vo ngoc lan anh_msc finance-treasury_course 2

UNIVERSITY OF RENNES 1

FOREIGN TRADE UNIVERSITY

MSc FINANCE IN TREASURY

GRADUATION THESIS

IMPROVING WORKING CAPITAL

MANAGEMENT AT AGRICULTURAL PRINTING

& PACKAGING JSC

Student:Vo Ngoc Lan Anh

Supervisor:Dr. Nguyen Thuc Anh

Hanoi, July 2013

TABLE OF CONTENTS

LIST OF TABLESiv

LIST OF FIGURESv

ACKNOWLEDGEMENTvi

LIST OF ABBREVIATIONSvii

CHAPTER I INTRODUCTION1

1.1 Research rationale1

1.2 Literature reviews2

1.3 Research objectives3

1.4 Data and methodology3

1.5 Research assumptions5

1.6 Organization of the research5

CHAPTER II THEORETICAL REVIEW OF WORKING CAPITAL

MANAGEMENT6

2.1 Working capital6

2.2 The importance of working capital management7

2.3 Elements of working capital management8

2.3.1 Cash management8

2.3.2 Short-term investments9

2.3.3 Inventory management10

2.3.4 Receivable management11

2.3.5 Payable management12

2.3.6 Short-term financing management13

2.4 Measurement of working capital management13

2.4.1 Efficiency ratios14

3.4.2 Liquidity measurement16

CHAPTER III OVERVIEW OF APP18

3.1 Background of APP Company18

3.2 Overview of APPs performance19

3.2.1 Profitability19

3.2.2 Risk analysis20

ii3.2.3 Efficiency analysis21

CHAPTER IV FINDINGS AND ANALYSIS OF WORKING CAPITAL

MANAGEMENT AT APP22

4.1 General analysis of working capital management22

4.1.1 Liquidity analysis22

4.1.2 Changes in working capital24

4.1.3 Efficiency of using working capital26

4.2 Component analysis28

4.2.1 Cash analysis28

4.2.2 Inventory analysis30

4.2.3 Account receivable analysis32

4.2.4 Account payable analysis34

4.2.5 Short-term financing analysis36

4.3 Brief summary37

CHAPTER V RECOMMENDATION AND CONCLUSION38

5.1 Main findings and forecast38

5.2 Recommendations39

5.3 Research limits40

5.4 Future researches41

5.5 Conclusion41

REFERENCES42

iiiLIST OF TABLES

Table 3.1: Gross profit margin, ROA and ROE in 2007-2012 period19

Table 3.2: Current ratio and quick ratio of APP in 2007-201221

Table 4.1: Percentage of cash & equivalent in total asset of APP, SOVI & industry

in 2007-201228

Table 4.2: CCC and its components of APP in 2009 -201229

Table 4.3: Current liabilities in 2008- 2012 period (in percentage)36

ivLIST OF FIGURES

Figure 3.1: Net revenue and target revenue in 2006-2012 period19

Figure 3.2: Some solvency ratios of APP in 2006-2012 period20

Figure 3.3: Some efficiency ratios of APP in 2007-2012 period21

Figure 4.1: Current ratio of APP, SOVI and Industry average in 2007-2012 period

22

Figure 4.2: Quick ratio of APP, SOVI and the industry in 2007-2012 period23

Figure 4.3: Cash ratio of APP, SOVI, and Industry in 2007-2012 period24

Figure 4.4: Current assets, current liabilities and net working capital of APP25

Figure 4.5: Components of current assets in 2007-2012 period25

Figure 4.6: Working capital turnover of APP, SOVI, and Industry in 2008-2012

period26

Figure 4.7: Current asset turnover of APP, SOVI and Industry in 2008-2012 period

27

Figure 4.8: Cash and cash equivalent of APP in 2007-2012 period28

Figure 4.9: CCC of SOVI, APP and the industry in 2009-201230

Figure 4.10: DIO and Inventory turnover of APP in 2009-201231

Figure 4.11: Inventory turnover of APP, SOVI and Industry in 2009 -201231

Figure 4.12: Account receivable in relation to total assets of APP, SOVI, and

Industry in 2007-2012 period32

Figure 4.13: DSO and receivable turnover of APP in 2008-201233

Figure 4.14: Receivable turnover of APP, SOVI and Industry in 2009 -201234

Figure 4.15: DPO and payable turnover of APP in 2009-201235

Figure 4.16: Payable turnover of APP, SOVI and Industry in 2009-201235

vACKNOWLEDGEMENT

First of all, I would like to convey my deepest gratitude to my advisor Dr. Thuc Anh. She has given useful advice and suggestion and guided me through the research processing.

I owe my gratitude to teachers of Master in finance treasury program who enlighten me new knowledge and experience in treasury area. I also want to thank my classmates and staff of CID who has accompanied me through the program.

I am grateful to accounts at Agriculture Printing & Packaging Joint Stock Company for their feedback and explanation for some questions I incurred in the thesis. Finally, I want to say special thanks to my family: my father, my mother and my little sister who always support and encourage me in every my decision.

viLIST OF ABBREVIATIONS

APPAgricultural Printing & Packaging Joint Stock Company

CCCCash conversion cycle

DIODays inventory outstanding

DPODays payable outstanding

DSODays sale outstanding

JSCJoint Stock Company

SOVIBien Hoa Packaging Joint Stock Company

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ABSTRACT

Working capital management has been a noticeable concern since global financial crisis in 2007. In Viet Nam, many companies have been decommissioned due to lack of liquidity and working capital problems. Hence, effective working capital management has become important to Vietnam companies. Research on working capital working management is necessary for the sustainable development of a company. This thesis presents a case study research on working capital management at a specific company at Viet Nam. Through the research, we can see the realistic situation of working capital management at the company and thereby recommend some suggestions for improvements on its working capital activities.

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CHAPTER I

INTRODUCTION

1.1 Research rationale

Working capital has been proved vital to the operation and profitability of a company. This is obviously illustrated in the financial crisis in 2008 which has caused many companies working capital problem, leading to downsizing, postponement of developing plans, depletion of operation and even bankruptcy. Even numerous companies with positive profit in financial statements still fall bankruptcy due to the lack of liquidity. Hence, more and more companies have begun to care about working capital and liquidity management.

In Viet Nam, the current financial recession has seriously impacted on many companies. In the 2011- 2012 period, there were approximately 100.000 bankrupted or discontinued companies. In the first quarter of 2013, about 13.000 companies were decommissioned, increasing by 26% compared with the same period last year. Majority of these companies are attributable to unability to cover short-term obligations and lack of capital for daily operation. Therefore, effective working capital management has become necessary to the existence of Vietnam companies. Each company should have a research on its working capital management practices to find solutions for optimal working capital management.

At Agricultural Printing & Packaging Joint Stock Company (APP), there are many researches on marketing, profitability, salary, operating costs and human resources. However, there is not yet a study on its working capital management. Therefore, this thesis is important to APPs working capital management. From the thesis, the company can see the realistic situation of its working capital management from which it has suitable improvements for its management.

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1.2 Literature reviews

This part generalizes some recent and important studies which indicate the importance of studying working capital and orient the structural investigation and evaluation of working capital management in this thesis.

Deloof. M (2003) found substantially negative relationship between operating profit and components of cash conversion cycle. He used a sample of 1,009 Belgian companies covering the 1992 -1996 period for his study.

Nilsson E & Astrom M (2005) used questionnaires and interviews to study the cash management in receivable view. They realized some problems Northern Sweden companies incurring in managing cash flows from German and Spain.

Molina C. A & Preve L. A (2009) found that financially distressed companies used receivable policy as trade-off between profitability and cash need, and they also estimated the cost of financial distress. Besides, they gave meaningful suggestions for companies when they are in financial distress.

Baig V.A (2009) investigated the working capital management activities of some diary cooperatives, diary firms and multinational diary firms. He reported some discoveries on internal and external working capital management, and also found the effect of ownership, government rules, managerial power, and cultural factor on working capital management at these firms.

Gbenga S.A (2009) found that working capital practices at VGC Telecoms company are effective when he measured by using surveys and observation. Then he used annual financial statements to reinforce his conclusion.

Dr. Azam M & Haider S.I (2011) studied the effect of working capital management on companies operation. He used data of all non-financial companies listed in KSE- 30 index in the Karichi Stock Exchange over 2001-2010 period.

Owolabi S.A & Obida S.S (2012) researched on liquidity and profitability relationships by investigating twelve manufacturing companies listed on the Exchange at Nigeria. They concluded that the well-managed liquidity had a positive impact on companies profitability.

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Vuorikari M (2012) studied on Case Company to find ways improving its processes in order to enhance its working capital management. He concluded that improvements in cash conversion cycle and credit management process enhance working capital activities.

