The working capital management at hoa phat interior supply company limited during 2016 2020

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING UNIVERSITY OF HO CHI MINH CITY THE WORKING CAPITAL MANAGEMENT AT HOA PHAT INTERIOR SUPPLY COMPANY LIMITED DURING 20

BANKING UNIVERSITY OF HO CHI MINH CITY

THE WORKING CAPITAL MANAGEMENT

AT HOA PHAT INTERIOR SUPPLY COMPANY LIMITED DURING 2016 - 2020

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

Student: NGUYEN HOAI BAO NGOC Class: HQ5 – GE02

Student code: 030805170133 Supervisor: Dr NGUYEN DUY LINH

THE STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY OF HO CHI MINH CITY

THE WORKING CAPITAL MANAGEMENT

AT HOA PHAT INTERIOR SUPPLY COMPANY LIMITED DURING 2016 - 2020

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

Student: NGUYEN HOAI BAO NGOC Class: HQ5 – GE02

Student code: 030805170133 Supervisor: Dr NGUYEN DUY LINH

Ho Chi Minh City, 2021

ABSTRACT

Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company It is concerned with current assets and liabilities For one thing, a traditional manufacturing firm's current assets account for more than half of its overall assets They account for even more for a distribution company Excessive amounts of current assets can easily result in a poor return on investment for a company Efficient working capital management entails preparing and managing current assets and current liabilities in a way that reduces the possibility of not being able to fulfill due short-term commitments and, on the other hand, avoids unnecessary investment in these assets

Working capital could be at an optimum level for maximizing a company's value High sales can result from a large inventory and a generous trade credit policy

A greater inventory decreases the probability of a stock-out Long, Maltiz, and Ravid (1993) and Deloof and Jegers (1996) suggested that trade credit can boost sales by allowing consumers to determine product quality before paying Accounts payable is another part of working capital Delaying payments to suppliers helps a company to determine the quality of goods it has purchased, and it can be a low-cost, versatile source of funding for the company On the other hand, if the company is given a discount for early payment, late payment of invoices can be very expensive However,

if the costs of increased working capital outweigh the benefits of keeping more inventories and/or granting more trade credit to consumers, corporate profitability could suffer as a result of the cash conversion period

Better working capital governance is essential to any business's success Working capital management organizes a company's cash flow, allowing it to operate smoothly Managing the proper relationship between a firm's short-term assets and short-term liabilities is part of proper working capital management Short-term assets are those that can be converted into cash within a year same short-term liability we may call such short-term liabilities that have a one-year payment period Working

capital management's primary aim is to ensure that an organization's regular activities can continue and that it has enough cash on hand to offset short-term debt and potential operating expenses This discussion of the value of working capital management, its various components, and its effect leads us to the problem statement that we will be analyzing

The main objectives of the thesis are to systematize the basic theoretical issues about working capital and using working capital of enterprises, analyze the use of working capital of Hoa Phat Interior Supply Company Limited, determine the successes and problems with the same cause and propose recommendations to improve the efficiency of working capital of this company

Working capital, in general, and working capital, in particular, are factors that ensure that the business's production process runs smoothly and continuously However, what is the best way to use working capital? Being successful is a difficult task The inefficiency of capital would perpetuate the joint deflation of market activities As a result, the Company must make informed choices on how it can use the capital

The company's working capital use was examined The author has finished her graduation thesis on the topic: "Working capital management at Hoa Phat Interior Supply Company Limited” Any of the following fundamental problems have been solved by the basic thesis:

- Provide a comprehensive general and reasonably complete theory of the historical situation of working capital in the market, emphasizing the significance and function of working capital in business helping to make decisions about the company's survival and growth

- Examine the Company's working capital use situation over the previous period, drawing conclusions, assessments, and feedback on accomplishments and flaws that must be addressed

- Make some recommendations for improving the company's working capital performance

