the
market’s law Businesses selling products will offer trade credit to customers firms purchasing
goods will obtain trade credit from the seller, respectively
However, the granting or receiving of trade credit will depend on various subjective and
objective factors This issue has also received the researchers’ attention around the world such
as Petersen and Rajan (1997), Niskanen and Niskanen (2006), Bougheas et al (2009),
García-Teruel and Martínez-Solano (2010a), etc Nevertheless, the research’s findings are controversial
as the factors affecting trade credit vary significantly between countries and industries
In addition, as we already know, companies granting trade credit to customers will be able
to speed up sales, reduce inventory, and increase revenue At the same time, buyers who are
offered trade credit will have a source of goods for production and business without immediate
payment However, maintaining a lot of receivables will not be healthy for companies Since
companies will face credit risk when implementing the sell-on strategy, namely the risk of
losing money if customers don’t pay for the products when due Meanwhile, trade credit
is mostly financed by short-term bank loans and offen used from payables that supplier’s capital is
occupied by the firms Therefore, it would also costs if the company’s trade credit strategy is ineffectual
So the question is how much trade receivable firms should allow their customers occupy is optimal to
maximine operational efficiency and firm value From there, the factors affecting the trade credit will
be adjusted appropriately As businesses give trade credit to consumers, the company is at a proactive
position, so it can determine the amount of money that might be employed by customers in a short time
space The firm is in a passive role when it takes advantage of the supplier’s trade credit, so it cannot
decide on its own how much trade payable it hopes to obtain These businesses should
only concern about what they can assist to benefit from the suppliers’ capital, but not reduce
the companies’ credit rating and credibility Then, the enterprises can operate sustainably and enhance
performance efficiency
Simultaneously, in the reality of Vietnam, trade credit is being used considerably by
companies in the business processes Nevertheless, the factors influencing trade credit and the
impact of trade credit Vietnamese enterprises’ performance in general and by industry sectors in
particular has been not comprehensively studied Afterward, the driving factors are adjusted
appropriately to maximize operating efficiency and firm value Hence, the topic “Research on
factors affecting trade credit of Vietnamese enterprises” is selected as the research purpose
2 Literature review
Studies on factors affecting companies’ trade credit
Factors influencing trade credit include operational years, size, net cash flow, short-term
finance, short-term borrowing ratio, financial cost, sale growth, asset turnover, short-term asset
ratio, gross profit margin, inventory ratio, and liquidity (Nadiri, 1969; Long et al., 1993; Petersen
and Rajan, 1997; Ng et al., 1999; Danielson and Scott, 2004; Niskanen and Niskanen, 2006;
Bougheas et al., 2009; García-Teruel and Martínez-Solano, 2010a; Vaidya, 2011; Khan et al., 2012;
Phan Đinh Nguyen và Truong Thi Hong Nhung, 2014; Shi et al., 2016; Tran Ai Ket, 2017)
However, each study has various factors affecting trade credit whereas the degree and direction of
these factors are also distinct
Research on the impact of trade credit on the enterprises’ performance
- The impact of trade payables on business performance Most of the analyses suggest that trade payables have a positive effect on the firm's performance, i.e., appropriating capital for as long as possible, as long as it does not affect a firm's credit rating (Lazaridis and Tryfonidis, 2006; Gul et al., 2013; Makori and Jagongo, 2013; Ukaegbu, 2014) However, no studies point out that the trade payables have a negative impact on firm's performance There are analyses confirm that business performance negatively affects the enterprise's accounts payable To explain this, the studies suggested that when operating efficiency decreases, profitability is low, so prolonging payment terms for suppliers, leading to increased payables These studies can be mentioned as Deloof (2003), Padachi (2006), Akinlo (2011), Sharma and Kumar (2011), Mansoori and Muhammad (2012), Vahid et al (2012) Additionally, pieces of research find no association between these two variables such as Garcıa-Teruel and Solano (2007), Gill et al (2010)
Thus, the research scope of the topic will not analyze the effect of payables on business performance Since previous studies, all show that the payables have a positive impact on firm performance thanks to its low cost of capital It means that occupying payables increases firm’s profitability consequently helps to enhance operational efficiency
- The impact of customer receivables on business performance There are two schools of thought in analyzing the influence of customer receivables on business performance The first stream proves that the customers receivable have a beneficial impact on the business’s operational efficiency, i.e the longer days of collection is, the higher the profit margin is, thereby enhance the firm’s operational efficiency Such studies can be mentioned as Akinlo (2011), Sharma and Kumar (2011) On the contrary, most other studies have suggested that increasing the number of days to collect money from consumers will make profits decrease, at the same time business efficiency will reduce This means that the number of days of sales
is inversely related to profitability These studies include Deloof (2003), Lazaridis and Tryfonidis (2006), Padachi (2006), Garcıa-Teruel and Solano (2007), Gill et al (2010), Mansoori and Muhammad, (2012), Vahid et al (2012), Gul et al (2013), Makori and Jagongo (2013), Ukaegbu (2014) There is only one study by Martínez-Sola et al (2012) showed that a nonlinear relationship exists between customer accounts receivable and firm value Accordingly, when accounts receivable are kept below the optimum amount of receivables, the benefits of trade credit will prevail, and an increase in receivables will result in a rise in corporate value Conversely, when the receivable is held higher than the optimal receivable, it will reduce firm value