Rehn E (2012) confirmed that working capital has effect on a companys profitability. To gain this conclusion, he calculated statistically the relationship between company profitability and its cash conversion cycle by using a sample data of public listed Finnish and Swedish companies.

1.3 Research objectives

The objectives of the thesis are to evaluate the effectiveness of working capital and thereby to give solutions to improve working capital management activities at APP. To achieve these objectives, we must have a comprehensive understanding of working capital management at APP. Therefore, I have set following tasks:

Analyze the liquidity

Analyze the change and efficiency of working capital Analyze elements of working capital management

Understand the current situation of working capital financing

Data and methodology

The research uses financial statement analysis approach to evaluate the efficiency of working capital management at APP in 2007-2012 period. Hence it uses mainly information from financial statement. It also employs the chart, year planning, stock analysis, answers of tailored questions from accountant of APP in evaluation process.

The thesis applies trend analysis and cross-sectional analyses which contain comparisons with a peer company and with industry average. Additionally graphs are used concurrently as an analytical tool for assessing working capital management at APP

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Data for cross-sectional analyses is taken from annual reports of publically listed companies in Hanoi Stock Exchange and HoChiMinh Stock Exchange. However, the Stock exchanges do not clarify the packaging and printing industry. Therefore, to obtain information for the packaging and printing industry, I have to elect which company belongs to the industry by requiring a company have to satisfy simultaneously following criteria.

A company need to have printing machines A company manufactures packaging

A company uses paper, plastic bead or aluminum foil as raw material

After comparing and selecting, I realize that there are 18 companies in the Exchange satisfied to these criteria. Finally, the research employs 102 year reports from 18 companies covering 2007-2012 period in which some companies do not have reports in 2007.

I also check the comparability of all companies in the industry. These companies all follow Vietnam Accounting Standard and regulations from The Ministry of Finance. All companies use straight-line depreciation method for fixed assets, weighted-average cost method for inventory recognition, and same revenue and cost recognition. Therefore, those companies are comparable.

To determine a peer company for cross-sectional analysis, I set up several standards for choosing a suitable company.

A company must belong to packaging and printing industry defined above

A company has customers for its packaging products in at least one of following industries: pharmacy, beverage, and confectionary or food industry A company uses at least one of following printing technology: flexo, bronze or offset printing

I have selected four suitable companies: An Phat Plastic & Green

Environment JSC; Sai Gon Plastic Packaging JSC; Rang Dong Plastic JSC; Bien Hoa Packaging JSC. Finally, I chose randomly Bien Hoa Packaging JSC as peer company for cross-sectional analysis.

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1.5 Research assumptions

Due to the confidentiality and shortage of certain information and the complexity of some information analysis, I has set out several hypothesis which thereby simplify the analysis of working capital management

Revenue generated only by packaging manufacturing sector when analyzing cross - sectional analysis

Revenue considered as credit sale

Average of data from the industry can present for industry norm

Organization of the research

The thesis is structured as following: Chapter 1: Introduction

Chapter 2: Theoretical review of working capital management Chapter 3: Overview of APP

Chapter 4: Findings and analyses of working capital management practices at APP Chapter 5: Recommendations and conclusion

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CHAPTER II

THEORETICAL REVIEW OF WORKING CAPITAL

MANAGEMENT

2.1 Working capital

Working capital measures efficient activities and short-term financial situation of a company. A common concept used to understand working capital is net working capital which usually is defined as difference between current assets and current liability. It presents whether the company has enough current asset to settle short-term obligations. When net working capital is negative, this refers that the company has not enough short-term assets to cover upcoming expenses. If the phenomenon lasts for a long time, this signals that the company has problems in operation and even may bankrupt if the company does not change the situation. However, always high net working capital is also not good. This may refer that the company has unnecessary excess of current assets.

Working capital always refers the relationship between current asset and current liability. To understand working capital, we need to comprehend current asset and current liability. Current assets are assets that can be converted to cash or used up within one operating cycle or one year, whichever is greater. Current assets are commonly used for operational purpose, and they usually include cash and cash equivalent, short-term investments, inventory, and account receivable. Similarly, current liabilities are those liabilities that can be paid off within one operating cycle or one year, whichever is greater. Current liabilities generally include short-term loans, debts maturing within one year, account payable, and acrrued expenses. Both current assets and current liabablities provide information about the operating performance and operational capacity of the company.

Another term used to understand working capital is gross working capital that is the total of all current assets. A company needs current assets to operate normally. However, balancing level of items in current assets is also important,

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because some assets are used better for another purpose. For example, the company do not need to keep too much cash on hand. It can invest excess of cash in marketable security for better profit. Through working capital management process, the company can adjust investments in current assets to achieve an optimal balance.

2.2 The importance of working capital management

Three basic questions of corporate finance include capital budgeting, capital structure and working capital decisions. Only working capital decision resovles short-term problems. As we know, short-term matters deals with how to maintain efficient and effective day-to-day performance. Inadequate cash may cause a company to sell its assets, reorganize its structure through bankruptcy process, or even liquidate. Excessive cash and liquid assets could not be the optimal use of the companys resources. The company can invest excessive cash in short-term financial assets for profit and just need to maintain enough cash to settle upcoming expenses and obligations. Therefore, the purpose of working capital management is to maintain optimal level of current assets and current liabilities that can support the daily operation and promote the development of the company.

Working capital management is important to survival of each compnay, as D. Chandra Bose stated, working capital is the life blood and nerve center of a business1. Many companies develop well and have prosperous long-term investments, only because of inefficent working capital management, these companies finally fall bankruptcy.

Working capital management is a complex process. It requires the cooperation of several aspects including finance, operation and commerce. It impacts directly on profitability and liquidity of a company, so when changing working capital management, the company need to consider the impacts of the change on its profitability and liquidity. Efficient working capital management stimulates not only the daily operation, but also increase the profitability and development of a company. The better working capital management is, the more a

1 Bose .C, 2002, Principles of Management and Administration, PHI Learning Pvt.Ltd, pp 310

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company can captures advantageous opportunities. In sum, well-managed working capital is required for sustainable growth of a company.

2.3 Elements of working capital management

Working capital refers the relationship between current assets and current liabilities. Common current problems involve cash, short-term investment, inventory, account receivable, account payable and also short-term financing matters. To have a complete comprehension on working capital management, we will consider its components as following.

2.3.1 Cash management

According to Tennet J (2012), a prosperous business demands to manage efficiently various resources including people, cash, equipment, property, services, products, and inventory. Therein, cash is perhap the most important of all these resources. Cash, like blood, circulates through most activities of a company. A company cannot perform without cash.

Cash management mainly handles with disbursement and collection cash, invests cash and ensures a reasonable cash level. Cash management is an important element of working capital to maintain financial sturdiness and liquidity.2.3.1.1 Collection and disbursement

The foremost duty of cash management is to control cash collection and disbursement. The goal of the processing is to collect as soon as possible and pay as late as possible. Cash collection manages primarily revenue collection, while cash disbursement manipulates inflow of operating expenses such as buying inventory, settling account payable and paying off accrued expenses.

Cash budgeting is an important tool to manage not only cash collection and disbursement but also other aspects of cash management. It forecast the future cash inflow and outflow, providing benchmark for real cash flow situation in future, and alerting future cash need and surplus. Companies can use conveniently accounting software or cash budgeting service in cash budgeting process.

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Nowadays, banks have developed many services to promote the collection and disbursement processing for companies. Banks usually provide payment methods, short-term investments and borrowings, cash flow management, and cash centralization, payable and receivable supports. These services enable companies to manage cash and working capital easily, conveniently and concentratedly.

2.3.1.2 Cash management model

Another duty of cash management is to maintain a sensible cash balance. Numerous models have been researched and developed to determine suitable cash balance. Brief introduction of common models are presented as following

Baumol-Allais-Tobin model: The model allows a company to determine optimal cash balance under assumption of constant cash need. The model considers the trade-off between trading costs (cost to convert cash to marketable securities) and opportunity cost (the cost of holding cash).

Miller Orr model: the model enables a company to estimate the range of cash balance it should hold. When cash balance reaches the upper or lower limit, the company begins to sell or buy short-term investments to maintain target balance.

2.3.1.3 Cash management evaluation

Liquidity ratios and cash conversion cycle are used to evaluate cash management. These ratios will be discussed in detail at 2.4.2

2.3.2 Short-term investments

As we know above, a company just needs to ensure reasonable cash balance to settle upcoming expense and obligations. The idle cash can be invested for profitability purpose and opportunity cost reduction.

Short-term investment often includes highly liquid and less risky marketable securities. Its financial instruments typically include term deposit, repurchase agreements, treasury bills, bankers acceptance, certificate of deposit, commercial paper, and money market mutual funds. These highly liquid securities with maturity less than three month are considered cash equivalents. Additionally, financial

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instruments can also encompass bond and stock investments. However, these instruments have higher return and risk than former instruments do. When a company considers investing idle cash, it should review characteristic of various marketable securities, such as maturity, marketability, default risk, and taxability.