It could be seen that Hoa Phat has been promoting its strengths with great policy in managing receivables and improving its previous strict policy to attract customers as well as demonstrating effectiveness in managing expense On the other hands, there are also some limitation that have been illustrated in this thesis about Hoa Phat Firstly, the Company has limited capital to compete with other larger corporations in the industry Secondly, Hoa Phat has a high amount of inventory that also incurred storage costs, inventory management costs, losing the investment opportunities of capital resources Lastly, the Company would not be able to cover unexpected expenses and make payment on time due to low liquidity strength

Hoa Phat Interior Supply Company Limited has many opportunities to grow stronger at the moment Those are the average urban growth rate that leads to the strong growth in housing and office segment, the development of furniture industry and also the technology However, the Company is now facing some challenges in the difficulty in e-Commerce furniture distributors, the availability of inventory on hand for customers and its strict policies on customers

The thesis uses different methods as the basis for the research such as: synthesis method, systematization; method of collecting secondary data; comparative method; index method; historical method; interpretation method; SWOT analysis In detail, in this thesis, there are analysis performed that help improving the company’s working capital management such as: Analysis of working capital structure, working capital turnover, inventory and accounts receivable, cashflow, liquidity and cash conversion cycle…

Realizing the current situation of Hoa Phat Interior Supply Company Limited, the author gives some conclusions for the Company as working capital management plays an important role in the company’s daily operation In 2020, Hoa Phat Interior Supply Company Limited has made some improvements but still faced some challenges, mainly lies in the management of inventory The thesis proposed several solutions that could be applied in order to optimize the use of inventory, avoid overstocking and thus enhance working capital in general such as inventory

categorization using ABC analysis or EOQ model At the same time, the Company should continue making improvement in its accounts receivable so that it can be quickly converted into cash and enhance the Company’s liquidity position Besides, there are some other recommendations that could be apply for Hoa Phat to improve and develop its operations

While several attempts have been made to study and investigate, due to a lack

of knowledge and the inability to learn about the Company's history of using working capital in a short period of time, evaluations and suggestions are difficult to avoid shortcomings The author only provided a few statements and assessments on the Company's use of stored capital activities before moving on to providing some recommendations for the use of capital However, the author hopes that by completing the study, she will be able to assist companies in doing better performance analysis using working capital in order to assist managers and entities involved in the organization in obtaining useful and timely information in order to make the best and most effective decisions

STATEMENT OF AUTHORSHIP

Except where reference is made in the text of the thesis, this thesis contains no material published elsewhere or extracted in whole or in part from a thesis by which

I have qualified for or been awarded another degree or diploma

No other person’s work has been used without due acknowledgements in the thesis

This thesis has not been submitted for the award of any degree or diploma in any other tertiary institution

Author

Nguyen Hoai Bao Ngoc

ACKNOWLEDGEMENT

The author would like to express her sincere her supervisor Dr Nguyen Duy Linh for his invaluable guidance, comments and suggestions through the course of her thesis It has created the best conditions for her to complete this thesis

Kindly thanks to Hoa Phat Interior Supply Company Limited has helped the author a lot in applying the principles and knowledge, through which she can possibly add more inadequate knowledge and contribute to developing herself in a professional and challenging working environment

However, due to the limit of time and understanding, her graduation thesis can not avoid the mistakes or omission She is very pleased to receive the comments and feedbacks from lecturers to improve this thesis

Author

Nguyen Hoai Bao Ngoc

TABLE OF CONTENTS

CHAPTER 1 OVERVIEW OF HOA PHAT INTERIOR SUPPLY COMPANY

LIMITED 2

1.1 OVERVIEW OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED 4

1.1.1 General information of Hoa Phat Interior Supply Company Limited 4

1.1.2 History of Hoa Phat Interior Supply Company Limited 4

1.2 ORGANIZATIONAL STRUCTURE OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED 2

1.3 INDUSTRY ANALYSIS 3

1.3.1 Overview of Vietnam’s furniture industry 3

1.3.2 SWOT Matrix 6

1.4 BUSINESS OUTCOMES OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED DURING 2016 – 2020 9

CHAPTER 2 WORKING CAPITAL MANAGEMENT OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED 12

