10 WORKING CAPITAL MANAGEMENT AT VINACOMIN DEO NAI COAL JOINT STOCK COMPANY

ACADEMY OF FINANCE
CORPORATE FINANCE

GIAP GIA HUNG
CQ55/11.02

GRADUATION THESIS
Topic:
WORKING CAPITAL MANAGEMENT AT VINACOMINDEO NAI COAL JOINT STOCK COMPANY

Major:
Code:
Supervisor:

Corporate Finance
11
Assoc. Prof. PHAM THI THANH HOA

HA NOI - 2021


Graduation thesis
finance

Academy of

DECLARATION
I hereby declare that this is a study done by myself with the support of
the supervisor. The figures and the results stated in the thesis are honest from
the actual situation of the internship company. In case any information given
in this thesis proves to be false or incorrect, I shall be responsible for

consequences.
Signature of thesis’s author

Giap Gia Hung

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TABLE OF CONTENTS

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LIST OF ABBREVIATIONS

No.
1
2
3
4
5
6
7
8
9
10
11

Giap Gia Hung

Abbreviation
AR
BEP
COGS
DSO
EOQ
NWC
ROA
ROE
ROS
VND
WC

Full meaning
Accounts Receivable
Basic Earning Power
Cost of goods sold
Days sales outstanding
Economic Oder Quantity
Net Working Capital
Return on assets
Return on equity
Return on sales
Vietnam dong
Working capital

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LIST OF TABLE

Table 2.1: Analysis and comparison of balance sheet criteria...................46
Table 2.2: Analysis and comparison of the Company's reporting
indicators of business performance.............................................................49
Table 2.3: Analysis of asset structure of Deo Nai Coal Joint Stock

Company – Vinacomin..................................................................................53
Table 2.4: Regular working capital in 2019, 2020......................................55
Table 2.5: Cash and cash equivalents structure in 2019 and 2020............60
Table 2.6: Solvency ratio of the company in 2020......................................64
Table 2.7: Structure of the account receivable............................................65
Table 2.7a: The situation of inventories of the company...........................69
Table 2.7b: The Company's Product Utilization Efficiency in 2018 - 2019
- 2020...............................................................................................................73
Table 2.8: Indicators reflecting the performance coefficient of working
capital in 2019, 2020......................................................................................74

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LIST OF FIGURE

Figure 1.1. Classification of working capital.................................................7
Firgure 1.2. Under matching plan................................................................16
Figure 1.3. Under Conservative Strategy....................................................16
Figure 1.4. Under highly aggressive strategy..............................................19
Figure 1.5. Baumol’s model-tradeoff between holding cost and trasaction

cost..................................................................................................................21
Figure 1.6. Miller-orr model.........................................................................21
Figure 1.7. EOQ model.................................................................................24
Figure 1.8. EOQ model with uniform demand...........................................24

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PERFACE
1. The rational of the study
In the market economy, in order to conduct production and business activities,
certain enterprises must have a certain amount of capital following their size and
business conditions. The problem is with this initial capital, how to put it into
production that earns the most profit? What will be the mobilization and use of
capital in the coming time to ensure that the production and business process is
continuous, giving the business owner a positive cash flow every year? To solve
these problems, the administrator needs to pay attention to the working capital
management of business and consider it an essential premise to ensure the long-term
survival and development of his business.
To conduct any production and business activities are also required capital.
Business capital is one of the factors that plays a decisive role in the operation

process of the business. Working capital is a part of business capital, plays an
important role in ensuring business activities of the business are conducted regularly
and continuously. Efficient and rational use of working capital contributes to
improving business performance business of the whole business. Therefore, the
management of working capital is a decisive factor to the existence and
development of each business.
Through the internship at Vinacomin – Deo Nai Coal Join Stock Company,
with the guidance and enthusiastic help of Assoc. Prof., Ph.D. Pham Thi Thanh Hoa
and the Board of Directors of the company especially the partners in the Finance
and Accounting Department; I have had many opportunities to be exposed to the
situation is the reality of the Company. Thereby, I have the condition to clarify the
theoretical issues learned at the school as well as be more aware of the importance
of working capital and working capital management for enterprises in general and
with Vinacomin – Deo Nai Coal Join Stock Company in particular.
Recognizing the importance of working capital management at the Company
and the difficulties that the company is facing, I decided to choose the topic:

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"Working capital management at Vinacomin – Deo Nai Coal Join Stock

Company” to my graduate thesis.
2. Research purposes
The objectives of this thesis is to propose some solutions to improve working
capital management at Vinacomin – Deo Nai Coal Join Stock Company in the
coming time.
Specific objectives:
- Systematize theoretical issues about working capital management of
enterprises.
- Assess the status of working capital management at Vinacomin – Deo Nai
Coal Join Stock Company, thereby drawing out the achieved results, limitations and
causes in working capital management at the Company.
- Proposing solutions to enhance working capital management at Vinacomin –
Deo Nai Coal Join Stock Company
3. Object and scope of the study
- Object of the study: The thesis focuses on studying the basic issues of
working capital and working capital management at the company.
- Research scope: Research the current situation of working capital
management at Vinacomin – Deo Nai Coal Join Stock Company 2019 - 2020.
4. Data and methodology
Data collection method: Collecting data through archived documents of the
company in recent years. Besides that, gather information through internship or
other information sources such as websites and references.
Research method: Based on collected data, start processing and analyze
according to the purpose and requirements of the topic.
Comparison method: Based on processed data to make comparisons between
years, thereby assessing the achieved and unsatisfactory results. At
the same time, do comparison with peer firms to make conclusions.

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Data sources used in the analysis were collected based on the actual situation
at the Company and the financial statements of 2018, 2019, 2020 of Vinacomin –
Deo Nai Coal Join Stock Company
5. Thesis structure
Besides Introduction, Conclusion and other supplemental documents, the
thesis consists of three chapters:
Chapter 1. Overview of working capital and working capital management
Chapter 2. Working capital management at Vinacomin – Deo Nai Coal
Join Stock Company
Chapter 3. Solutions to improve working capital management at
Vinacomin – Deo Nai Coal Join Stock Company
I only research within the scope of management and use of working capital at
Vinacomin – Deo Nai Coal Join Stock Company .The thesis is presented in the
direction of applying general arguments on working capital and working capital
management in evaluating the management of working capital at the Company;
point out the results achieved as well as the remaining limitations, causes, and
remedies; at the same time to export a number of solutions to improve the efficiency
of using business capital at the Company.
I sincerely thank Assoc. Prof., Ph.D. Pham Thi Thanh Hoa, Vinacomin – Deo
Nai Coal Join Stock Company and other members of Finance and Accounting

Department, and teachers of the Academy of Finance have been helpful to complete
this research project.
Student
Giap Gia Hung

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CHAPTER 1:
OVERVIEW OF WORKING CAPITAL AND WORKING CAPITAL
MANAGEMENT
1.1. Working capital and company’s working capital financing
1.1.1. Definition and characteristics of working capital
1.1.1.1. Definition of Working Capital (WC)
In order to carry out businesses, every company needs cash to invest to form
the required assets. In addition to the initial investment in fixed assets, the company
needs a necessary working capital to operate continuously. This working capital is
used to purchase materials, goods,labor cost, etc. At the end of an operating cycle,
the initial investment in working capital is collected completely when a company
collects all sales from goods and services
As such, WC involves the use of short-term assets such as cash, inventory to

ensure the company's operating activities are continuous. In this view, working
capital is defined as “initial investment in current assets to maintain the smooth
operations of a company in a particular period". This is the gross definition of
working capital.
WC is also known as the variance between current assets and current
liabilities. This is net definition of working capital. That means Net Working Capital
(NWC) is equal to (Current Assets - Current Liabilities). This definition considers
not only the current assets but also its liquidity to cover the short-term obligations
of a company.
WC in this thesis is defined according to the first way, the gross definition.
That means, the amount of money put into current assets to make the operations of a