2.3.3 Inventory management

Inventory may have several different forms, including raw materials, work in progress and finished goods. Along with cash and receivalbe, inventory contributes to the primay operational investment of a company. The main objective of inventory management is to maintain a balance in inventory, adequate but not too much. Excessive inventory increases opportunity costs which includes storage cost, insurance and taxes, loss for obsolence and spoilage, and the opportunity cost of amount invested in inventory. On the other hand, deficit inventory incurs shortage cost and easily leads loss in sale.

2.3.3.1 Inventory management method

Economic order quantity model (EOQ): The model allows a company to estimate the optimal inventory order. It considers the trade-off between opportunity cost and shortage cost to minimize the total of those costs. EOQ has unrealistic assumption of using inventory completely before order; so some extension has been developed to improve the model. Two common extensions encompass safety stock and reorder point.

ABC analysis: All kinds of commodities do not have same role in inventory maintenance. Therefore, the analysis based on annual consumption value to

categorize inventory into three (more) classes to manage inventory more effectively.

2.3.3.3 Measuring inventory management

The most popular method to evaluate inventory management is to use inventory turnover ratio and days inventory outstanding. These ratios will be explained clearly in 2.3.4

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2.3.4 Receivable management

Trade receivable is created when the company sells its goods on credit term. Most companies sell their products on credit, rather than on prompt payment. This is a way to promote sale in many companies. Account receivable management is quite important, because receivable usually contributes a large portion in current assets. Dloof M (2003) reports that receivable constitutes for 17% of assets in Belgian firms. According to study of Molina S.A and Preve L.A (2009), account receivable is 18% of total asset, when they computes a study on numerous companies over 1978-2000 period.

2.3.4.1 Credit policy analysis

When a company decides to sale on credit terms, the company usually has a credit policy as procedure to manage credit sale. A credit policy includes three components: term of sale, credit analysis and collection policy. Credit policy is a guide for the company when accepting sale on credit and which extension on credit sale and under what circumstances.

Lenient credit policy simulates sale but also increase risk of nonpayment. Strict credit policy loses sale in reverse. Granting credit is clearly trade-off between revenue and risk. Therefore, when the company intends to change its credit policy or establish new one, evaluating the credit policy is necessary. The company needs to compare the benefit and the cost that the policy brings. The policy is accepted only if its benefit more than its cost.

2.3.4.2 Evaluating customers creditworthiness

Before granting credit for a customer, the company clearly needs to evaluate the companys ability to pay or creditworthiness. There are many tools used currently to measure customers creditworthiness. These tool analyses are required to determine the maximal exposure of credit limit that the company can take.

Evaluate a customers ability to create cash flow in future. This evaluation could use Monte Carlo situation to improve the estimation.

Use clients financial statement to analyze the customers financial performance

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Use the information in the market. This information can be extracted from officially public information or stock (bond) price, or bought from credit agencies and specialists.

Analyze customers historical record on their ability and readiness to pay their debts

Use scoring model like Z- score (1968) by Altman to predict the default probability. The model is highly reviewed on its accuracy for one year

horizon

2.3.4.3 Measuring receivable management

The most two common ways used to evaluate account receivable management are account receivable aging schedule and receivable turnover and days receivable outstanding (they will be discussed in detail in 2.4.2), and account receivable aging schedule that is the list of account receivable broken into days receivable outstanding categories.

2.3.5 Payable management

Account payable rises when the company buys goods or material from suppliers on credit term. In financial distress like present, account payable becomes a important short-term financing to many companies, especially small and medium companies, when there is difficult to access to bank loans. Ineffectiveness in managing account payable may incurr opportunity cost and lost chance to take advantage of credit facilities. Therefore, effective payable management is important in working capital management.

2.3.5.1 Evaluating trade discount

In general, a supplier allows a company to choose one of two following choices of payment: early payment discount and no discount with payment on specified date. To choose which the better solution is for the company, it should consider trade-off benefit and cost of each method.

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2.3.5.2 Measuring payable management

The popular method to evaluate payable management is to use payable turnover ratio and days payable outstanding. These ratios will be explained clearly in 2.3.4.

2.3.6 Short-term financing management

Working capital can be considered investment in current assets to support the normal operation of a company. In this understanding, we need to attend which source the company takes to finance its current assets. In general, a company can not use only its generated cash and its equity to finance its business cycle and develop its expansion. Because there is a time lag between cash disbursment and cash receipt. At some point of times, the company have to depend on outside source more and less. Understanding the benefits and costs of each source helps the company to have a optimal short-term financial strategy to support its performance. Commonplace types of short-term financing from banks or financial institutes include line of credit, factoring account receivable, account receivable loan, inventory and term loan. Besides, a company also uses other sources from delaying payable and expenses to finance working capital.

2.4 Measurement of working capital management

Analyzing working capital management can use following methods: ratio, fund flow and working capital budgeting analysis2. However, this thesis applies only ratio analysis to evaluate working capital management, so this part presents only ratios. We measure mainly the companys efficiency of using working capital, and its liquidity in evaluating working capital management processing. Therefore, ratios in efficiency and liquidity are main ratio for measurement of working capital management.

2 Bose .C, 2002, Principles of Management and Administration, PHI Learning Pvt.Ltd, pp 314

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2.4.1 Efficiency ratios

2.4.1.1 Inventory turnover and days inventory outstanding

Inventory turnover =

Inventory turnover indicates how many time the company sell and replace inventory for its opreation. The higher ratio, the shorter time the company hold inventory.

Days inventory outstanding (DIO) =

DIO indicates the number of day that company hold its inventory. The shorter DIO, the quicker the company sell its goods. DIO and inventory turnover move reversely. If inventory turnover is higher, DIO is lower, vise versa. Two ratios are used to measure the effectiveness of inventory management. These ratios usually are compared with those of the industry. If DIO is higher and inventory is lower than that of the industry, the company may manage the inventory better than average companies in the industry do, or alternatively the company has not enough inventory to support sale. To know which is more suitable reason, we need to consider the growth of the company in relation to that of industry.

3.4.1.2 Receivable turnover and days sale outstanding

Receivable turnover =

Receivable turnover assesses how effective a company collects debts from its clients. The higher ratio, the quicker the company collect cash .

Days sale outstanding (DSO) =

DSO indicates how long the company can receive cash from sale on credit. Like the relation between DIO and inventory turnover, DSO and receivable turnover move oppositely. Those ratios are used to assess account receivable managemet at a company. The higher DSO shows that the company take longer time to collect money from sale, implying possibly lenient credit policy or problems in collection. Lower DSO and higher receivable turnover indicate that the company

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manages receivable and collection better, or use stricter credit policy that potentially results in lost in sale. DSO and receivable turnover should be compared with those of industry to know whether the recevable management is good.

3.4.1.3 Payable turnover and days payable outstanding

Payable turnover =

The payable turnover indicates how many times a company pays off all its debts to its suppliers in accounting year. The higher payable turnover, the quicker the company settles its debts.

Days payable outstanding (DPO)=

Meanwhile, DPO shows the number of days that the company makes payment for its suppliers. Usually, the higher DPO and lower payable turnover, the better the company. Because this reflect that the company takes advantage of available credit and lenient suppliers. However, there is an alternative explanation that the company has problem in payments, a potential signal of financial distress. To know which is more suitable reason, we need to consider other liquidity ratios to determine that the company has enough cash and other current assets to settle the debts. The lower DPO and higher payable turnover may reflect that the company has not take fully use of available credit terms, or alternately the compay use prompt payment discount. Those ratios are compared with those of the industry used to measure the effectiveness of account payable management.

3.4.1.4 Working capital turnover

Working capital turnover =

Working capital turnover implys how efficiently a company use working capital to generate revenue. The higher working capital turnover, the more revenue the company create for each 1 unit of working capital. The higher the turnover, the more efficient the company.

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3.4.1.5 Current asset turnover

Current asset turnover =

Like working capital turnover, current asset turnover measures how efficiently a company use current asset to generate revenue. The higher current asset turnover, the greater efficiently the company use current assets in its operation.

3.4.2 Liquidity measurement

Liquidity accounts for a companys credit-worthiness. If a company is considered as credit-worthiness, the company is easy to access to loans with lower interest rate and better terms, allowing it to take advantage of potential opportunities. The less liquid, the more risk company may face financial disobligeness or eventually bankruptcy. Liquidity signals the situation of working capital management at the company.