2.1 WORKING CAPITAL STRUCTURE OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED 12

2.2 ANALYSIS OF WORKING CAPITAL’S COMPONENT OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED DURING 2016 – 2020 17

2.2.1 Inventory management 17

2.2.2 Accounts Receivable management 21

2.2.3 Cash and Cash Equivalents Management 25

2.3 REVIEW OF WORKING CAPITAL MANAGEMENT AT HOA PHAT

INTERIOR SUPPLY COMPANY LIMITED 34

2.3.1 Review of the world’s wood and furniture industry 34

2.3.2 Vietnam’s furniture industry forecast over 2020 – 2024 35

2.3.3 Analysis of domestic furniture corporations 36

2.3.4 Review of working capital management at Hoa Phat 39

CHAPTER 3 RECOMMENDATIONS OF WORKING CAPITAL MANAGEMENT AT HOA PHAT INTERIOR SUPPLY COMPANY LIMITED 44

3.1 DEVELOPMENT ORIENTATION OF WORKING CAPITAL MANAGEMENT OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED 44

3.1.1 Furniture market trend in the next five years in Vietnam 44

3.1.2 Hoa Phat’s development orientation 45

3.2 RECOMMENDATIONS FOR IMPROVING WORKING CAPITAL MANAGEMENT 46

3.2.1 Inventory categorization using ABC analysis 46

3.2.2 EOQ model 46

3.2.3 Other recommendations for the Company 49

REFERENCES 51

EOQ Economic Quantity Order

LIST OF CHARTS AND TABLES

LIST OF CHARTS

Chart 1.1 The organizational structure of Hoa Phat Interior

Supply Company Limited 2 Chart 1.2 SWOT matrix of Vietnam’s furniture industry 6

Chart 2.1 Furniture industry over the world 34

Chart 2.2 Vietnam’s furniture industry forecast over 2020 –

Chart 2.3 Revenue from the kitchen furniture market in

Chart 2.4 Large firms hold the majority of the market share 37

Chart 2.5 SWOT matrix of Hoa Phat 40

Supply Company Limited during 2016 - 2020 12

Table 2.3 The working capital turnover of Hoa Phat Interior

Supply Company Limited during 2016 - 2020 15

24

PREAMBLE

Working capital management lies at the heart of every business as it is vital to the financial healthy and operational success of any corporation A hallmark of an effective working management system would be maintaining a solid balance between growth and liquidity, ensuring that tied down capital could be utilized to optimum

The importance of working capital management is indispensable in daily business operations Working capital serves as a metric to evaluate how well a business is operating with its given amount of working capital, how financially stable the enterprise is in short-term after fulfilling its short-term obligations Working capital is a powerful metric as it is the reflection of various company activities such

as revenue collection from customers, inventory management, payments to suppliers Essentially, working capital management is an accounting strategy that aims to not only cover the financial obligations of the company but also help to boost earnings

Being aware of the importance of the working capital management, I chose the topic "Working capital management at Hoa Phat Interior Supply Company Limited during 2016 - 2020” for graduation thesis

This thesis provides the basic reasoning on the working management situation

of the Company, analysis based on the financial statements and financial ratios; thereby assessing advantages and disadvantages and proposing some recommendations to improve the working capital management at the company

Scope of thesis is the working capital management at Hoa Phat Interior Supply Company Limited from 2016 to 2020

CHAPTER 1 OVERVIEW OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED

A popular measure of working capital management is the cash conversion cycle, which tells us how cash is moving through a company in terms of duration

Cash conversion cycle = Operating Cycle – Accounts Payable Period 1.1.2 Models review

• Production Order Quantity Model (POQ Model)

The POQ production-ordered output model is a storage model that is used when a constant quantity of products is shipped or when a commodity is made, used, and sold all at the same time There are assumptions of this model as below:

- The time between placing an order and receiving it remains constant and is predetermined

- Goods shortages are not permitted

- The order cost is set, regardless of the order quantity, and there is no discount policy (the purchase price decreases with the increase in sales)

- Regardless of the number of products, a product category is a single category

To use the POQ model, the company needs to know the following

information:

- p is the daily production (supply) level

- d is daily demand (d <p)