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company smooth and continous.
1.1.1.2. Characteristics of working capital in capital circulation:
Because working capital is the amount of capital spent in advance to create
current assets, so the characteristics of working capital are also influenced by the
characteristics of current assets.
Firstly, the expression form of working capital is always changing through

stages of production and business process. Especially for manufacturing enterprises,
working capital changes from the form of monetary capital initially to materials
reserved in production, then to semi-finished products, finished products and finally,
when the product consumption process ends, it returns to its original form, which is
capital in money.
Secondly, at the end of the operating cycle, working capital value is fully
transferred into value of goods and services; and being recovered completely when
a company collects sales.
Thirdly, the working capital cycle completes after a business operating cycle.
The transformation and movement process of working capital takes place regularly,
continuously and repeatedly after each business cycle, creates a circulating cycle of
working capital.
1.1.2. Classification of working capital
Working capital can be classified on the basic of concept and on the basic of
time which are shown in Figure 1.1.

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Figure 1.1. Classification of working capital

1.1.2.1. On the basic of concept
From the conceptual point of view, working capital is classified into gross
working capital and net working capital.
Gross working capital refers to the amount which the company has invested
into the current assets; current asset includes cash, stock, debtors or anything which
can be converted into cash within a year. It should be neither excessive nor
inadequate asset. According to this concept, working capital means Gross working
capital, which is total of all current assets of a business. It can be represented by the
following equation:
Gross Working Capital = Total Current Assets (1)
NWC is the difference between current asset and current liabilities. It explains
the management of financing working capital through the financing of long term
and short-term funds. Net working capital can be positive and negative. A positive

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net working capital will arise when current assets excess current liabilities. A
negative net working capital occurs when current liabilities are in excess of current
assets.
Net Working Capital = Current Assets – Current Liabilities (2)
NWC is a qualitative concept. It indicates how much a company has to invest
of its long-term capital to finance the current assets. Current assets should be
sufficiently in excess of current liabilities to constitute a margin or buffer for
maturing obligations within the ordinary operating cycle of a business. In order to
protect their interests, for instance, short-term creditors always like a company to
maintain current assets at a higher level than current liabilities. It is a conventional
rule to maintain the level of current assets twice the level of current liabilities.
However, when short-term liabilities exceed current assets, net working capital
becomes negative. The so called “net working capital deficit” suggests that weak
liquidity position poses a threat to the solvency of the company and makes it unsafe
and unsound thus proved to be harmful for the company’s reputation. Excessive
liquidity is also bad. It may be due to mismanagement of current assets.
1.1.2.2. On the basic of time
By using period, working capital is classified in two kinds: permanent
working capital and temporary working capital.
Permanent working capital is also called fixed working capital. It is the
minimum level of current assets which is required by a firm or carrying out its
business activities and that cannot be converted into cash in normal course of

business. The level of permanent working capital depends on the business cycle as
well as the growth of a firm. Permanent working capital can be further divided into
the following categories:
• Regular working capital: minimum level of working capital required to
circulate from one form to another: from cash to inventory, inventory to receivables,
receivables to cash, and so on.

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• Reserve working capital: permanent working capital in excess of regular
working capital. Reserve working capital arises from such contingencies as union
strikes, recession, etc.
• Temporary working capital is the difference between actual level of
investment in short-term assets and the permanent working capital investment.
Temporary working capital is needed for shorter period. Two types of temporary
working capital are seasonal working capital and specific working capital.
• Seasonal working capital: required to meet the seasonal demands of the
enterprise is called seasonal working capital.
• Specific working capital: is that part of working capital which is required to
meet unforeseen contingencies like slump, strike, flood, war.