3.4.2.1 Current ratio

Current ratio =

Current ratio is similar to net working capital, expressing the relationship between current assets and current liabilities. Current ratio higher than 1 presents that the companys current asset can cover its current liabilities. Higher current ratio, better liquidity of the company is. A lower ratios imply the companys less liquidity, showing that the company depends more heavily on outside source to finance short-term expenses and debts.Quick ratio (acid-test ratio) Quick ratio=

Quick ratio just use current assets that are easy to transfer cash. Therfore, the quick ratio measure more conservatively the ability of the company to pay off short-term obligations. The ratio indicate the fact that some current assets, such inventory and pre-paid expenses, are not easily and quickly converted to cash.

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3.4.2.3 Cash ratio

Cash ratio=

This ratio is the most conservative view at the companys liquidity in presented ratios. The ratio only includes most liquid asset in the formula and leaves out inventoy and receivable, so this ratio is lower than others. Like above ratios, the higher ratio indicate the better liquidity of the company.

3.4.2.4 Cash conversion cycle

Cash conversion cycle (CCC) = DIO + DSO DPO

Cash conversion cycle is the length of time the company take to convert cash paid to supplier to cash received from sale. The company buys inventory on credit, creating account payable at the same time. The conpany use continuously inventory as input to product its goods and then sell to customers on credit terms, raising account receivable. The company settles payments for its suppliers, decreasing account payable. Subsequently, it collects cash from sale, reducing account receivable. The different time between cash disbursment and cash collection is cash conversion cycle. CCC measures the effectiveness of a company in managing its working capital. The lower CCC indicates that the company generates cash for a shorter time, showing better in working capital management in general.

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CHAPTER III

OVERVIEW OF APP

3.1 Background of APP Company

APPs precursor was a printing workshop, established in 1969, whose mission was to design and draw manually maps for the need of the State. The workshop changed into a state-owned enterprise under the Ministry of Agriculture & Rural Development with different names in 1970, 1983 and 2002. Its duty was to print material, book for the ministry and others. In 2004, the enterprise was equitized and became Agriculture Printing & Packing Joint Stock Company (APP) with authorized capital 27 billion VND, while the State held 25% of shares. In 2008, the company increased its capital to 54billion VND. The company has been listed on Hanoi Stock Exchange since 2010, and it has increased again its capital to 81 billion VND since 2012.

The company has headquarters at Ha Noi and 2 plants (APP Ha Noi and APP Hung Yen) at industrial zones. It has owned Digital Anti Counterfeit Company (DAC) since 2013. Furthermore, it has gained ISO 9001:2008 and ISO 14001-2001 certifications, presenting its strength and experience in packaging & printing industry.

The company specializes in designing and making packages used offset printing, bronze printing, and flexo printing technology, and manufacturing digital anti-counterfeit stamps, PVC, aluminum and BOPP films. It also supplies printing material for printing companies and imported plastic blister for pharmaceutical companies. Additionally, the company lends office building at 72 Truong Chinh Street, Thanh Xuan District, Ha Noi.

Its customers include mainly northern companies in many industries such as pharmacy, confectionery and food, and beverage industry. The company has many big, famous customers, such as Traphco, Pharbaco, Nam Ha Pharma, Hai Ha, Hu Nghi confectionery, Sabeco beverage and so on.

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3.2 Overview of APPs performance

3.2.1 Profitability

Although it was established for more than 40 years, it is really considered developed since its equitization. The company is in its growth stage. Its revenue has increased steadily. From 2006 to 2012, the sale rose by 7.3 times, from 54 billion VND to 417 billion VND, as showed in figure 4.1. We also see that revenue was higher than target in 2010 -2012 period.

Figure 3.1: Net revenue and target revenue in 2006-2012 period

Millions

400.000

300.000

200.000

Net Revenue

100.000

Target revenue

-

2006200720082009201020112012

Source: Calculated and synthesized from financial statement of APP

Since 2013, APP has owned Digital Anti Counterfeit company, a good company specializing in anti-counterfeit stamps, so it is well anticipated that APP has a sharp rising sale in 2013 and has continuously developed in future.

Besides expanding its new technology and updating new machines, it gradually changes its structure in sale, following its strategy that promotes and develops commercial activities. The sale of material in relation with revenue has increased, while the sale of finished goods has had tendency to decrease. However, the sale of finished goods has accounted primarily for the companys revenue, proximately 80% of total sale, and got gross profit about 17-20%.

Table 3.1: Gross profit margin, ROA and ROE in 2007-2012 period

200720082009201020112012APP'sIndustry

averageaverage

ROA9,25%10,12%14,02%10,08%10,06%15,28%11,47%7,35%

ROE17,69%18,16%22,29%17,63%18,83%25,72%20,05%14,01%

Source: Calculated and synthesized from financial statement of APP and industry average

19

The table above reveals that ROA and ROE ratios of APP are higher than those of packaging and printing industry. ROE ratio of APPs average is even higher than that of industry average by 6%. The company operates more effectively than the industry does. In fact, APP is one of big companies in package and printing industry in northern Vietnam.

3.2.2 Risk analysis

The company has built a close relationship with banks, and it has usually been a candidate for support packages from banks policy. Therefore, it is very easy for the company to borrow money from the bank and with lower interest rate than most of companies bear. Until now, the company has had no bad debt and still remained quite large credit line at banks.

Figure 3.2: Some solvency ratios of APP in 2006-2012 period

150,00%

15,00100,00%

10,0050,00%

5,000,00%

-200720082009201020112012

Debt to assets ratio

Debt to capital ratio

interest coverage


In 2007, more than 45% of assets were finance by debt and the debt is equal to stockholders equity. Since then, the debt ratio has maintained at lower level, presenting that the company restrict bank loan for its operation and development. In 2010-2011, the company replaced some old machines for new ones and invested bronze technology. So it encountered higher financial risk than in 208-2009 period as a result of borrowing more to finance the projects. In 2012, the company issued new shares and refrained from borrowing. Therefore, this year has lowest financial risk and highest solvency in recent years. Additionally, interest coverage, ability to settle interest payment, measures level of solvency, as the higher it is the stronger solvency is. Interest coverage does not move together with debt to assets ratio and debt to capital ratio, because interest coverage is affected by the increase in

20

borrowing interest rate in recent years. However, this ratio has been higher than 4.5 times, expressing the company can easily handle the interest payment by earning from companys operation.

Table 3.2: Current ratio and quick ratio of APP in 2007-2012

200720082009201020112012

Current ratio2,011,701,621,631,301,36

Quick ratio1,300,860,880,980,690,77


The table 3.2 shows that APP appear less liquid overtime as current ratio and quick ratio lower in general. However the current ratio is higher than 1,3; so the company could easily meet its short-term obligation. (More liquidity analysis will be discussed in chapter IV)

3.2.3 Efficiency analysis

Figure 3.3: Some efficiency ratios of APP in 2007-2012 period

20,00

10,00

0,00

200720082009201020112012

Asset turnover

Working capital turnover


The above figure indicates that the company appears to operate more efficiently as both ratios measuring efficiency improve. APP uses total assets better than before, while it use working capital and current asset much better than before. Asset turnover increased slightly but steadily over 7 years, presenting that the company has used asset more effectively. Working turnover increased, especially shooting up in 2012. The company generated more profit from its working capital, particularly in 2 recent years. The company has updated new technology and improved its management, resulting that the company appear to operate more effectively. (More efficiency analysis will be discussed in chapter IV)

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CHAPTER IV

FINDINGS AND ANALYSIS OF WORKING CAPITAL

MANAGEMENT AT APP

4.1 General analysis of working capital management

To understand working capital management at APP, we consider the liquidity, change in working capital and the efficiency of using working capital at APP in trend and in cross-sectional analyses with industry average and with Bien Hoa Packaging JSC (SOVI).

4.1.1 Liquidity analysis

The industrys current ratio decreased from 2008 to 2011 and then increased slightly in 2012. It appears that the industry is less liquidity in period studied. The figure 4.1 reveals that APPs current ratio has followed the movement of the industrys ratio. Like the industry, APP seems less liquid over time, but remains higher than 1, meaning that APP has enough current assets to settle current liabilities. Additionally, APPs ratio has lain slightly under industrys ratio, illustrating that APPs ratio is a bit lower than industrys ratio, so APP is clearly less liquid than industry norm.

Figure 4.1: Current ratio of APP, SOVI and Industry average in 2007-2012 period

2,00

APP

1,00

SOVI

Industry average

0,00

200720082009201020112012

Source: Calculated and synthesized from financial statement of APP, SOVI and companies in

packaging and printing industry

22

APPs ratio is higher than SOVIs ratio in each year, except for 2011. APP is obviously more liquid than SOVI. From figure above, we can conclude that APP is less liquidity than the industry, but more liquidity than SOVI.

The following figure 4.2 shows that APPs quick ratio was volatile. It depleted from 2007 to 2008, increased slightly in 2009 and then steeply in 2010, dropped to bottom in 2011 and then rose gradually in 2011 -2012 period.