- t is the production time to get enough quantity for 1 order (or lead time)

- Q is the output of the order

- H is the reserve cost per unit per year

The formula will be as below:

• Reorder Point Model (ROP Model)

The reorder point (ROP) is the level of inventory which triggers an action to replenish that particular inventory stock It is a minimum amount of an item which a firm holds in stock, such that, when stock falls to this amount, the item must be reordered

Reorder Point = Normal consumption during lead-time + Safety Stock

Or Reorder point = S x L + J ( S x R x L)

• S = Usage in units per day

• L = Lead time in days

• R = Average number of units per order

• J = Stock out acceptance factor

1.2 OVERVIEW OF HOA PHAT INTERIOR SUPPLY COMPANY

LIMITED

1.2.1 General information of Hoa Phat Interior Supply Company Limited

Hoa Phat Interior Supply Company Limited was founded on April 03th, 2010 Hoa Phat (Hoa Phat Interior Supply Company Limited) specializes in designing, producing, importing and selling furniture

Company name (Vietnamese):

Company name (English):

1.2.2 History of Hoa Phat Interior Supply Company Limited

Hoa Phat has had years of experience in manufacturing and selling architecture pieces, furniture items The Company employed endurable and finest materials as well as craftsmanship techniques to its own designs Hoa Phat also demonstrates its sophisticated taste in architectural pieces when selecting only the finest products from well-known suppliers and then sell to its customers Its products cater for all needs and purposes, from practical items for daily use to expensive, sophisticated pieces for decoration and art During stages of its development, Hoa Phat becomes a strong furniture brand, receiving the recognition and trust from its customers and business partners

Hoa Phat produce all indoor decors for daily use in dining room, kitchen and bedroom Some of its products are chairs, tables, shelves, closets, cupboards The Company also provides customized pieces for customers with specific needs such as hospitals and schools To meet the needs and desires of customers in an ever- changing market, Hoa Phat tailor-made unique designs and craftsmanship had offered

to accommodate every consumer’s need The Company also continuously expands its collection to offer a wider range of products every year Apart from providing high-quality products, Hoa Phat also commits to making sure its products are safe for consumer’s health, developing customer policy regarding warranty and maintenance, maintaining highly competitive prices for its customers

1.3 ORGANIZATIONAL STRUCTURE OF HOA PHAT INTERIOR

SUPPLY COMPANY LIMITED

Chart 1.1 The organizational structure of Hoa Phat Interior Supply Company

Limited

Functions and duties of each department in the company are as follows:

Director: The director is the legal representative of the company responsible

before the law for all activities of the company The director is the highest-level executive who is also responsible for managing and arranging the professional departments of the departments to implement the objectives to bring maximum profits

DIRECTOR

ORGANIZATION AND ADMINISTRATION

TECHNICAL

FINANCE AND ACCOUNTING

SALES

to the company, in addition to supervising The director is also the person who directly deals with company sales contracts

Organization and Administration Department: advise the Director,

organize personnel management and the administrative work of the enterprise Set up plans, recruit and use human resources effectively They also ensure employees benefits and obligation

Finance and Accounting Department: Advise the Director of the company

in the field of financial management accounting of the entire enterprise, implement and instruct the company's departments to carry out the financial and accounting work

in accordance with the provisions of the accounting law The Finance and Accounting Department also conduct financial planning, revenue and expenditure estimation, manage the company’s asset At the end of the quarter and year, the department also conducts timely and accurate settlement, prepare financial statements in accordance with state regulations

Technical Department: this Department is in charge of implementing orders,

in case of any specific orders that require the item to be custom made, the department will have its employees work on the order They also ensure convenient operation and service provision for customers, ensure safety and stability when delivering the goods At the same time, they are also responsible for maintenance and repair of machinery and equipment in the company to ensure daily operations run smoothly

Sales Department: in charge of implementing the contract of purchase and

sale of goods, directly responsible to the Director for the business results and product distribution system of the company The Sales Department is also responsible for advising the director on business plans, market research, market expansion