1.1.3. Working capital financing
- To raise funds for working capital, a company can ultilize a variety of ways.
WC can be financed by both short-term and long-term sources.
Short-term financing sources for WC includes:
 Loans from commercial banks: Small scale industries can raise loans from
the commercial banks with or without security. This method of financing does not
require any legal formality except that of creating a mortgage on the assets. Loan
can be paid in lump sum or in parts. Hence, it is generally a cheaper source of
financing working capital requirement of enterprise. However, this method of
raising funds for working capital is a time-consuming process.
 Trade credit: Trade credit is a loan from selling firm to its customers. For
the number of reasons, trade credit can be an attractive source of funds. Firstly,
trade credit is a simple and convenient to use, and if therefore has lower transaction
costs than alternative sources of funds. Secondly, it is a flexible source of funds, can
be used as needed. Finally, it is sometimes the only source of funding available to a
firm.
 Advances from customers: One way of raising funds for short-term
requirement is to demand for advance from one’s own customers. This has become
an increasingly popular source of short-term finance among the companies mainly

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due to two reasons. First, the companies do not pay any interest on advances from
their customers. Second, if any company pays interest on advances, that too at a
nominal rate. Thus, advances from customers become one of the cheapest sources
of raising funds for meeting working capital requirements of companies.
 Discounting Bills of Exchange: When goods are sold on credit, bills of
exchange are generally drawn for acceptance by the buyers of goods. The bills are
generally drawn for a period of 3 to 6 months. In practice, the writer of the bill,
instead of holding the bill till the date of maturity, prefers to discount them with
commercial banks on payment of a charge known as discount. It generally amounts
to the interest for the period from the date of discounting to the date of maturity of
bills.
 Bank Overdraft and Cash Credit: Overdraft is a facility extended by the
banks to their current account holders for a short-period generally a week. A current
account holder is allowed to withdraw from its current deposit account up to a
certain limit over the balance with the bank. The interest is charged only on the
amount actually overdrawn. The overdraft facility is also granted against securities.
 Accrual accounts: Generally, there is a certain amount of time gap between
incomes is earned and is actually received or expenditure becomes due and is
actually paid. Salaries, wages and taxes, for example, become due at the end of the
month but are usually paid in the first week of the next month. Thus, the
outstanding salaries and wages, say, expenses for a week help the enterprise in
meeting their working capital requirements. This source of raising funds does not
involve any cost.
Long-term sources to finance WC includes long-term debts or equity. A
company can issue debts through bank borrowings or bond issuance. Regarding
equity, a company can use internal sources get by accumulated retained earnings or
issuing new shares to raise funds. Long-term sources usually have high cost of
capital, and put burdens on a company’s cash flows through repayment of principal

and interest.

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1.2. Working capital management
1.2.1. Definition and objectives of working capital management
1.2.1.1. Definition of working capital management
It is undeniable that in the market economy, working capital plays an essential
role to maintain smooth running of a business. No business can run successfully
without an adequate amount of working capital because it is considered as the flesh
and blood of an enterprise. Hence, all enterprises need to find ways to manage their
working capital on their own effectively and efficiently.
According to Basic Corporate Finance (For the Advanced Educational
Program): “Working capital management is the process of managing and
monitoring activities related to working capital. Thus the main objectives of
working capital management and ensuring the firm has sufficient liquidity to meet
its short-term obligations.”
Therefore, it is obvious to understand that working capital management
involves management of different components of working capital such as cash,
inventories, accounts receivable, creditors, etc. In other words, it involves in

managing the relationship between a firm’s short-term assets and its short-term
liabilities.
Working capital management is the process of planning, selecting,
implementing, and evaluating decisions related to the working capital. These
decisions are made on the basis of a trade-off between costs and benefits to bring
the best benefits for businesses as well as shareholders. These are decisions on
components of working capital: cash, inventories, and accounts receivable; and
decisions on current liabilities including short-term debts and accounts payable.
1.2.1.2. Objectives of working capital management
Due to the crucial impact of working capital, it should be well managed in
order to assure the company’s operation. The question of how to perform working
capital management efficiently is always the first and foremost issue the company
needs to resolve. WC management is a managerial accounting strategy focusing on

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maintaining efficient levels of both components of working capital, current assets
and current liabilities, in respect to each other. Working capital management ensures
a company has sufficient cash flow in order to meet its short-term debt obligations
and operating expenses.

