Efficiency of working capital

JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE


MASTERS FINANCE AND CONTROL





THESIS

SITUATIONS OF THE EFFICIENCY OF
WORKING CAPITAL USE IN THE
VIETNAM ELECTRICITY CORPORATION - EVN





Prepared by: DO QUANG HUY
Supervised by: Mr. VU MANH CHIEN









Hanoi 2013

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ACKNOWLEDGEMENTS

I would like to sincerely thank all of teachers for their education and enthusiastic helps
that created favorable conditions for me in the process of study and research at Vietnam
Commercial University (VCU).
I owe sincere and earnest thankfulness to Mr. Vu Manh Chien, my supervisor in VCU for
his helpful suggestions, guidance and enthusiasm.
Also, I am obliged to many of the Director Board, staffs and particularly Ms. Nguyen Thi
Vinh Long - my supervisor at Vietnam Electricity Corporation - EVN, who supported me and
created opportunities for me to access data, research documents on the business and operations
of the Group.
I would like to show my gratitude to my cousin, Mr. Phan Anh Tu, audit staff, for his
patience and supports.
Finally, I would like to thank my family for their interminable encouragements and
supports.












Hanoi, 10 August ,2013

DO Quang Huy.
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Table of contents

ACKNOWLEDGEMENTS 1 -
List of tables 5 -

List of charts 5 -

INTRODUCTION 1

1. Research context 1

2. Research questions 1

3. Research objectives 1

4. Research methodology 2

5. The structure of the thesis 2

CHAPTER I: WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT IN
ENTERPRISE 3

1.1. Working capital in enterprise 3
1.1.1. Definition of working capital 3

1.1.2. Characteristics of working capital and the differences between working capital and fixed
capital 3

1.1.3. Classification of working capital 4

1.1.3.1. Based on the role of working capital in the production process 4

1.1.3.2. Based on the source of working capital 5

1.1.3.3. According to the expression patterns 5

1.1.4. Structure and determinants of working capital 5

1.2. Working Capital Management 6

1.2.1. Definition and components 6

1.2.2. Assessing the working capital performance 6

1.2.2.1. The rotating speed of working capital 7

1.2.2.2. The capital saving due to increasing the rotating speed of working capital 8

1.2.2.3. Coefficient of working capital 8

1.2.2.4. Coefficient of working capital profitability. 9

1.2.3. Objective and necessity of enhancing Working Capital efficiency 9

1.2.3.1. Business objective of the corporation 9

1.2.3.2. The important role of working capital in corporation 9

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1.2.3.3. The meaning of enhancing working capital efficiency 10

1.2.3.4. The fact of working capital efficiency in corporation 10

1.3. Assessment and management of working capital 10

1.3.1. Principles of Working Capital Management 10

1.3.2. Models of reserve and inventory management 11

1.3.3. Cash management models and highly liquid securities 12

1.3.4. Management models of receivables 14

1.3.5. Evaluating and overall managing via working capital metrics 15

1.3.6. Basic methods of enhancing working capital efficiency 15

CHAPTER 2: RESEARCH AND IMPLEMENTATION METHODOLOGY AT EVN 17

2.1. Introduction to EVN 17

2.1.1. Creation and development history 17

2.1.2. Organizational structure 18

2.1.3. Business operation features 19

2.1.3.1. Features of business sectors 19

2.1.3.2. Features of products 19

2.1.3.3. Features of market 20

2.1.4. Financial management mechanism of EVN 21

2.1.4.1. Capital and assets management 21

2.1.4.2. Revenue, profit, and business expense management 22

2.1.4.3. Financial Planning 23

2.2. Steps to collect and process the data 23

2.2.1. Secondary steps (literature review or document study) 23

2.2.2. Steps to collect and process primary data by interviews 24

CHAPTER 3: ANALYSIS OF WORKING CAPITAL EFFICIENCY IN EVN 26

3.1. EVN’s financial analysis 26

3.2.1. EVN’s business 26

3.2. Analysis of EVN’s working capital efficiency 29

3.2.1. Sources of working capital 29

3.2.2. Structure of working capital 29

3.2.3. Analysis of working capital efficiency 30

3.2.3.1. Rate of working capital turnover 30

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3.2.3.2. The capital savings thanks to the increasing in the rate of working capital 31

3.2.3.3. Undertaking coefficient of working capital 31

2.2.3.4. Profitability coefficient of working capital 32

3.2.4. Analysis of factors affecting the efficiency of working capital use of EVN 32

3.2.4.1. Management of working capital forms 32

3.2.4.2. Working capital planning 33

3.2.4.3. General financial management 34

3.3. Assess the working capital efficiency of EVN 35

3.3.1. Synthetic conclusions from the indicators assessing WCM efficiency 35

3.3.2. Indicators of WCM metrics 36

CONCLUSION 38

1. Academic and managerial contributions 38

2. Limits and research perspectives or orientation 38

BIBLIOGRAPHY 40


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List of tables
Table 1.1: Proportion of short-term assets and long-term assets in the sectors 4

Table 3.1: Profit indicators of EVN (2011- 2012) 26

Table 3.2: Assets Structure of EVN (2011- 2012) 27

Table 3.3: Capital Structure of EVN (2011-2012) 28

Table 3.4: Capital Structure of EVN (2011-2012) 30

Table 3.5: Indicator of working capital turnover (L) and duration of working capital turnover (K)
of EVN (2011-2012) 30