3 Research gap Currently there are no studies in Vietnam that comprehensively consider the internal factors affecting Vietnamese listed firms’ trade credit in general and by industry sector specifically In addition, the provision for bad debts might affect customer receivables that has not been tested by any study Besides, the general concern accepted that the business's operational goal is to maximize the value of assets for the owners To achieve the goal, companies must improve their operational efficiency Hence, businesses need to know how trade credit affects operational efficiency to adjust the factors affecting trade credit to improve operational efficiency Therefore, it is necessary to have a study to examine the factors affecting trade credit and analyze the impact of customer receivables on the performance of listed companies At the same time, it discovers the optimal level of customer receivables for Vietnamese listed companies in
Trang 2general and Vietnamese listed industry groups in particular to maximize the business performance
Currently, there are no studies in Vietnam and in the world that mention this issue So, it can be
considered as a research gap
4 Objectives of the study
- Thesis’s general objective: to examine factors affecting trade credit of Vietnamese firms
This is the foundation on which propose recommendations to improve the trade credit
management of Vietnamese companies
- To accomplish the general goal, the thesis offers the following specific objectives:
+ Complete theoretical analysis framework on trade credit of enterprises
+ Analyze and assess the current situation of factors affecting trade credit of Vietnamese listed
companies in general and Vietnamese listed industry groups in particular
+ Analyze and assess the current situation of the impact of trade credit on the performance
of Vietnamese listed companies in general and Vietnamese listed industry groups in particular
+ Recommendations are proposed to improve the management of trade credit for
Vietnamese listed companies
5 Research subjects and scope of the study
5.1 Research subjects
The subjects of study is the enterprise's trade credit
The thesis only focuses on the subjective factors belonging to the business affecting trade credit, in
which trade credit is understood to be trade receivables (short-term) and trade payables
When studying the impact of trade credit on the performance of Vietnamese listed
companies, the thesis only focuses on researching the impact of customer receivables on the
performance of Vietnamese listed enterprises
5.2 Research scope
- Research space: Vietnamese non-financial companies listed on HNX and HOSE
- Research period: the 2013-2017 period
6 Research questions
- Research questions:
+ What factors affect the trade credit of businesses?
+ How is the situation of factors affecting trade credit of Vietnamese listed companies in
general and Vietnamese listed industry groups in particular?
+ Is there an optimal level of customer receivables at which the Vietnamese listed
companies have the highest performance? What is the ideal amount of account receivable of
Vietnamese listed companies in general and by industry sectors in particular?
- Management question: What are the recommendations to improve the trade credit
management in Vietnamese listed companies?
7 The contributions of the thesis
Firstly the study inherits and builds a model measuring the factors affecting trade credit
and add a new variable affecting trade credit, which is the provision for bad debts Specifically,
an increase in the provision for bad debts causes costs to increase and profits to decrease,
resulting in a decrease in the market value of the stock (Cheng et al., 2009) Therefore, in order
not to reduce profits and stock value, listed businesses must increase revenue through accelerating sales by loosening trade credit policies for customers, making receivables increased The second contribution is to identify factors that influencing the trade credit of Vietnamese listed companies in general and industry groups in particular on both aspects, including accounts receivable from customers and accounts payable to the seller The factors impacting
on customer receivables of listed companies are provision for bad debts, net cash flow, financial cost and inventory ratio The factors affecting the trade payables of listed companies are short-term loan ratio, net cash flow, ratio of short-term assets, inventory ratio, liquidity and firm size Moreover, it is noteworthy that the sale growth factor, unlike the previous studies, has no effect on trade credit of Vietnamese listed companies in general and industry groups in particular Thus, the motivation that makes the accounts receivable changed
in Vietnam listed companies is not the increasing sales goal, but the more profound purpose
is to increase profits since profit is the core goal of each enterprise If businesses only focus
on increasing sales but do not care about profits, it is very dangerous because the risks of not being able to recover money are very large In addition, whether Vietnamese listed companies use capital from suppliers more or less will not depend on sales, but mainly on cash flow, financial cost and the ratio of short-term loans
The third contribution is to determine the impact of customer receivables on the performance of Vietnamese listed companies in general and Vietnamese listed industry groups in particular (infrastructure services industry, consumer services, consumer goods, and basic materials) in an inverted U shape It can be understood that in the initial increase
of customer receivables, the more receivables increase the more effective the business
is To a certain level of receivables, the more receivables from customers make the business performance decrease The point at which corporate performance reverses is called optimal customer receivables
The fourth contribution is to determine the optimal customer receivables to maximize the operational efficiency of Vietnamese listed companies in general and for each industry sector in particular Specifically, the optimal level of customer receivables over total assets of Vietnamese listed companies is generally 25,07%; the infrastructure services industry is 15,10%, the consumer services industry is 17,42%; the consumer goods industry is 19,51% and the basic materials industry is 17,50%
The fifth contribution is a recommendation to businesses and the government to help Vietnamese listed companies improve the efficiency of trade credit management For businesses acting as a trade credit providers, it is necessary to: (1) Pay attention to factors affecting customer receivables and current versus optimal customer receivables to make appropriate adjustments, (2) Establish an effective receivable management process For businesses acting as trade credit users,