The goal of working capital management is to assure the continuity of the
company in which sufficient cash flow is available at any time to meet the
requirement of short-term debt and operational expenses. In other words, it is the
way of achieving the optimal amount which satisfies the demand of working capital
at the lowest possible cost of usage. In more detail, working capital management
aims to the three following objectives.
- To determine the optimum levels of investments in various categories of
current assets.
- To distribute optimal mix of temporary and permanent capital.
- To decide appropriate means of short-term financing.
1.2.2. The content of working capital management
1.2.2.1. Determination of working capital needs and working capital financing
WC is an indispensable part of the business activities of a company. Business
process always requires a company to have necessary working capital to meet needs
for materials and accounts receivable & payable. That is the demand for regular and
necessary working capital of businesses.
As a result, the regular working capital requirement is the minimum amount of
working capital required to maintain the operating activities of a company.
Therefore, determining working capital needs accurately is the priority of working
capital management because it impacts on the efficiency of WC as well as the
liquidity of a company. The working capital requirement is determined by the
following formula:
Working capital requirements (Needs for WC)
=[ Inventory + Account Receivables] – Account payables for suppliers
In which:

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Inventories refer to minimum necessary amount of money put into raw
materials, fuel, unfinished goods, and finished products;
Accounts Receivable are minimum necessary amount of money which is
occupied by customers and suppliers during payment process;
Accounts Payable are minimum necessary amount of money which is
occupied by a company during payment process.
To compute the needs for working capital a company can follow a direct or an
indirect method.
• The direct method:
The content of this method is to determine directly the capital demand for
inventory, accounts receivable, accounts payble and then gather them into the total
working capital requirements of enterprises. The order of implementation is as
follows:
- Determining capital requirement of inventories: including inventory at the
production reserve, production and circulation stages.
- Determining accounts receivables requirements: Accounts Receivable
refers to the amount of money that a company has to cover when selling goods and
services on credit. Alternatively, that means a company’s capital ties up into
accounts receivale. The more accounts receivable are, the higher needs for
necessary working capital is.
- Determining amount of money of suppliers that a company can ultilize
during operations: Account payables refer to short-term debt payments due to

suppliers. That means a company can use this amount of money in a particular
period of time. Thus, accounts payable helps a company reduce the needs for
Working Capital.
• The Indirect method
The indirect method is based on analyzing the actual situation of using
working capital of a company in the reporting year (a base), changes in business
scale and working capital turnover rate in the planning year to determine the

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working capital needs of enterprises in the planning year. It can be done by three
approaches:
- Adjustment based on the percentage of working capital requirements
compared to the reporting year. This method is based on the actual working capital
needs in reporting year and adjusting the demand according to the business scale
and rotation speed of working capital in the planning year. The formula is as
follows:
MKH
VKH =

VBC

x

MBC

x

(1+t%)

In that:
VKH : Working capital in planning year
VBC : Average working capital in the reporting year
MKH : the level of working capital rotation in planning year
MBC : the level of working capital rotation in report year
t%: the shorten ratio of working capital period rotation in planning year
- Based on the working capital turnover and working capital turnover rate in
the planning year. The working capital needs is determined based on working
capital rotation level total (or net sales) and estimated working capital rotation level
of the planning year. The formula is as follows:
Mkh
VKH =
Lkh
In that:
Mkh : The total level of capital rotation in planned year (net revenue)
Lkh : The number of working capital cycles in planned year
- Method based on the percentage of revenue. The content of this method is
based on the change in the ratio of working capital turnover constituents of the
enterprise in the reporting year to determine the working capital requirements
according to the revenue of the planned year. This method is conducted through the

following 4 steps:

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Step 1: Calculating the average balance of items in the balance sheet
performed period
Step 2: The selection of current asset items and occupied capital in the balance
sheet is directly affected, closely related to the revenue and calculate the percentage
of those items compared to the revenue realized in the period.
Step 3: Use the percentage of items on revenue to estimate the additional
working capital requirement for the plan year, on the basis of the projected revenue
for the planning year.
Additional
working

=

capital needs

Additional

revenue

=

Percentage rate of working

Additional

x

revenue

revenue

Revenue of the
planning period

Ratio of

Percentage of

working

working capital

capital needs

=

assets items

compared to

compared to

revenue

revenue

capital needs compared to

x

Revenue of the reporting period

Percentage of account payables
-

and other available sources of
finance above revenue.

Step 4: Forecasting funding for the company's increased working capital needs
and make adjustment to the financial plan to achieve the company's goals.
In fact, indirect methods are used quite commonly. Because this method has
overcome the disadvantage of the direct method. On the other hand, the calculation
and identification of working capital needs by indirect method is simple, helping
enterprises to quickly estimate working capital needs in the planning year to

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determine the need for funding in accordance with business conditions in market
economy.
1.2.2.2. Financing working capital
Financing the needs for working capital means making a decision on which
funds businesses will use. Usually there are 3 financing models as follows:
- The first financing model:
Firgure 1.2. Under matching plan
Total Assets
Temporary working capital
Short-term sources

Permanent working capital

Long-term
sources

Fixed assets
Time
All fixed assets and permanent working capital are regularly secured with
permanent capital, all temporary working assets are guaranteed by temporary

capital.
Advantages: Helping businesses limit payment risks, higher safety levels;
lower cost of capital
Disadvantages: Financing is less flexible. A company must maintain a large
amount of permanent capital even when facing difficulties to reduce their business
size.
- The second financing model:
Figure 1.3. Under Conservative Strategy

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Total Assets
Temporary Working capital
Short-term sources

Permanent working capital

Long-term sources

Fixed assets

Time
Financing All fixed assets and permanent working assets and a part of
temporary working assets are secured by permanent capital and the remaining part
of working assets financed by permanent capital.
Advantages: solvency and safety of revenue are high.
Disadvantages: Enterprises have to pay a high fee because of using many
long-term and medium-term liabilities. Moreover, it wastes the company’s capital
when it needs to maintain a certain amount of permanent capital to finance
temporary working assets while there are times when the enterprise does not need
for this type of asset.
- Third financing model:

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Figure 1.4. Under highly aggressive strategy
Total Assets

Temporary working capital

Short-term sources

in
ork

g

al
pit
a
c

w
nt
e
an
m
r
Pe

Fixed assets

Long-term sources

Thời gian
All fixed assets and a part of permanent working assets are regularly secured
by permanent capital, the remaining part of permanent current assets and all
temporary working assets are secured by temporary capital.
Advantages: The cost of capital will be lower than other models due to the use
of more short-term sources. In addition, the use of capital will be more flexible.
Limitations: High financial risk therefore requires businesses to be active in
organizing capital.
In fact, this model is often chosen by businesses because a part of short-term
credit is cyclical, and is considered as permanent long-term.
- Components of Working Capital:
After determining the needs for working capital and financing models, a
company has to make decision on components of working capital. Other speaking,
a company has to allocate working capital in different current assets. Primarily,
three current assets should be considered: cash, inventories, and accounts receivale.
The structure of working capital depends on both external and internal factors;
howevern it closely connects with the firm size, sales, and business characteristics.
1.2.2.3. Cash management

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