1.4 INDUSTRY ANALYSIS

1.4.1 Overview of Vietnam’s furniture industry

• History of furniture industry in Vietnam

Vietnam's furmiture industry has a long and illustrious history, and it is renowned for its diversity and high-skilled craftsmanship Vietnam furniture has gained considerable ground not only in the Asian market but has also expanded rapidly outside the country in the last decade The country is currently prominently

on the radar screen, boosted by strong interest in its very competitive furniture products of many international buyers

The furniture industry in Vietnam is characterized by a rapid influx of foreign investment and the expansion of established businesses The rapid growth and market expansion that has been experienced in recent years is expected to continue in the near future Aside from conventional markets in Asia and the Pacific, Vietnam furniture has piqued the attention of emerging markets such as the United States and Europe The low cost of goods coming out of the country, as well as the significant increase in quality, are major draws

The global economic crisis, which began in 2008, has had a significant effect

on the Vietnamese economy, resulting in market shrinkage, higher inflation, price decreases, and other business difficulties However, the year 2012 and the beginning

of 2013 saw an uptick in wood exports from Vietnam Exports of wood products grew

19 percent in 2012, with a turnover of 4.5 billion USD, compared to 2011 In the first nine months of 2013, the value of wood products exported totaled 2.6 billion dollars, maintaining Vietnam's position as the top wood product exporter in Southeast Asia and the second-largest in Asia after China (VOV, 2013) FDI origin enterprises outstripped local companies during the recession time, despite many organizational declines among the firms According to the Vietnamese Timber and Forest Product Association (VIFORES), foreign-owned businesses in Vietnam increased their export revenue to 64 percent of total export potential in 2013 (VNS, 2013)

• Furniture life cycle

Vietnam ranks first in Southeast Asia, 2nd in Asia and 4th in the world in exporting wooden furniture Vietnam's domestic market is the size of 5-7 European countries combined, with a population of approximately 100 million people Furthermore, the Vietnamese economy is growing at a healthy pace, which

is being accompanied by the expansion of the real estate market, especially in the apartment segment, which is driving up demand for furniture

Furniture is rising with a rate of about 30% per year The majority of young families in Vietnam's big cities choose to live in apartments, which has increased demand for apartment interiors in recent years Young people assume that the economy is improving, that their income is rising, and that Vietnamese people are beginning to put a greater focus on home investments Apartments currently range

in size from 70 to 80 square meters, with each family spending between 300 and

400 million VND on interior finishing

• Vietnam’s furniture industry value chain

Vietnam, officially the Socialist Republic of Vietnam, is a Southeast Asian nation with a population of 90 million people as of 2013 Vietnam has a total area of about 331,210 square kilometers, with about 16.2 million hectares of forestland (Nguyen & Tran, 2011) In recent years, the Vietnamese economy has remained stable, with an ambitious estimated growth rate of 6.9% from 2014 to 2016 (EY, 2013) In terms of foreign trade, Vietnam has long been regarded as an emerging economy that has grown rapidly and maintained relatively strong economic growth amid the global downturn For example, in 2009 and 2010, Vietnam's annual GDP growth rate was 6.3 percent and 5.3 percent, respectively, while the US GDP growth rate was -2.6 percent and 2.7 percent (MARD, 2012)

Furniture is one of the most rapidly growing industries in Vietnam It is a key component of the national strategy to boost the value of forests and forest products Indeed, the furniture industry is one of the top eight largest export components in the country's economy, which also includes a range of ancillary industries such as raw materials, chemicals, and hardware, as well as a dynamic supply chain system

1.4.2 SWOT Matrix

STRENGTHS

- Many strong and famous brands

- Big market share

- Maintain and develop the operations

- Strong labor force

SWOT

MATRIX

THREATS

- Competition from Vietnam’s neighboring countries

- Lack of training for senior management and skilled employees with professional technnology supervisors

WEAKNESSES

- The very rapid growth of furniture industry is making problems in management -High amount of inventory -Need more staffs can speak foreign languages fluently

SWOT

MATRIX

Chart 1.2 SWOT matrix of furniture industry

As we can see in chart 1.2, furniture corporations need to promote their strengths and overcome weaknesses while consider the opportunities and threats as listed to develop in the future:

- Products and sales system quality are maintaining and developing in the best way to increase competitiveness among corporations in Vietnam

- Furniture is one of the most rapidly growing industries in Vietnam

- Joining WTO, TPP creates many chances for businesses to find out foreign partners

to promote their brands

- The average urban growth rate of 3% annually leads to strong growth of the housing and office segment

• THREATS

- Furniture businesses still face some obstacles to compete with larger domestic and multinational corporations and neighboring countries

- Lack of training for senior management and skilled employees with professional technology supervisors

1.5 BUSINESS OUTCOMES OF HOA PHAT INTERIOR SUPPLY

COMPANY LIMITED DURING 2016 – 2020

Table 1.1 Financial information of Hoa Phat Interior Supply Company

Limited from 2016 - 2020

Unit: million VND

Net revenue 10,485.2 10,620 8,348.9 7,756.6 6,559.8 Cost of Sales 9,189.4 9,382.4 7,501.7 6,690.2 5,580.2

Gross profit 1,295.8 1,237.7 847.2 1,066.4 979.5

Financial income 0.56 0.55 0.38 1.7 1.3 Financial expense 266.5 268.9 188.0 274.2 235.8 General and

Result of other

activities 182.8 195.2 100.5 85.2 58.7

Profit before tax 475.6 494.4 469.2 351.3 331.3

Income tax expense 95.1 98.87 93.8 70.3 46.4

Net profit after tax 380.5 395.5 375.4 281.0 284.9

Source: Statement of Income of Hoa Phat Interior

Supply Company Limited from 2016 -2020

Table 1.2 Analysis of the financial information of Hoa Phat Interior

Supply Company Limited from 2016 - 2020

PERCENTAGE CHANGE (%)

2016 - 2017 2017 - 2018 2018 - 2019 2019 - 2020

Net revenue 1.29 (21.39) (7.09) (15.43) Cost of Sales 2.10 (20.04) (10.82) (16.59)

Financial income (1.79) (30.91) 347.37 (23.53) Financial expense 0.90 (30.09) 45.85 (14.00) General and

Administration expenses (9.09) (56.59) 81.44 (10.48)

Other income 7.55 (48.91) (15.22) (31.10) Other expenses 3650 - - -

Result of other activities 6.78 (48.51) (15.22) (31.10)

Income tax expense 3.96 (5.13) (25.05) (34.00)

Source: Writer’s calculation

According to the Statement of Income of Hoa Phat Interior Supply Company Limited during 2016 - 2020, there have been a few changes in the Company’s financial performance In general, the company experienced a decline in its gross profit through this period In spite of a strong increase in 2019 with 25.87%, the company still kept the gross profit slightly fell 8.15% in 2020 The company saw a downward trend in its net profit after tax throughout the period, especially during

2018 - 2019 when Hoa Phat’s net profit fell 25.15% lower compared to a modest decrease of 5.08% in 2018 While the economy of the world has been going through

a damage of COVID-19, because of Hoa Phat’s efficient management, its profit still slightly increased in 2020 Details of the Company’s financial performance are as follows:

Firstly, Hoa Phat showed a fluctuation in its revenue growth rate during the

period In particular, revenue increased from 10,485.2 in 2016 to 10,620 million VND in 2017 Then, the figure of revenue diminished over the span of the next three years In detail, this figure decreased significantly 21.39% in 2018 and kept drop to 7,756.6 million VND in 2019 and finally hit a low at 6,559.8 million VND in 2020, corresponding with a decline of 15.43%, lower than the growth rate of 7.09% in the previous year In the following sections, after considering the amount of goods sold, the reason for this lower revenue growth was due to the decrease in demand of consumers, because there are many new manufacturers, market shares are divided and new manufacturers have new machinery and equipment, so their designs are more diversified Especially in 2020, due to pandemic, consumers had tightened their spending on shopping

However, besides having fluctuated revenue, the Company’s net profit declined because the decrease in margin of cost was higher than that of revenue In