it is necessary to: (1) Strengthening the advantage of big business to use capital from suppliers, (2) Use more trade credit when commercial bank interest rates rise, (3) Depending on the characteristics of each business area, businesses can choose to use more trade credits, (4) When businesses have difficulties in cash flow and liquidity, businesses should use trade credit, (5) Calculate reasonable payment time to bring benefits to businesses For the Government should: (1) Build a strong the legal framework in trade credit relations, (2) Take control of macro issues like inflation and interest rates, (3) Establish trade credit information center for businesses, (4) Establish and facilitate the debt trading market
Trang 38 The structure of the thesis
Besides, the introduction, and conclusion, the thesis content includes 5 chapters: Chapter
1: Theoretical framework of trade credit and the factors affecting enterprises’ trade credit;
Chapter 2: Research method; Chapter 3: The current situation of trade credit of Vietnamese
enterprises; Chapter 4: Results of the test of factors affecting trade credit of Vietnamese
enterprises; Chapter 5: Research discussions and recommendations
CHAPTER 1: THEORETICAL FRAMEWORK OF TRADE CREDIT AND
THE FACTORS AFFECTING ENTERPRISES’ TRADE CREDIT
1.1 Trade credit of the business
1.1.1 The concept of trade credit
Trade credit is the credit between enterprises in the buying and selling process
Specifically, the vendor agrees to the customers to get the products with delay payment
conditions within a certain period This investment is recognized as the buyers’ account
receivable with the sellers, and this capital appropriation is recognized as the accounts payable
in the balance sheet of the purchaser
1.1.2 Characteristics of trade credit
- The object of trade credit is commodities, not cash
- The manufacturers are the organizations involving in the trade credit relationship
- The credit scale is usually small
- Credit periods are usually short
1.1.3 The purpose of forming trade credit
There are three motivations behind the emergence of trade credit which are finance, cash
flow management, and sales (García-Teruel and Martínez-Solano, 2010a) These motives are
rooted in theories: financial advantage theory, transaction costs theory, price discrimination
theory (Petersen and Rajan, 1997)
1.1.4 The role of trade credit
- Accelerate the process of goods’ distribution, reduce storage costs of credit vendors and
shorten business cycle of purchasers
- Save expenses and speed up the money circulation
- Fostering business growth and economic development
1.1.5 The impact of trade credit on business performance
1.1.5.1 The impact of trade payables on business performance
Most of pieces of research suggest that trade payables have a beneficial effect on the
firm's efficiency, i.e., appropriating payables for as long as possible, whenever it does not affect a firm's
credit rating There are no studies, however, reveal that the trade payables have an adverse impact on
firm's performance There are a few studies confirming that company’s performance negatively affects
the enterprise's accounts payable Since a reduction of efficiency and low profitability causes
the expansion of payment period toward the suppliers, thus the account payables rises
1.1.5.2 The impact of customer receivables on business performance
Pertaining to the previous studies, the impact of customer receivables on the operational
performance can be positive or negative Only one study by Martínez-Sola et al (2012) showed
that there is a non-linear relationship between customer receivables and firm value Accordingly, when customer receivables are kept below optimal levels, the benefit from trade credit will prevail, an increase of customer receivables leads to a rise of firm value Conversely, when customer receivables are kept above the optimal level of receivables, it will reduce the value of the business
Thus, providing trade credit can bring pros and cons to the company Therefore, the businesses need to balance the benefits and costs when providing trade credit The trade credit’s gain include: (1) increasing sales and profits; (2) strengthening long term business relationships with customers; (3) being a part of the company's pricing policy to stimulate demand; (4) being
an investment strategy to find customers; (5) generating interest income for buyers' late payments In addition to the benefits, trade credit also brings disadvantages such as: (1) financial risk; (2) increasing cost of credit management Therefore, the relationship between customer receivables and business value will become negative at a high level of customer receivables This is because the cost of trade credit will outweigh the benefits at a too high level of customer receivables (Martínez-Sola et al., 2012)
1.2 Factors affecting the trade credit of the business 1.2.1 The objective factors
The objective factors affecting trade credit include a country's monetary policy, financial system development and legal infrastructure; the development of financial markets and financial intermediaries; macroeconomic growth; characteristics of the business line
1.2.2 The subjective factors The subjective factors affecting trade credit include: years of operation, size, net cash flow, term finance, term borrowing ratio, financial cost, sale growth, asset turnover, short-term asset ratio, gross profit margin, inventory ratio and liquidity
1.3 Theories applied to research the trade credit of the business
- Theory of customer receivables management
- Theory of seller payables management
- Theory of the trade-off between risk and expected return
CHAPTER 2: RESEARCH METHODS 2.1 Proposed research model and research hypothesis
2.1.1 Research model of factors affecting trade credit of enterprises
To answer the research question about factors affecting trade credit of enterprises, the author uses 2 models on the basis of the inheritance and development from the previous studies, especially the study of García-Teruel and Martínez-Solano (2010a) Specifically:
Model 1: Examining the factors affecting the customer receivables of the enterprise RECit = β0 + β1PROVIit + β2GROWTHit + β3SIZEit + β4LAGEit + β5STLEVit + β6FCOSTit
+ β7CFLOWit + β8TURNit+ β9GPROFit + β10INVENit+ β11LIQit+ εit (1)
Of which: PROVI is Provisions for doubtful debts This is a new variable added to the model by the author Currently in Vietnam, the provision for bad debts is made accordance with
“Circular 48/2019/TT-BTC dated 08/08/2019 of the Ministry of Finance guiding the appropriation and handling of provisions for devaluation of inventories, loss of investments, bad debts and warranty for products, goods, services, construction works at enterprises”
Trang 4Provisions are seen as expenses of the business Therefore, if the enterprise makes a provision,