Figure 4.2: Quick ratio of APP, SOVI and the industry in 2007-2012 period

1,50

1,00

APP

0,50

SOVI

Industry average

-

200720082009201020112012



APPs ratio has moved with the change of industry ratio, except for 2011. At the time, APPs ratio increased while industry ratio depleted. It is explained that APP kept highest amount of cash in time studied, holding more than 1,6 time amount of cash APP kept in previous year due to the positive cash flow from financial activities, so APPs current assets increased with higher growth rate than APPs current liabilities did. We also notice that industrys quick ratio has been quite stable since 2010, remaining closely at 1, meaning the easily-converted current assets able to cover current liabilities. APPs liquidity seems follow the industrys liquidity trend, so APPs quick ratio is expected to remain at 0,8. Combined with above analysis, we can see that APP is less liquidity than industry and seems less liquid over time.

Like APPs quick ratio, SOVIs quick ratio was also unstable, but not moved together with APPs ratio. Although SOVIs current ratio was always lower than that of APP in the time researched, SOVIs quick ratio had some years getting higher level due to large portion of account receivable in relation to current liabilities.

23

Cash ratio is the most conservative ratio to assess liquidity of a company, so we need to consider APPs cash ratio to see its liquidity. The figure 4.3 shows that APPs cash ratio has followed the movement of industrys cash ratio, except for 2010. At that time, APP has highest cash ratio due to holding very high amount of cash. The figure also reveals that APPs cash ratio was lower than industry average, except for 2010. This presents that APP is generally less liquidity than industry average.

Figure 4.3: Cash ratio of APP, SOVI, and Industry in 2007-2012 period

0,80

0,60

APP

0,40

SOVI

0,20

Industry average

-

200720082009201020112012



APPs cash ratio was higher than that of SOVI in 2008-2010 period. However, APP has kept cash ratio lower than SOVI and industry did in 2011-2012 period. It seems than SOVI has adjusted cash ratio to more suitable to industry average.

From above analysis, we can see that APPs liquidity is lower than industry average and generally followed the change of industrys liquidity. Additionally, it appears that APP is less liquidity overtime. APP was generally more liquid than SOVI in 2007-2010, but has been less liquid in 2010-2012.

4.1.2 Changes in working capital

Table 4.4 reveals that APPs gross working capital has been fairly stable after a sharp increase from 2008 to 2010. Additionally, its growth in sale in 2010-2012 has been steady, each year increasing at least 70 billion in revenue. So we can

24

reasonably expect that the total current asset is around 100 billion each year if the company continues to operate normally like present.

Figure 4.4: Current assets, current liabilities and net working capital of APP in 2007-2012 period100.000Millions

50.000 Current assets

Current labilities

Net working capital- 2007 2008 2009 2010 2011 2012


However, the structure of items in current assets has not stabilized, showed in figure 4.5. Cash and cash equivalent accelerated in 2007-2010 period and then has decreased since 2010, while account receivable reduced in 2007-2009 period and then increased since 2009. Inventory in relation to current assets was various, and recently has quite stabilized at 40%.

Figure 4.5: Components of current assets in 2007-2012 period

100%

Other current asset

50%

Inventory

Account receivable

0%

Cash & equivalent

200720082009201020112012


The figure 4.4 also shows that APPs current liabilities rose from 2008 to 2011 and been stabilized in 2011-2012 period. We also see that current liabilities have increased in relation to current assets, showing the company less liquidity. The company has used increasingly current liabilities to finance current assets. With the recently stableness in current asset and liability, we can expect that net working capital has been fairly steady in near future, but it is lower in relation with current assets than it was in previous period.

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4.1.3 Efficiency of using working capital

The figure 4.6 presents that APPs working capital turnover was improved each year, increasing by 3,8 times over 5 years. The company has generated higher revenue relative to working capital. This is can be explained that the growth of revenue was higher the change in working capital each year. Especially, the sale rose by 42% in 2011 and 28% in 2012, while net working capital decreased by 42% in 2011 and then increased by only 18% in 2012. In general, the working capital turnover has moved with upward trend

Figure 4.6: Working capital turnover of APP, SOVI, and Industry in 2008-2012 period

25,00

20,00

APP

15,00

10,00

SOVI

5,00

Industry

-

20082009201020112012



Besides, APPs working capital turnover has been higher than that of industry average since 2009. This can be translated that APP has generated more revenue for each 1 VND of working capital than other similar companies in packaging and printing industry have done. Hence, APP appears to use working capital more efficiently than industry average does. The industrys turnover has followed upward trend; however the increase of the turnover each year is quite small and stable. Therefore, the increment in APPs turnover is partly explained by general increase in industrys turnover, but sharp increase in 2010-2012 period is mainly caused by positive changes in APPs working capital management which will be discussed in detail in part 4.2.

Compared with SOVIs working capital turnover, APPs working turnover was always lower in the period studied, although SOVIs turnover was volatile. We

26

can conclude that SOVI used working capital better than APP did and much better than industry did.

The figure 4.6 and 4.7 reveals that APPs current asset turnover has moved together with its working capital turnover. We can see that APP used better not only working capital but also current assets. It appears that APP has adjusted the mix of current assets more suitable, leading the better in daily performance.

Figure 4.7: Current asset turnover of APP, SOVI and Industry in 2008-2012 period

5,00

4,00

3,00

APP

2,00

SOVI

1,00

Industry average

-

20082009201020112012



Meanwhile, SOVIs current asset turnover has decreased steadily from 2008 to 2011 and increased in 2012. In 2011-2012 period, SOVIs turnover was lower than APPs turnover. Therefore, even though SOVIs working capital turnover was higher than APPs turnover; we cannot conclude that SOVI used working capital better than APP did. We reasonably consider that SOVI has problems in working capital management.

The figure 4.7 also shows that industrys current asset turnover was stable in 2009-2011 period and slightly decrease in 2012. So clearly, the increase in APPs turnover is not caused by industry trend. The growth is resulted from improvement in APPs management and operation itself.

In sum, we can see that APP has used working capital and current asset more efficiently and reasonably over time and better than industry average has.

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4.2 Component analysis

4.2.1 Cash analysis

The figure 4.8 illustrates that APPs cash and equivalent increased from 2007 to 2010, and then decreased rapidly. This can be explained from information from APPs cash flow statements. Company has generated increasing net cash flow from operating activities. The cash from operating activities has grown by 7.6 times in 2008-2012 period. However, the company has invested increasingly in new machine and technology since 2010, resulting in decrease in cash amount from 2010 to 2012.

Figure 4.8: Cash and cash equivalent of APP in 2007-2012 period

Millions

30.000

20.000

10.000

- 2007 2008 2009 2010 2011 2012

cash equivalent

cash

Source: Synthesized from APPs financial statements

We also notice that APP invested in term deposit as short-term investment only in 2009 and 2010. APP does not invest in any other type of short-term investment. APP does not have a clear investment policy for investing idle cash.

The table 4.1 reveals that APP kept less cash in term of total asset than SOVI did, except 2010 the year APP held highest amount of cash in period studied

Table 4.1: Percentage of cash & equivalent in total asset of APP, SOVI & industry in

2007-2012

200720082009201020112012

APP5,05%7,22%13,86%17,36%8,28%3,55%

SOVI11,78%8,56%13,98%7,47%20,08%7,95%

Industry average3,54%7,47%9,76%6,15%11,91%7,36%



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APP kept cash in relation to total current asset higher than industry average did in 2007-2010 period, and lower level than industry since 2011. In fact, numerous companies in the industry invest cash in short-term investment, not in the term of cash equivalent. Therefore, compared with industry average, APP appears to keep unsuitable cash level for its operation, sometime too high and sometime too low. In reality, APP has policy to keep minimum cash level for its operation. This level is determined by historical data and expectation. The company can use cash management model to determine holding cash level and have a comprehensive investment policy for investing excess amount of cash.

The table 4.2 reveals that APPs cash conversion cycle was improved each year. CCC deteriorated form 99,79 days to 56,21days, decreasing by more than 43.58 days in 5 years. The company has shortened the time between disbursing cash to suppliers and collecting cash from sales, showing the improvement in cash management at APP. CCC has been improved by the decrease in DIO and DSO.

Table 4.2: CCC and its components of APP in 2009 -2012

2009201020112012DIO78,1259,4545,7641,53DSO44,4147,4442,3838,46DPO22,7423,9121,8123,78CCC99,7982,9866,3256,21


To see more clearly the improvement in CCC at APP, we compare it with that of SOVI and of industry average. SOVIs CCC has been stable, time to convert cash about 51-53 days, and better than APPs CCC. So SOVI generates cash quicker than APP do. In another hand, the industrys CCC has been fairly steady, much higher than APPs CCC and SOVIs CCC. The figure 4.9 presents that APP has changed its CCC from level of industry to level of SOVI. While both CCC of SOVI and industry has been quite steady, APPs CCC has followed a decreasing trend. This decrease is clearly not cause by the industry. It is resulted from the changes in management and investment of APP.