2018, the Company’s strategy was to enhance the diversity of its product, as evidently

illustrated in the higher amount of inventory bought in the next chapter, therefore, the Company began buying many different types of products from new suppliers and thus not able to receive discounts or competitive prices from these new suppliers Moreover, new businesses competed in designs and prices, so profits are reduced

On the other hand, Hoa Phat had been actively reducing its general and administration expenses as well as its financial expense during 2016 – 2018 This had showed effectiveness in expense control and management of the Company had managed to lower its financial and general expense to more than 50% and thus improve net profit despite having lower gross profit Then, in 2019, those expenses climbed to 80% compared to the previous year because of the methods against the pandemic Lastly, when the Company had prepared well and came back to its work

in the second – half of 2020, the expenses fell about 10%

Overall, Hoa Phat had showed some positive changes in its financial performance as illustrated in the decreasing revenue growth as well as net profit, effective general and administration expense management However, low revenue and profit growth are not enough to justify whether the decrease in the cost of sales

is reasonable or not Detailed analysis and further investigation should be taken by the Company to lower these costs through looking for cheaper sources for materials

or negotiate for a discount policy with suppliers

CHAPTER 2 WORKING CAPITAL MANAGEMENT

OF HOA PHAT INTERIOR SUPPLY COMPANY

LIMITED

2.1 WORKING CAPITAL STRUCTURE OF HOA PHAT INTERIOR

SUPPLY COMPANY LIMITED

Working capital is the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities This

is an indicator of a company's liquidity, operational efficiency and short-term financial health If a company has substantial working capital, then it should have the potential to invest and grow If a company's current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors, or even go bankrupt

Working capital is calculated as:

Working Capital = Current asset – Current Liabilities

Table 2.1 Working capital structure of Hoa Phat Interior Supply Company

Source: Financial Statements of Hoa Phat Interior

Supply Company Limited from 2016 -2020

Table 2.2 Analysis of the working capital structure of Hoa Phat Interior

Supply Company Limited during 2016 - 2020

Source: Writer’s calculation

In general, Hoa Phat’s working capital fluctuated during the 2016 – 2020 period Firstly, in 2017, the Company’s working capital increased 16.1% from 2,461.3 million VND in 2016 to 2,846.8 million VND in the next year Since current liabilities remained relatively constant during the period, the increase in current asset was the key factor mainly contributing to higher amount of inventory Current asset increased 342.2 million VND in value with much of the jump attributable to the roughly rise of 27.08% in accounts receivable In 2017, accounts receivable increased

by VND 218 million compared to that of 2016, which proves that the company loosened its credit policy, leading to a higher amount of capital occupied by customers Working capital during 2017 could have been higher had it not been for a

122 million VND decline in cash, corresponding with the decrease of operating

Criteria

Difference 2016-2017 2017-2018 2018-2019 2019-2020

Capital 395.5 16.1 (624.7) (21.9) (418.1) (18.8) 3.9 0.2

Secondly, in 2018, the working capital significantly reduced by 21.9%, mainly driven by the decline of accounts receivable and cash While inventory also had an upward change of more than 20%, cash and accounts receivable decreased at a higher margin than inventory did, leaving the total current asset to ultimately declined and thus lower working capital During the year, the Company was able to tighten its collection policy and improve its working capital At the same time, the Company had to pay about 1 billion VND to its capital providers, causing a significant decrease

in cash

Thirdly, in the next year 2019, the Company’s working capital kept showing

a downward trend by a decline of 18.8% compared to the previous year The main factor for the decrease of its working capital is the drop of inventory, which is higher than the increase of the liabilities In this year, the Company had improved its sales pipeline that led to the rise of accounts receivable and cash and this was the reason for the decline of the amount of inventory

Finally, in 2020, Hoa Phat presented a slight increase in its working capital by 0.2% compared to 2019 Because of COVID-19, the inventory of the Company had risen 131.1 million VND, which was 3.0% Besides, the cash increased 26.7% which was driven by the fall of receivables However, in spite of the pandemic during 2020, the Company’s working capital still increased because of its great efforts in management