it will be reduced a part of corporate income tax payable However, for many listed companies,
provision reduces corporate profits and affects the market value of shares (Cheng et al., 2009)
So corporations will try to increase revenue to cover the losses or potential loss to not to affect
the market value of the stock
Therefore, if the provision for bad debts increases, it indicates that the risk of the business
is likely to rise, so the enterprise will limit granting trade credit to customers However, the
growth in provision for bad debts may also increase customer receivables Because if the
provision for bad debts goes up, it reduces profits and stock value Hence, the enterprises raise
the adoption of trade credit strategy, leading to an increase of customer receivables, stimulating
revenue and profit Thus, the study does not have a straightforward forecast for the relationship
between the provision for doubtful debts and the receivables This will be verified experimentally
The research hypothesis is summarized in Table 2.1 with the expectation of the sign as
follows:
Table 2.1 Describe the variables measuring the factors affecting customer receivable
for the sign
Studies have been done that have corresponding scales
Dependent
variable
Customer
receivables
rate
REC
Average customer receivables/ Total average assets
Niskanen and Niskanen (2006);
Martínez-Sola et al (2012); Khan
et al (2012), Tran Ai Ket (2017) Independent
variables
Provision
for bad
debts
PROVI
Absolute value of the average provision for bad debts/ Total average assets
+/-
Sale growth GROWTH (Sales year t – Sales
year t-1)/ Sales year t-1 +/-
Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and Martínez-Solano (2010a), Khan et al
(2012), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et al (2016)
Size SIZE Ln (Total Revenue) +/- Martínez-Sola et al (2012)
Years of
operation LAGE
Ln (1 + Years of
Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and Martínez-Solano (2010a), Khan et al
(2012), Shi et al (2016), Tran Ai Ket (2017)
Short-term finance STLEV
Average short-term
García-Teruel and Martínez-Solano (2010a), Vaidya (2011), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et
al (2016) Financial
Financial cost/
(Average payables - Average payables to sellers)
- García-Teruel and Martínez-Solano (2010a)
Net cash
(Profit after tax + Depreciation) / Sales +/-
García-Teruel and Martínez-Solano (2010a)
Asset turnover TURN
Sales/(Average total assets - Average customer receivables)
+/- García-Teruel and Martínez-Solano (2010a)
Gross profit margin GPROF Gross margin/ Sales +
Petersen and Rajan (1997), García-Teruel and Martínez-Solano (2010a)
Inventory ratio INVEN
Average inventory/
Bougheas et al (2009), Vaidya (2011)
Liquidity LIQ
Average Cash and Short-term investments/
Average short-term debt
+/- Nadiri (1969)
Source: Author's synthesis Model 2: Examining the factors affecting the trade payables of the enterprise PAYit = β0 + β1GROWTHit + β2SIZEit + β3LAGEit + β4STFINDit+ β5FCOSTit +
β6CFLOWit+ β7CURRASit+ β8INVENit+β9LIQit+ εit (2) The research hypothesis is summarized in Table 2.2 with the expectation of the sign as follows:
Table 2.2 Describe the variables measuring the factors affecting trade payables Variable Symbol Scale Expectations for the sign Studies have been done that have corresponding scales Dependent
variable Seller payables rate
PAY Average seller payables/
Average total assets
Petersen and Rajan (1997), Niskanen and Niskanen (2006) and García-Teruel and Martínez-Solano (2010a), Tran Ai Ket (2017)
Independent variables
Trang 5Sale growth GROWTH (Sales year t – Sales year
Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and Martínez-Solano (2010a), Khan et al (2012), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Shi et al
(2016) Size SIZE Ln (Total Revenue) +/- Martínez-Sola et al (2012)
Years of
operation LAGE Ln (1 + Years of operation) +/-
Petersen and Rajan (1997), Niskanen and Niskanen (2006), García-Teruel and Martínez-Solano (2010a), Khan et al (2012), Shi et al
(2016), Tran Ai Ket (2017) Short-term
borrowing
ratio
STFIND
Average short-term borrowings / Average total assets
-
García-Teruel and Martínez-Solano (2010a), Phan Dinh Nguyen and Truong Thi Hong Nhung (2014), Tran Ai Ket (2017)
Financial
Financial cost/ (Average payables - Average payables to sellers)
+ García-Teruel and Martínez-Solano (2010a)
Net cash
(Profit after tax + Depreciation) / Sales -
García-Teruel and Martínez-Solano (2010a)
Short-term
asset ratio CURRAS
Average short-term assets / Average total assets +
García-Teruel and Martínez-Solano (2010a)
Inventory
ratio INVEN Average inventory/ Sales +/-
Bougheas et al (2009), Vaidya (2011)
Liquidity LIQ
Average Cash and Short-term investments/ Average short-term debt
- Nadiri (1969) Source: Author's synthesis 2.1.2 Model to study the impact of customer receivables on business performance
To answer the research question of the impact of customer receivables on the performance
of Vietnamese listed companies, the author inherits and develops from the research model of
Martínez-Sola et al (2012) to set up 2 models, including:
Model 3: Testing the non-linear relationship between customer accounts receivable and
business performance
Vit = β0 + β1(RECit) + β2(RECit2) + β3(GROWTHit) + β4(SIZEit) + β5(LEVit) + εit (3)
The research hypothesis is summarized in Table 2.3 with the expectation of the sign as
follows:
Table 2.3 Describe the variables used to test the nonlinear relationship between
customer accounts receivable and business performance
for the sign
Studies have been done that have corresponding scales Dependent
variable Return on
Profit after tax / Average total assets
Wang (2002), Forghani et al (2013), Bagh et al (2016) Return On
Profit after tax / Average equity
Wang (2002), Forghani et al (2013), Bagh et al (2016) Independent
variables Customer receivables rate REC
Average customer receivables/ Total average assets
+
Niskanen and Niskanen (2006); Martínez-Sola et al (2012); Khan et al (2012), Tran Ai Ket (2017)
The squared customer receivables ratio
(REC)2
Square of (Average customer receivables / Average total assets)
- Martínez-Sola et al (2012)
Sale growth GROWTH (Sales year t – Sales year
t-1)/ Sales year t-1 +
Geroski et al (1997); Claver et
al (2002); Samiloglu and Demirgunes (2008); Martínez-Sola et al (2012); Yazdanfar (2013)
Size SIZE Ln (Total Revenue) +/- Martínez-Sola et al (2012);
Yazdanfar (2013) Financial
Leverage LEV
Average Liabilities / Average Equity -
Goddard et al (2005); Martínez-Sola et al (2012) Source: Author's synthesis H21: The impact of trade receivables on the performance of Vietnamese listed companies