29

Figure 4.9: CCC of SOVI, APP and the industry in 2009-2012

150,00

100,00

APP

50,00

SOVI

-

Industry

2009201020112012



The reason for the improvement is that the company has developed more line of product, and improved in supply chain and management. Therefore, the amount of inventory has increased to support the higher growth of revenue, resulting in raising DIO. Another reason is that APP used stricter credit policy, leading lower DSO.

Combining with liquidity analysis, we can see that APP has kept lower level of cash and generated quicker cash from operation than the industry has. However, SOVI has held higher level of cash and created quicker cash from its performance than the industry has. Hence, we cannot conclude that APP can keep lower level of cash than the industry. It should use cash management model to determine an optimal or a suitable range of held cash.

4.2.2 Inventory analysis

The company has used monthly weighted-average cost method to recognize its inventory. The inventory is recorded by perpetual inventory system. The company has not changed the inventory recognition policy, so it is convenient to compute trend comparison.

The number of days of inventory has decreased by 36,6 days, and inventory turnover ratio has increased by 1,9 time from 2009 to 2012. The company seems to manage inventory more efficiently, but this phenomenon is also can explained that the company has inadequate inventory to support sale, which may result loss in sale.

30

Figure 4.10: DIO and Inventory turnover of APP in 2009-2012

100,00

10,00

50,00

5,00DIO

Inventory turnover-

-

2009201020112012


We need to consider the sale growth to see which most suitable explanation is. APP has APP compound average sale growth is 33,25%, while average sale growth of packaging and printing industry was 15,08% (calculation presented in appendix). Clearly, APPs growth rate is much higher than that of the industry. Hence, the first explanation is most suitable, meaning the company has improved effectively inventory management over time. In fact, the improvement in inventory management is caused by software application in inventory management since 2007, investment in new bronze technology in 2010, investment in new machine to boost productivity and enhancements in supply chain.

The figure 4.11 reveals that APP has upward trend of inventory turnover ratio, while SOVI has downward tendency of inventory turnover. This indicates that APP appears to manage inventory more efficiently and SOVI seems have problem in inventory management. Even so, SOVIs turnover is higher than APPs turnover, except for 2012. In general, SOVI has managed inventory better than APP has, although it has recently faced inventory management problems.

Figure 4.11: Inventory turnover of APP, SOVI and Industry in 2009 -2012

15,00

10,00

APP

5,00

SOVI

-

Industry

2009201020112012



31

Industry also has upward trend in inventory turnover, so the increase in APPs turnover is partly caused by general trend of the industry. However, the growth of APPs turnover is much higher than that of the industrys turnover has. Therefore, the increase in APPs turnover is mainly contributed to its development in products and improvements in supply chain and management. As a result, the amount of inventory has increased to support the higher growth of revenue, resulting in raising inventory turnover. Combining above analysis, we can conclude that APP has improved inventory management more efficiently and handled inventory better than the industry has.

4.2.3 Account receivable analysis

The figure 4.12 illustrates that APPs receivable in relation to total assets has followed with movement of industrys receivable in total assets in 2008-2012 period. APP had lower percentage of receivable in current assets than industry average did since 2008.

Figure 4.12: Account receivable in relation to total assets of APP, SOVI, and Industry in

2007-2012 period

60,00%

40,00%

APP

20,00%

SOVI

0,00%

Industry average

200720082009201020112012



It fact, in the economy slowdown, like many Vietnam companies, APP has faced clients payment problem. So the company adjusted its target customers and collection policy. The company has limited small and medium customers, prioritized good-payment history companies and focused big companies, especially pharmaceutical companies. Meanwhile, many companies in the industry have used lenient credit policy to boost the revenue, resulting the account receivable accounting for 40% of current assets and 25% of total asset in general.

32

SOVI is a company using lenient credit policy. Its receivable in current asset is much higher than that of industry and APP, contributing about 55% in current asset and 40% in total asset. Since 2010, we can see the fall in percentage of receivable in total asset at SOVI. This is contributed to the sharp increase in fixed asset. In fact, SOVI has extended its credit, as its receivable accounted for 55% in current asset in 2012, increasing by 5,8% compared with last year. Its account receivable increased by 2,55 times in 2007-2012 period. Although APPs receivable in total asset is lower than that of industry, it has generally moved with upward tendency. Especially, APPs receivable accounted for 50% in current asset and in 22% in total asset in 2012, increasing by 13% and 3% respectively compared with last year. APP seems loosen its policy less strict than it did before. We can see that APP, SOVI and other companies in the industry use credit policy frequently as a tool to manage their working capital.

The figure 4.13 showed that APPs DSO has decreased for 5 years. In 2008, DSO was 83,11 days, meaning after sale 83,11 days the company received money. Until 2012, DSO was only 38,46 days, decreasing by 44,65 days for 5 years. This is really an impressive number. Furthermore, receivable turnover ratio increased by 2,16 times over 2008-2012 periods. However, the growth in receivable turnover and the decrease in DSO have been quite small since 2009. It seems that that APP did something to improve receivable management in 2008-2009 period.Figure 4.13: DSO and receivable turnover of APP in 2008-2012

100,00

10,00

50,00

5,00DSO

Receivable turnover-

-

20082009201020112012


In reality, the company has applied information technology to manage account receivable along with inventory since 2007 and has fairly completed

33

receivable policy, resulting in a steep reduction in DSO and receivable turnover in 2008-2009 period.

The figure 4.14 shows that APPs receivable account has followed the trend of industry. So the change of APPs receivable turnover is clearly caused by the general upward trend of industry. However, APPs turnover is much higher than that of industry. This is contributed to the improvements in APPs management itself.

Figure 4.14: Receivable turnover of APP, SOVI and Industry in 2009 -2012

10,00

8,00

APP

6,00

4,00

SOVI

2,00

Industry

-

2009201020112012



SOVIs receivable turnover has followed downward trend. This can be explained that many its client has problem in payment or SOVI is using lenient credit policy. In fact, SOVI has lenient credit policy to boost revenue and also hold existing its customers some of who has faced to difficulties. Using lenient credit policy, SOVI has boosted its revenue fourfold, but faced recently slowing inventory management. Therefore, APP should evaluate its credit policy before deciding to change its credit policy and combine with inventory management when changing credit policy.

4.2.4 Account payable analysis

APPs account payable has increased by 6.54 times over 5 years, because the company has expanded its trading portion in sale according its strategy, and it need more raw material for production as the company has updated its machines and technology.

34

The figure 4.15 shows that its payable turnover and DPO have moved unstably. The payable turnover increased from 2009 to 2010, decreased in 2011 and then increase in 2012. APPs DPO moved in reverse direction. Although volatile change, DPO has shifted slightly in the range of 2 days. In practice, suppliers allow APP two choice of payment: prompt payment discount and payment on time.

Figure 4.15: DPO and payable turnover of APP in 2009-2012

25

17

24

16DPO

23

22

15

21

payable turnover

20

14

2009201020112012


To deepen understanding of APPs payable management, we need to compare APPs payable turnover with the peer, SOVI, and industry average.Figure 4.16: Payable turnover of APP, SOVI and Industry in 2009-2012

20,00

15,00

APP

10,00

SOVI

5,00

Industry

-

2009201020112012



The figure 4.16 shows that APPs payable turnover has moved with the change of industry, while SOVIs turnover has had downward tendency. Combining with recently higher cash ratio and cash management analysis, we can conclude that SOVI has extended using available credit from its suppliers. Meanwhile, APPs payable turnover has been higher than that of SOVI and of industry average. Higher payable means that the company makes more payment times per year. This indicates APP has not taken full advantage of available credit from suppliers, or alternatively APP has used prompt payment discount. Although offered two types of payment, APP often the later payment method. It pays via letter of credit (L/C) or

35

telegraphic transfer (T/T). Hence, the explanation that APP has not taken full use of credit facilities is more suitable.

4.2.5 Short-term financing analysis

APPs sources for short-term financing include line of credit, from banks, account payable for suppliers and other payables. Additionally, it sometime uses other types of loan, such as account receivable loan and inventory.

To have comprehensive understanding in short-term financing, we need to know APPs relationship with banks, because bank loan is one of most important source to finance working capital. Short-term loan usually account for 40% in current liabilities. APP has built a good relationship with Vietnam Bank for Agriculture and Rural Development for a long time. It primarily borrows from this bank. Besides, it utilizes services from other commercial banks, such as Ocean Bank and Military Bank. APP does not use full loan limit in line of credit to finance working capital, because it intends available credit line for emergency case. Up to this point, it has pay off loans on time and often receives supporting policy from banks. Currently, APP has aimed using less short-term loans and taking full advantage from other sources, such as account payable, tax payable, employee payable and retained earnings.