Table 2.3 The working capital turnover of Hoa Phat Interior Supply Company

Limited during 2016 - 2020

Revenue (million

VND) 10,485.2 10,620 8,348.9 7,756.6 6,559.8 Average working

capital (million

VND) 2261.1 2649.1 2534.5 2,013.1 1,805.9

Working capital

Source: Writer’s calculation

Table 2.4 Analysis of working capital turnover of Hoa Phat Interior Supply

Company Limited during 2016 - 2020

Criteria

Difference 2016-2017 2017-2018 2018-2019 2019-2020

Revenue 135 1.3 (2,271) (21.4) (592.3) (7) (1,197) (15.4) Average

Source: Writer’s calculation

In 2017, the Company’s working capital turnover was 4.01, slightly lower than that of 2016 The lower ratio implies inefficiency in utilizing short-term assets and liabilities of the Company to support its sales Consider the fact that in 2018, after paying almost half of its amount of cash to its owners and got competition going on within groups of companies and across groups the Company was operating with 17.8% less working capital than in 2017 While 1 VND of working capital could only

generate 4 VND of revenue in 2017, the figure has decreased to 3 VND of revenue

in 2018 In 2019, the Company was clearly using its investment in working capital more efficiently as indicated by its higher working capital turnover than that of 2018 (3.85 compared to 3.29), this has showed that the Company had utilized its working much better than in 2018 Lastly, in 2020, its working capital turnover slightly fell again to 3.63 due to the pandemic spreading through the world With the ratio of 2.60

of the industry according to Stockbiz, it could be seen that compared to the working capital turnover of the industry, Hoa Phat was higher, which accounted more than 3.0 over the five years However, this figure is unstable and on a downward trend compared to 2016, led to a decrease trend of net revenue

Overall, it can be seen that the general trend of the Company is fluctuated between the amount of accounts receivable and inventory Some positive changes can

be seen but there are still some unreasonable points such as: stockpiling too many inventories, low cash volume, which might put the Company in a poor liquidity position Since current liabilities presented a downward trend during 2016 – 2018 however, from 2018 – 2020 it remained relatively up during 2016-2020, the fluctuations of current assets was the driving force behind such changes in working capital Therefore, details of each component of the current asset and the efficiency

in which they are managed will be discussed in a detailed manner in the following sections

While this ratio gives an overall view of how working capital was used to generate revenue for the Company, further metrics used below would be more suitable and appropriate in giving a thorough analysis of how efficiently working capital was managed Since working capital is used to fund a company’s day-to-day operations, detailed analysis of each component and financial ratios concerning the company’s liquidity, inventory management, accounts receivable and payable will be more effective in representing the operating liquidity of working capital that is available to a business The following sections will provide a breakdown of every

component in the working capital structure and analyze its management efficiency

2.2 ANALYSIS OF WORKING CAPITAL’S COMPONENT OF HOA PHAT INTERIOR SUPPLY COMPANY LIMITED DURING 2016 – 2020

2.2.1 Inventory management

Inventory lies at the heart of the Company because the Company generate revenue and profits through the sale of inventory in the ordinary course of the business In addition, inventory also represents a significant asset because in fact, inventory amounts account for a majority of Hoa Phat’s current asset Therefore, it is important to analyze and understand the changes in inventory during the 2016- 2020 period, as well as to use financial ratios to evaluate the efficiency of inventory management Below are Tables 2.5 and 2.6, which indicate how inventory changed from 2016 and 2020:

Table 2.5 Ending inventory of Hoa Phat Interior Supply Company Limited

during 2016 - 2020

Source: Writer’s calculation

In general, there has been a continuous upward trend in the inventory level of the Company during 2016-2018 In particular, from 2016 to 2017, inventory amount increased slightly 1.3% In the following year, this item went up to 23.0% After that,

in 2019, this figure fell roughly 15.0% and slightly increased 3.0% in 2020

Criteria 2016-2017 2017-2018 Difference 2018-2019 2019-2020

Inventory 53.5 1.3 954.8 23.0 (763.9) (15.0) 131.1 3.0