is non-linear (inverted U shape) This means that the relationship between customer accounts receivable and performance of the listed Vietnamese companies will not be monotonous (concave) Specifically, there is a positive relationship when customer receivables are low and there is a negative relationship when customer receivables are high At the same time, there is
an optimal level of customer receivables where the performance of Vietnamese listed companies
is the greatest Therefore, the study expected positive sign for variable REC (β1> 0) and negative sign for variable REC2 (β2 <0) This reversal point is the optimal customer receivables and is equal to - β1/2 β2
Model 4: Examining the impact of the change in customer receivables on the business performance
Vit = β0 + β1(DEVIATIONit) + β2(GROWTHit) + β3(SIZEit) + β4(LEVit) + εit (4)
Trang 6DEVIATION: it represents the deviation from the optimal receivable level, calculated by
taking the absolute value of the residual in the first model DEVIATION is used to determine
whether deviations from target receivables affect the performance of Vietnamese businesses At
the same time, we removed the two REC and REC2 variables in the third model and replaced
the DEVIATION variable, then regressed the DEVIATION variable in the fourth model
H22: When the receivables are higher or lower than the target receivables, they reduce
the efficiency of Vietnamese enterprises, ie β1 <0
The research hypothesis is summarized in Table 2.4 with the expectation of the sign as
follows:
Table 2.4 Describe the variables used to test the effect of change in customer receivables
on the performance of the business
for the sign
Studies have been done that have corresponding scales Dependent
variable
Return on
Profit after tax / Average total assets
Wang (2002), Forghani et al
(2013), Bagh et al (2016) Return On
Profit after tax / Average equity
Wang (2002), Forghani et al
(2013), Bagh et al (2016) Independent
variables
Deviation
from optimal
receivables
DEVIATION
Absolute value of residuals in model
1
- Martínez-Sola et al (2012)
Sale growth GROWTH
(Sales year t – Sales year t-1)/
Sales year t-1
+
Geroski et al (1997); Claver et al
(2002); Samiloglu and Demirgunes (2008); Martínez-Sola et al (2012); Yazdanfar (2013)
Martínez-Sola et al (2012);
Yazdanfar (2013) Financial
Average Liabilities / Average Equity
- Goddard et al (2005);
Martínez-Sola et al (2012) Source: Author's synthesis 2.2 Data collection methods and processing data
2.2.1 Data sources
Data used in the study were collected from two sources, which are primary and secondary
- Primary data: obtained from in-depth interviews with business leaders about factors
affecting the trade credit management of listed companies in Vietnam and the impact of trade
credit on the performance of Vietnam's listed companies
- Secondary data: obtained from the financial statements of Vietnamese listed companies excluding financial sector on the HNX and HOSE provided by the General Statistics Office of Vietnam with the high reliability
2.2.2 Data analysis method
Qualitative method The method used in this study is a method of in-depth interviews in the form of semi-structured firms’ executive about the factors affecting trade credit management in Vietnamese listed companies
The main objective of the survey is to assess the current situation of using trade credit policies and the factors affecting the granting and use of trade credit of Vietnamese listed companies At the same time, the survey tests whether trade credit has an impact on the performance of Vietnamese listed companies The survey’s findings will support the academic world the manner to explain quantitative empirical research results about the current situation
of factors affecting trade credit and the impact of trade credit on the performance of Vietnamese listed companies Since then, the thesis proposes suitable recommendations to improve the management of trade credit for listed companies in Vietnam
Quantitative method The study uses multivariate linear regression models and tabular data for Vietnamese listed companies with the support of Stata 14.0 software
The thesis uses Random Effects Model (REM), Fixed Effects Model (FEM), Feasible Generalized Least Squares (FGLS) and Generalized Method of Moments (GMM) The author uses necessary tests to select the appropriate model, as well as detecting and correcting model defects such as F-test, Hausman test, VIF coefficient, Wald test, Breusch test -Pagan test, Wooldridge test, Hansen test and Arellano-Bond test In particular, the author uses the GMM model - this is a modern estimation method that allows to overcome many defects of the model such as heteroscedasticity, autocorrelation and endogenous phenomena in the model 2.3 Research data
2.3.1 Qualitative research data Qualitative research data includes in-depth interviews of listed companies The author stops interviewing when the information is saturated and there is no new information available Number of interviews was 21, including 2 enterprises in infrastructure services, 2 enterprises in technology industry, 3 enterprises in industry, 4 enterprises in consumer services, 4 enterprises
in consumer goods, 4 enterprises in basic materials and 2 enterprises in the health sector in Hanoi, Ho Chi Minh City, Da Nang and Binh Dinh Time for each interview lasted about 35-60 minutes
2.3.2 Quantitative research data Quantitative research data includes the financial statements of 326 non-financial joint stock companies listed on the HNX and HOSE, provided by the General Statistics Office of Vietnam in the 2013-2017 period with approximate 1630 observations in 7 industry groups including: basic materials, industry, consumer goods, health care, consumer services, infrastructure services and technology
Trang 7CHAPTER 3: THE CURRENT SITUATION OF TRADE CREDIT
OF VIETNAMESE ENTERPRISES 3.1 Characteristics of business operations of listed companies on the Vietnamese
stock markets
3.2 Trade credit situation of Vietnamese listed companies
3.2.1 Trade credit value scale
3.2.1.1 Account Receivables
The proportion of accounts receivable from customers to the total assets in Vietnamese
listed companies is significant as 18,68% However, if we compared with the study of
García-Teruel and Martínez-Solano (2010a), the ratio of trade receivables to total assets of Vietnam is
still low compared to other countries, for example in Spain is 39,28%, Greece is 36,55%, France
is 35,55%, and Finland has the lowest rate of 19,18%
3.2.1.2 Account Payables
The average market payables accounted for 11,60% of total liabilities and equity The
technology industry has the highest account payable proportion with an average rate of 14,44%
Especially, in this industry, there are businesses that hold the account payable as 69,45% of total