Table 4.3: Current liabilities in 2008- 2012 period (in percentage)

20082009201020112012

Short-term loan40,46%37,38%49,04%38,09%18,11%

Account Payable12,92%27,13%20,39%27,30%32,15%

Unearn revenue20,63%9,66%4,40%6,85%7,40%

Taxes payables6,04%5,65%8,91%8,35%9,70%

Employees payables7,21%5,47%11,91%9,46%19,15%

Welfare fund4,12%4,34%2,66%3,34%6,38%

Other payable8,62%10,38%2,69%6,61%7,10%

Total current liabilities100,00%100,00%100,00%100,00%100,00%

Source:Synthesizedfrom APPsfinancial statements

The table 4.3 reveals that short-term loan decreased in relation to total current liabilities since 2010. Although APPs borrowed loan in 2008 was the

36

lowest amount in time studied, this loan accounted for the second highest in relation to current liability in the period. Its loan in 2012 was the second lowest amount, but the loan account for lowest in current liabilities. So we can see that the importance of short-term loan has decreased in current liabilities.

In general, we can see that item of current liabilities decreased in relation to total current liabilities in 2008-2009 period. Since 2010, interest- bearing sources have depleted in relation to total current liabilities, while noninterest-bearing sources have increased their importance in current liabilities. Noninterest-bearing sources are account payable, payable to employees, tax payable, welfare funds, and unearned revenue. It appears that APP has taken more advantage of delaying payables as its strategy sets up.

4.3 Brief summary

In general, APP has better performance in working capital management over time. APP appears to manage working capital and current asset more efficiently than industry does, while SOVI seems to incur problem in working capital management. APP manages cash, inventory and account receivable better over time. Besides, it has taken more advantage of payables to finance working capital and limited interest-bearing sources. However, APP keeps lower level of cash compared with that of industry, not yet takes full use of available credit from suppliers, and it is liquidity than industry average.

37

CHAPTER V

RECOMMENDATION AND CONCLUSION

5.1 Main findings and forecast

From findings and analysis above, we can see the realistic situation of working capital management in APP and somewhat could predict its working capital in future.

Liquidity: APP has moved with the direction of industry average, but it has been less liquid than the industry. However, the liquidity of APP is expected not lower than present, because the current assets and current liabilities seems not change in near future.

Effectiveness of using working capital: APP has used working capital and the combination of current assets more efficiently over time and more better than industry has. It is reasonably expected that APP continue use working capital and current asset at SOVI used working capital and current asset much better than industry did and APP did in past time. SOVI seems recently face problems in using working capital.

Cash management: APP has kept the lower cash in relation to total asset than industry and SOVI has. The company has not held an optimal cash level to support its operation, and has not had a throughout investment policy.

Inventory management: APPs improvements in its technology, management and supply chain cause the company use inventory more efficiently and better than industry does, while SOVI has managed inventory less efficiently over time. APPs inventory management has followed improving trend.

Account receivable management: APPs improvements in its management cause it to manage receivable better over time and much better than industry does. APP has recently changed from strict credit policy to more lenient policy. It intends to loosen credit policy, following the trend of the industry.

38

Meanwhile SOVI used lenient credit policy and has recent restrict its policy. The problem SOVI incurring is that SOVI has use lenient credit policy but not yet adjust inventory management to be suitable to the policy.

Account payable management: APP has not taken full use of accessible credit faculty from supplier although it has increased amount of account payable.

Short-term financing: APP has limited the use of bank loans and increased use of delaying payables to support its working capital and normal operation.

5.2 Recommendations

Based on the findings above, the following solutions are recommended to

improve the working capital management more effectively and efficiently:

Using cash models: APP has not kept suitable cash level for its performance compared with industry average, so APP could use cash models to determine holding cash. APP can consider Baumol-Allais - Tobin model or Miller-Orr model. With Baumol model, APP can determine the optimal cash it should hold, while it could calculate the range of holding cash with Miller-Orr model.

Building a clear investment policy: APP should establish a throughout investment policy that determines conditions the company uses the policy and regulates types of securities and characteristic of those securities.

Using economic order quantity model: APP uses quarter forecast to determine the amount of inventory required. It could use EOQ model to determine optimal inventory order. If EOQ is not suitable to the company, APP could consider its extension to find the most suitable solutions. Continue using new technology in working capital management:

Technology here concerns new printing method, new machines to boost productivity, vehicle and warehouse to support supply chain, and software & network in management. New technology is important reason for the improvements of managing inventory and receivable at APP. Managing

39

software and network has driven the company control inventory and receivable more consistently and easily than before. APP should continue exploiting technology in working capital management.

Along with applying adjusted credit policy, the company should change inventory management to avoid the lack of or stasis of inventory. SOVI is a clear example for changing credit policy without adequate adjustment of inventory management.

Taking full use of acquirable credit: Although APP increases amount of account payable each year; it has not yet taken full advantage of available credit from supplier.

Considering prompt payment option: although APP is offered early payment discount, it seldom take this option. APP should consider this option and determine the tradeoff between benefit and cost of prompt payment before deciding.

Continue take use of noninterest bearing source of current liabilities: APP has followed the strategy that limits bank loans and increases use of delaying payables. This strategy is clearly beneficial for the company, because interesting-bearing source is obviously costly than noninterest-bearing source.

5.3 Research limits

Even though I have devoted my effort to the thesis, it still has some restrictions which I cannot handle. Firstly, I cannot collect some specific information, such as aging schedule and sale of each business line, and credit sale, which may affect to the exact measurement of working capital management at APP. Secondly, the research focuses mainly on ratio analysis that may not reflect fully broad picture of working capital management at the company. Finally, the sample data of packaging and printing industry includes only publically listed companies which are considered big or well operation and likely to distort public report to meet investors expectation, so the industry data may overstate the real situation of the industry.

40

5.4 Future researches

Due to restrictions on the thesis, the dissertation is relativistic. The research can

be used and developed further under many following aspects.

A research on optimal working capital for APP. Finding the optimal combination of items of current assets and current liability can lead best support for the companys performance and profitability.

A research works on the effect of working capital on profitability at APP. The research focuses on finding the relationship between working capital and profitability from which the research adjusts suitable working capital management to boost profitability.

This thesis focuses on general working capital management and does not deepen component of working capital at APP. Hence, one can continuously develop the research on one of those components in APP. Understanding each component and its management at APP can result in building optimal strategy and finding suitable management for each component.

A research on short-term financing for working capital studies inside and outside source of funding for APP. Hence, the research finds the optimal short-term financing for the company to maintain lower cost and have profit maximum. Conclusion

The thesis presents the real situation of working capital management at APP, and thereby suggests recommendations to improve its working capital performance. From throughout analysis, we can conclude that APP has a good and improving working capital management. However, this conclusion does not imply that APP has an optimal working capital management. The company can continuously use models and technique presented above to improve its working capital performance.

41

REFERENCES

Baig V, 2009, Working capital management: a comparative study of different ownerships, Management & Change, Vol 13, No.2

Bose C, 2002, Principles of Management and Administration, PHI Learning Pvt.Ltd Brealey Meyers, 2003, Principles of Corporate Finance 7th ed, The McGraw-Hill CFA Institute, 2011, Financial Reporting and Analysis level 1 curriculum, John Wiley & Sons Inc

Deloof M, 2003, Does working capital management affect profitability of Belgian firms?, Journal of Business Finance & Accounting, Vol 30, pp 573- 587Dr. Azam M & Haider S.I, 2011, Impact of working capital management on firms performance: evidence from non-financial institutions of KSE-30 index, Interdisciplinary Journal of Contemporary Research in Business, Vol3, No.5, pp 481- 492

Ganesan V, 2007, An analysis of working capital management efficiency in telecommunication equipment industry, River Academic Journal

Gbenga S.A, 2009, Working capital management in telecommunication sector: a case study of VGC telecoms, School of Management: Blekinge Institute of Technology

Molina C. & Preve L., 2009, Trade receivables policy of distressed firms and its effect on the cost of financial distress, Journal Financial Management, Vol 38, No.3, pp 663-686

Nilsson E & Astrom M, 2005, controlling cash management in the context of trade receivables: a case study in large international manufacturing company, Lulea University of Technology

Owolabi S.A& Obida S.S, 2012, Liquidity management and corporate profitability: case study of selected manufacturing companies listed on the Nigerian Stock Exchange, Business Management Dynamics, Vol 2, No.2, pp10-25

42

Preve. L & Sarria Allende. V, 2010, Working Capital Management, Financial management association survey and synthesis series, Oxford University Press

Rehn E, 2012, Effect of working capital management on company profitability: an industry-wise study of Finish and Swedish public company, Hanken School of Economics

Ross. S, Westerfield. R and Jordan. B, 2007, Fundamentals of Corporate Finance

8th ed, New York, McGraw- Hill/ Irwin

Seidman K., 2004, Economic Development Finance, SAGE Publications Inc Tennet J, 2012, Guide to cash management: how to avoid a business credit crunch, The Economist in Association with Profile Book ltd