liabilities and equity This is also the industry sector providing the most trade credit to customers
in the whole market However, the seller's capital appropriation rate in Vietnamese list
companies is still much lower than in other countries in the world
3.2.2 The current situation of the use of trade credit in Vietnam's listed companies
The current situation of trade credit usage of Vietnamese listed companies is reflected
through in-depth interviews with business leaders
The usage levels of trade credit
According to results being obtained from in-depth interviews, 100% of businesses use
credit from suppliers In general, Vietnamese businesses are now usually allowed to pay
30-60-90 days deferred, rarely 120 days (DN1)
Reasons for using trade credit
The majority of enterprises believe that the main reason of using trade credit is capital
rotation In addition, “this activity helps businesses obtain more capital and ensures business
process” (DN20)
Factors affecting the use of trade credit
(1) Prestige; (2) Cash flow and solvency; (3) Inventories; (4) Bank interest rate; (5)
Discount rate for early payment; (6) Sales ability
The impact of the use of trade credit on business performance
Most businesses said that commercial credit has a positive impact on business performance
According to DN1, “the longer an enterprise occupies trade credit, the easier it is to turn the capital
around, thus the enterprise will make many good policies and its profitability will be better”
However, a few businesses hold a firm belief that the usage of trade credit is only
“reluctant” since if the debt is too high, the reputation will decrease, the suppliers will
stop providing the goods This leads to there might be not enough materials for production and
business (DN8) or firms need to import materials at the high prices, consequently lowering firm
performance (DN14, DN21)
3.2.3 Trade credit policy of Vietnamese listed companies The current status of the trade credit policy of Vietnam's listed companies is expressed in the outcomes of the in-depth interviews with corporate executives
The usage levels of the trade credit policy 100% of businesses use trade credit policy in sales activities
Reasons for using the trade credit policy The main reason why businesses implement trade credit policy is the competition and to remain business relationships
Factors affecting trade credit policy Revenue and profit; (2) Bank interest rate; (3) Inventories; (4) Ability to rotate capital, cash flows; (5) Industry features
Trade credit policy
- Credit term and discount rate The credit term depends a lot on the industry, but it is usually between 30 and 120 days
- Credit requirements Normally, businesses currently use the 5C judgment to measure credit quality: Character, Capacity, Capital, Collateral and Condition
- Debt collection policy Debt collection policy is the policy which is related to the collection process of account receivables Most of businesses believe that the debt collection process consists of the following steps: determining the amount of receivales should be claimed, classifying customers by the receivables’ levels, choosing debt collectors, reminding collectors, reminding customers to pay when the due date is close and negotiating with consumers If they still don’t pay the debt, company will ask for court intervention
- Payment discount Payment discount is the discount amount of money for early payment customers It is a tool to encourage customers to pay account receivalles on time
The impact of trade credit policy on business performance The majority of enterprises stated that trade credit policy has a positive impact on business performance However, a few said that if they do not control their receivables well, bad debts will appear Thereby they negatively impact on the firms’ operational efficiency since all of firm always need financial sources to do business
3.2.4 Characteristics and role of trade credit for Vietnamese listed companies
Trade credit characteristics of Vietnamese listed companies
- Trade credit is used by businesses popularly and with simple manner
- Trade credit potentializes many risks
- There haven’t existed the specific regulations of trade credit yet
The role of trade credit for Vietnamese listed companies
- Increase financial resources for production and business activities
- Save the cost of capital and money circulation costs
- Speed up the products circulation
Trang 83.3 Assess the current status of trade credit of Vietnam's listed companies
Currently, trade credit is being used by many Vietnamese listed companies, but there are
many potential risks Vietnamese listed companies also have a certain credit requirements
However, according to the results of in-depth interviews, many enterprises do not have detailed
binding terms, as well as the debt collection process has not been properly built Therefore,
businesses need to study the strict terms of the business contract and establish a strict debt
collection process to avoid any loss to businesses In addition, according to Vietnamese listed
companies, trade credit is a valuable source of funding, so most businesses do not miss this
source of capital to diversify the financial sources and maintain business operations However,
it does not mean that the companies can use these financial sources as much as possible, the firms’
reputation and the relationship between them and their vendors are the core determination
The application of trade credit policies of Vietnamese listed companies is heavily
influenced by the degree of corporate creditworthiness In general, Vietnamese enterprises with
large scale and the stable market will reduce the attraction of customers through trade credit
policy Besides, long-established businesses will provide credit to customers more than
misappropriating capital from suppliers
CHAPTER 4: RESULTS OF THE TEST OF FACTORS AFFECTING
TRADE CREDIT OF VIETNAMESE ENTERPRISES
4.1 Descriptive statistics
4.2 Examining the factors affecting the customer receivables of Vietnamese listed companies
Table 4.1 Factors affecting customer receivables
PROVI 0,7116*** 1,0127*** 1,4667*** 1,6450**
GROWTH -0,0165*** -0,0111** -0,0114*** -0,0201
SIZE -0,0153*** -0,0126*** -0,0098*** 0,0024
STLEV 0,0880*** 0,1071*** 0,0999*** -0,0893
INVEN -0,1288*** -0,1112*** -0,0606*** -0,2008*
(*), (**) and (***) represent 10%, 5%, and 1% significance respectively
Source: Author's test results
In table 4.1, employing the GMM estimation method, there are 4 factors that affect the receivables in the whole market including: provision for bad debts (PROVI), net cash flow (CFLOW), financial cost (FCOST) and inventory ratio (INVEN)
Additionally, each industry group will have its own unique and different business characteristics, so the factors affecting the customer receivables of each industry group are also different The test results of factors affecting the customer receivables of Vietnam's listed companies under the GMM method are detailed in Appendix 7
4.3 Examining the factors affecting the trade payables of Vietnamese listed companies
Table 4.2 Factors affecting trade payables
SIZE 0,0096** 0,0090*** 0,0044*** 0,0124**
STFIND -0,3408*** -0,3024*** -0,2511*** -0,1972***
CFLOW -0,0978*** -0,1353*** -0,0919*** -0,1404*** CURRAS 0,2403*** 0,2323*** 0,2096*** 0,1369*** INVEN -0,0384** -0,0424*** -0,0269*** -0,0877*** LIQ -0,0527*** -0,0512*** -0,0405*** -0,0343***
(*), (**) and (***) represent 10%, 5%, and 1% significance respectively
Source: Author's test results
In table 4.2, by using the GMM method of estimation, there are 6 factors affecting the trade payables in the whole market including short-term loan ratio (STFIND), net cash flow (CFLOW), short-term assets ratio (CURRAS), inventory ratio (INVEN), liquidity (LIQ), firm size (SIZE)
Trang 9In addition, each industry group will have its own unique and different business
characteristics, so the factors affecting the trade payables of each industry group are also
different The test results of factors affecting the trade payables of Vietnam's listed companies
under the GMM method are detailed in Appendix 8
4.4 Examining the impact of customer receivables on the performance of Vietnam's
listed enterprises
The regression results show that the expectation of a nonlinear relationship between
customer receivables and business performance is completely reasonable (table 4.3) The
regression coefficients of the variables REC and REC2 are statistically significant When the
dependent variable is ROA, the coefficients of REC and REC2 are both significant
both significant at level 5% Similarly, ROE is replaced as the dependent variable, the
significance of the coefficients REC and REC2 are both at 10%
Table 4.3 The results of regression of non-linear relationship between customer
receivables and performance of Vietnamese listed companies
REC 0,4295** 0,9869*
REC2 -0,8597** -1,9625*
GROWTH 0,0223*** 0,0728***
SIZE 0,0082* -0,0031 LEV -0,0254*** -0,0141 Number of observations 1304 1304
AR (2) 0,256 0,761
Hansen test 0,149 0,766
(*), (**) and (***) represent 10%, 5%, and 1% significance respectively
Source: Author's test results When ROA and ROE are employed as the dependent variable respectively, the coefficient
of REC is positive and the coefficient’s sign of REC2 is negative as expectation This proves
that a nonlinear relationship exists between customer receivables and business performance, ie
it has an inverse U shape
In order to test the robustness of the research results, which mean that how business
performance will change if the ratio of customer receivables to assets deviates from the optimal
value The study eliminates two variables REC and REC2 in the third model and replaced with
the variable named DEVIATION Then regression was performed in the fourth model of
DEVIATION The research results are presented in table 4.4
Table 4.4 The regression results test the change of customer receivables to the
performance of Vietnamese listed enterprises
DEVIATION -0,0568* -0,1285*
GROWTH 0,0117 0,0370**
SIZE 0,0119*** 0,0254**
LEV -0,0306*** -0,0119 Number of observations 1304 1304
AR (2) 0,204 0,193 Hansen test 0,747 0,973 (*), (**) and (***) represent 10%, 5%, and 1% significance respectively
Source: Author's test results The regression results in Table 4.4 reveal that the expectation of business performance will decrease when the ratio of customer receivables to assets deviated from the optimal value is completely reasonable Specifically, the coefficient of the variable DEVIATION is negative and has a significant level of 10% in both cases of the dependent variable ROA and ROE Thus, the test results have highlighted that when the customer receivables ratio shifted away the optimal value, the firm performance will decrease
Additionally, due to the different business characteristics of each industry sector such
as companies in some industry use trade credit accounted for more than 20% of their total assets (technology, healthcare, industry), some industries employ trade credit policy of less than 20%
of total assets value (infrastructure services, consumer services, consumer goods, basic materials) So the optimal level of customer receivables for each group industry is diversified The test results indicate that in the infrastructure services, consumer services, consumer goods and basic materials sectors, the impact of the customer receivables on firm performance in the reverse U-shaped, with the optimal customer collection is about 15,10%, 17,42%, 19,51% and 17,50% respectively Specifically, the results of testing the non-linear relationship between the customer receivables and the performance of each group of Vietnamese listed companies are described in Appendix 9; The outcomes of analysis the effect of customer receivables’ changes on Vietnamese listed companies’ performance is specified in Appendix 10
CHAPTER 5: RESEARCH DISCUSSIONS AND RECOMMENDATIONS 5.1 Reasearch discussions
5.1.1 Factors affecting the trade credit in Vietnam's listed companies 5.1.1.1 Factors affecting the customer receivables in Vietnamese listed companies
For the whole market
- When the provision for doubtful debts rises, the customer receivables increase It is because an increase of the bad receivables’ provision causes a rise of enterprise’s expense and
a fall of earnings, leading to a drop in the stock market value (Cheng et al., 2009) Therefore, in order not to reduce profit and stock value, Vietnamese listed companies must raise revenue, accelerate sales by loosening consumers’ trade credit policy rising customer receivables
Trang 10Logically, the provision for doubtful debts was generated from bad account receivables, so
endogeneity will appear Therefore, the author has used GMM estimation method to overcome
endogenous problems and the result proves that the bad debt provision’s coefficient is
significant at 5% level with the largest value of regression coefficient (β = 1,6450) Thus the
new factor of the model is the provision for doubtful debts that has the greatest and positive
influence on the customer receivables
- If a Vietnamese listed company chooses to stabilize its cash flows as its priority, it will
limit trade credit to its customers in order to avoid possible risks affecting the operating cash
flow of the business
- When the financial costs of Vietnamese listed companies increase or interest rates rise,