Vourikari M, 2012, Optimizing working capital management from processes perspective, Saimaa University of Applied Sciences

43

APPENDIX

Balance sheet of APP in VND

200720082009201020112012Cash5.024.000.0007.846.591.63818.448.936.81229.890.253.75316.394.660.0407.992.092.601Account receivable35.881.000.00016.567.941.09821.609.518.53837.637.570.05837.759.447.73050.102.970.942Inventory22.051.000.00023.238.301.45331.662.644.61830.551.948.20338.997.551.30138.128.728.874Other current asset40.000.000406.315.1171.704.623.6923.185.392.8024.279.234.6364.676.701.655Current assets62.996.000.00048.059.149.30673.425.723.660101.265.164.81697.430.893.707100.900.494.072Fixed assets36.518.000.00060.544.334.12959.672.229.41470.923.448.797100.575.698.508124.515.473.586Total asset99.514.000.000108.603.483.435133.097.953.074172.188.613.613198.006.592.215225.415.967.658Short-term loan20.713.000.00011.425.821.86616.984.838.62130.525.871.12028.548.182.48313.454.683.340Account Payable

3.650.128.09612.330.624.73312.691.440.79820.458.986.68723.880.941.136Unearned revenue

5.827.410.2184.388.533.8752.741.481.0335.133.517.2605.498.122.782Taxes payables

1.706.245.7872.568.717.3605.545.250.1996.261.674.1847.208.210.221Payables to employees

2.035.016.6142.484.110.5177.414.512.3507.088.568.53114.224.509.847Payables expense

284.813.070229.791.171520.156.113660.812.400341.439.115Welfare and reward fund

1.162.466.6971.971.180.9421.656.740.9422.506.539.0544.737.289.285Other payable10.681.000.0002.434.173.4834.715.066.8001.674.861.4804.954.976.7985.276.077.293Short-term liabilities31.394.000.00028.241.262.76145.443.072.84862.250.157.92274.952.444.99774.279.833.904Long-term loan24.444.000.0008.000.000.0007.758.366.08015.056.577.08019.951.633.0802.649.611.000Total liabilities55.838.000.00036.315.764.03553.302.533.78877.459.048.90894.906.753.07776.929.444.904Paid-in Capital27.000.000.00054.000.000.00054.000.000.00054.000.000.00054.000.000.00081.000.000.000Additional paid-in capital15.990.000.00015.141.431.63815.141.431.63815.141.431.63815.141.431.63815.041.209.638Retained Earning

14.936.211.45118.319.352.54529.105.912.173Stockholder's equity total43.676.000.00072.287.719.40079.795.419.28694.729.564.705103.099.839.138148.486.522.754Total liabilities and equity99.514.000.000108.603.483.435133.097.953.074172.188.613.613198.006.592.215225.415.967.658

Source: Database of StoxPro 3.5

1

Income statement of APP in VND

200720082009201020112012

Net Revenue74.456.000.000115.178.386.192156.904.549.660227.930.101.242324.718.581.462416.943.025.834

Cost of Goods Sold60.955.000.00094.506.191.296128.249.204.567191.001.580.205277.394.226.839340.331.220.921

Gross profit13.501.000.00020.672.194.89628.655.345.09336.928.521.03747.324.354.62376.611.804.913

Income from financial activities109.000.000509.821.888666.491.476892.886.5822.769.625.527603.475.198

Financial expense1.968.000.0003.742.343.9052.435.016.0634.054.632.5299.508.734.3245.849.016.539

- Interest expense1.818.000.0002.921.089.5822.048.153.5903.718.949.4829.243.576.3245.825.853.272

Sale & Administration expense3.872.000.0005.359.669.3408.720.782.86313.299.441.43018.212.153.39433.083.875.701

Operating profit7.770.000.00012.080.003.53918.166.037.64320.467.333.66022.373.092.43238.282.387.871

Other profit19.000.000- 18.182.444407.270.38041.416.000202.243.500227.170.002

Gain/loss from joint venture

268.686.847334.811.595

investment

Earnings before tax7.789.000.00012.061.821.09518.573.308.02320.508.749.66022.844.022.77938.844.369.468

Net income7.219.000.00010.530.725.26716.948.143.57115.381.562.24618.626.282.14632.356.503.296

Source: Database of StoxPro 3.5

Cash flow statement of APP in VND

2008

2009

2010

2011

2012Net cash from operating activities

8.218.149.860

25.366.418.534

22.292.242.329

35.099.172.218

62.496.999.345Capital expenditures-213.747.306-1.652.019.047-32.593.167.157-45.169.162.910-56.115.787.240Net cash from investing activities

285.488.158-967.979.096-31.780.998.292-42.453.020.344-55.482.088.813Net cash from financing activities-5.680.705.133-13.798.160.296

20.930.072.904-6.141.745.587-15.417.477.971Net increase (decrease) in cash

2.822.932.885

10.600.279.142

11.441.316.941-13.495.593.713-8.402.567.439Beginning cash balance

5.023.658.753

7.846.591.638

18.448.936.812

29.890.253.753

16.394.660.040Effect of exchange rate changes

2.066.032

Increase ( decrease) in cash &

equivalent

7.846.591.638

18.448.936.812

29.890.253.753

16.394.660.040

7.992.092.601

Source: Database of StoxPro3.5

2

Some ratios of APP

200720082009201020112012

Current ratio

2,011,701,621,631,301,36

Quick ratio

1,300,860,881,080,720,78

Cash ratio

0,160,280,410,480,220,11

Current asset

2,072,582,613,274,20

turnover

Working capital

4,486,566,8010,5616,98

turnover

Inventory turnover

4,676,147,988,79

DIOdays

78,1259,4545,7641,53

Receivable

8,227,698,619,49

turnover

DSOdays

44,4147,4442,3838,46

Payable turnover

16,0515,2716,7415,35

DPOdays

22,7423,9121,8123,78

CCCdays

99,7982,9866,3256,21

ROA

0,140,100,100,15

ROE

0,220,180,190,26

Debt to assets ratio%45,38%17,89%18,59%26,47%24,49%7,14%

Debt to capital ratio%103,39%26,87%31,01%48,12%47,04%10,85%

interest coverage

5,285,1310,076,513,477,67

3

Balance sheet of SOVI in thousand VND

2007

20082009201020112012Current assets

118.024.844

97.552.960142.100.826229.944.870326.261.421294.403.913Cash & equivalent

17.980.503

11.997.00625.450.25921.701.83487.364.86943.694.913Account receivable

63.754.219

62.534.09577.919.299125.601.900161.223.874162.796.735Inventory

36.058.967

22.862.25436.865.72964.887.06875.146.94484.884.989Other assets

231.156

159.6051.865.53817.754.0672.525.7343.027.276Fixed assets

34.669.576

42.626.20339.911.27860.555.512108.733.254255.258.581Total asset

152.694.419

140.179.162182.012.104290.500.382434.994.675549.662.494Current liabilities

82.736.299

71.859.685114.310.088204.767.226248.452.391284.361.750Short-term loans

40.715.422

35.273.30350.698.81967.926.16288.289.268104.999.085Account payable

28.507.944

24.364.73138.909.59899.708.135116.229.080107.439.534Long-term liabilities

25.204.188

19.616.2017.946.4065.793.18926.887.96173.808.254Total liabilities

107.940.487

91.475.885122.256.494210.560.415275.340.351358.170.004Paid-in capital

39.000.000

39.000.00039.000.00039.000.00089.189.90089.189.900Additional paid-in

capital-

-

-20.10914.940.45414.940.454Retained earning

338.694

2.468.36510.585.53326.329.73647.853.36670.747.390Total liabilities and

equity

152.694.419

140.179.162182.012.104290.500.382434.994.675549.662.494Source: Database of StoxPro 3.5

4

Income statement of SOVI in thousand VND

200720082009201020112012Net revenue282.108.632402.122.371411.366.560574.005.284694.886.367851.748.987Cost of goods sold249.342.625351.145.484355.365.632497.766.570581.217.719728.958.149Gross profit32.766.00750.976.88756.000.92876.238.714113.668.648122.790.837Income from financial activities507.3081.001.5501.049.6203.263.8055.013.3547.111.625Financial cost4.171.7908.242.9644.997.7576.393.45618.447.6778.943.314

Sale expenses9.694.46112.972.15614.318.70919.164.28227.100.37438.642.176

Administration expenses10.777.72617.988.68712.892.71711.125.48815.057.79517.983.705Operating profit8.629.33712.774.63024.841.36442.819.29258.076.15664.333.267Other profit466.653340.131218.451638.003720.251891.839Earnings before taxes9.095.99013.114.76125.059.81543.457.29558.796

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