businesses will implement a tight trade credit policy
- The inventory ratio is also an important factor affecting the customer receivables of
Vietnamese listed companies and it affects on a negative direction
For each industry group
The first factor is the provision for bad debts This is a new factor of the model and it
positively affects the accounts receivable of customers in infrastructure services, industry,
consumer goods, and healthcare That means when increasing the provision for bad debts, to
avoid reducing profits, businesses in these industry groups also increase the application of trade
credit policies to encourage increased revenue This leads to an increase in customer receivables
The second factor is the firm size For the infrastructure services industry, the larger the
enterprise is, the easier financial resources should be provided Thus these companies provide more
trade credit to customers Because enterprises in the infrastructure services industry produce
essential goods for people's lives such as electricity and water, the government has preferential
interest rates on loans, especially for large enterprises This has enabled these businesses to provide
trade credit to their customers Moreover, with the characteristics of the industry with great demand,
sustainable growth, low risk and the market is often kept stable for large businesses, these
businesses are easy to accept for customers to buy on deferred payment, i.e create conditions for
business customers As for small businesses with weak financial resources, it is difficult to create
conditions for customers through trade credit policies However, for the technology industry and
industry, the bigger the business is, the less likely it is for customers to occupy capital and strictly
manage their accounts receivable, which in turn reduces customer receivables The reason is that
these two industries typically have quite a large level of customer receivables compared to the other
industries The technology industry's products, goods and services are highly competitive and are
often characterized by service provision first and payment later As for industrial enterprises, in
which most of them are related to the construction and installation sector, the time for settling capital
recovery is slow due to the problem of documents and settlement procedures Therefore, with the
advantage of large enterprises, they will limit trade credit to customers in order to reduce related
costs such as debt collection costs, management costs, and increased capital turnover
The third factor is years of operation For the consumer services, basic materials, and
medical industries, the longer a business has been in operation, the more restrictive it will be to
granting commercial credit to customers Thus, in three industry sectors, when the
enterprise is long existence, its position and reputation are well-known to customers, the need
to attract consumers through the trade credit policy is unnecessary On the contrary, firm will
tighten trade credit policy as well as better control customers, leading to a decrease in customer receivables
The fourth factor is short-term finance For the infrastructure services, consumer goods and basic materials industries, the more short-term debts are allowed to expand production and business activities, the more customers’ receivables the firm has This is due to the matching financing between short-term liabilities and short-term assets
The fifth factor is the financial cost For the technology and consumer services industries, when the financial costs increase, the cost of capital rises, causing profits to drop and it is more difficult in finding the suitable financial sources Therefore, businesses will reduce the customers receivables and limit providing trade credit, causing a decrease in customer receivable However, for the infrastructure services industry, if financial costs increase, businesses will create more conditions for customers to buy goods with deferred payment Because when financial costs increase, both businesses and customers are subject to increased interest from financial institutions But companies in the electricity and water infrastructure sector still enjoy preferential interest rates
on loans This is specified in Decree No 38/2013 / ND-CP and Decree No 16/2016 / ND-CP Moreover, when interest rates rise, customers will find more difficult to get loans from financial institutions, therefore they tend to occupy payables from their vendors more Hence, companies will use trade credit policy with the goal of attracting consumers This policy will help
to stimulate revenue growth and reduce financial cost pressure on customers Consequently, it will make firms’ earnings grow little
The sixth factor is net cash flow For the infrastructure services industry, businesses with
a large net cash flow will create conditions for customers to buy goods with more deferred payment and vice versa In contrast, for the basic materials industry, this relationship is inverse Thus, enterprises in the fields of mining, metallurgy, chemical products, and forest products give priority to controlling cash flow, avoiding financial risks They will limit customers to purchase products with later payment
The seventh factor is asset turnover In the infrastructure, technology, industrial and basic materials services industry, the business with the greater turnover of assets is, the more trade credit to customers is However, the impact of asset turnover on customer receivables is only mild Since if the firm wants the asset turnover to increase rapidly, it will use more trade credit policy which will boost the customers’ accounts receivable
The eighth factor is the gross profit margin In the consumer services and basic materials industries, a highly profitable business will be willing to finance its customers, leading to an increase in customer receivables In contrast, for the health sector, when businesses want to have high profits, they will not have the need to use trade credit policies to increase revenue, reducing customer receivables This is because the health sector is mainly sold to OTC (free block - drugstore) and ETC (hospital block), in which most customers are allowed to pay later in a period of 30-90 days When pharmaceutical enterprises want to participate in the bidding for commodity products in hospitals, they must comply with the “Regulations of the Law on Bidding, specifically Decree 63/2014 / ND-CP dated June 26, 2014” Therefore, the payment is prolonged because it depends on the payment process of the hospital and the insurance company, leading to increased debt collection costs, decreased profits, and reduced gross profit