Table 3.6: Indicator of undertaking coefficient of working capital of EVN (2011-2012) 32

Table 3.7: Profitability coefficient of working capital of VNE (2011-2012) 32

Table 3.8: Criteria assessing the efficiency of working capital use of EVN from 2011-2012 35

Table 3.9: Working capital management metrics of EVN in 2012 36



List of charts
Chart 2.1: Organizational structure of EVN 18

Chart 3.2: Expense indicators of EVN (2011-2012) 27

Chart 3.2: Scale of sources can form the working capital 29




1
INTRODUCTION

1. Research context
Many financial analysts have considered the working capital of corporations as the blood
circulation in the human body. The reason for that comparison is the similarity of the circulation
and the necessity of working capital for the body of corporation. In the market economy, without
capital, corporations cannot run their business activities. In the corporations, capital in general
and working capital in particular are present in all the operation stages from reserving and
producing to circulating. Working capital helps corporations survive and operate smoothly.
However, due to the complex circulation and limited financial management skills in many
Vietnamese corporations, working capital has not managed and used effectively, which leads to
the low efficiency of business operations.
The Vietnam Electricity Corporation is a state-owned corporation, whose principal
business is producing, transmitting, distributing and trading electricity; commanding and
operating the system of production, transmission, distribution and distribution of electricity in the

national electricity system. In the Vietnam Electricity Corporation, the issues of working capital
management did not receive concern deserving its importance; and enhancing working capital
efficiency is a topic to which the Corporation pays a lot of attention. With such awareness, the
writer decides to choose the topic: “Situations of the efficiency of working capital use in the
Vietnam electricity Corporation - EVN”.
2. Research questions
The main research question of the thesis is: “What are the actual situation of working
capital management and its efficiency in the EVN?” Since then, the specific research questions
are outlined as follows:
- The theory of working capital & working capital management in the Corporation, the
benefits of good working capital management and the quality evaluation methods of this
operation;
- The situation of working capital management in the EVN: working capital forming
sources, working capital structuring, working capital management efficiency evaluation through
indicators and factors affecting working capital efficiency;
- The solutions to improve the quality of working capital management in the EVN.
3. Research objectives
The purpose of the author is to indicate the situation of working capital management in
the EVN with the orientation that it is the basis, the starting point for efforts to improve the
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quality of this operation which is being studied in this Corporation. The thesis will provide
answers to the research questions above.
4. Research methodology
The research subject of the thesis is the situation of working capital management in the
EVN between 2011 and 2012. From that, the thesis will evaluate the efficiency of this operation
through quantitative indicators.
The thesis uses two data sources, namely: primary data (through interviews) and
secondary data.
5. The structure of the thesis
The structure of the thesis consists of three chapters:

 Chapter 1: Working Capital and working capital efficiency in the Corporation in the
market economy
 Chapter 2: Research methodology implemented in EVN
 Chapter 3: Analysis of working capital efficiency in EVN


3
CHAPTER I: WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT IN
ENTERPRISE

1.1. Working capital in enterprise
1.1.1. Definition of working capital
Normally, capital is the total material value invested by one enterprise to conduct
business activities. According to Jani, Virenda C. (2007), all the enterprises need capital for two
purposes: (1) establish and expand business extent and (2) pay for daily operation costs. Capital
exists in all the business stages, from reserves, production to circulation; businesses need capital
to invest in basic construction; need capital to maintain production and to invest in production
capacity enhancement, etc.
Working capital is as an important part of the total capital of enterprises. Eugene F.
Brigham & Joel F. Houston (2009) referred to many related concepts such “gross working
capital”; “net working capital”; “net operating working capital”. In particular, “working capital”
are short-term assets or current assets, including cash, tradable securities, inventories and
accounts receivable. Current liabilities subtracted from current assets is called “net working
capital” (Net Working Capital (NWC) is defined as current assets minus current liabilities). “Net
operating working capital” is calculated by subtracting all noninterest-bearing current liabilities
from current assets (accounts payable for supplies and other accounts payable). The definition
assumes that cash and tradable securities in the balance sheet are used for the long-term goals
and the company is not holding excess cash. Cash surplus and trade securities surplus are not
considered as net working capital. The definition of “working capital” (or “net working capital”)
interpreted in this thesis as the concept defined by The Accounting Principles Board of the

American Institute of Certified Public Accountants is as under, “working capital” represented by
the excess of current assets over current liabilities and identifies the relatively liquid portion of
the total enterprise. Capital which constitutes a margin or buffer for maturing obligations within
the ordinary operating cycle of the business”.
1.1.2. Characteristics of working capital and the differences between working capital
and fixed capital
In his book, Modern Corporate Finance (2003), Tran Ngoc Tho analyses three main
characteristics of working capital namely: (1) rotating with the rapid rate, (2) changing
expression patterns, and (3) operating in a circulating cycle. Working capital rotates with the
rapid rate and complete a cycle after finishing a business cycle. Working capital in the business
is always changing its expression patterns during the cyclic rotation, and it only participate in to
a production cycle but does not keep the original physical forms. Its whole value is once shifted
into the value of product. Working capital operates according to a cycle from one form to
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another form and then return to the original form with a greater value than the initial value. The
cycle of working capital is an important basis used to assess the working capital efficiency of the
business.
The most difference between working capital and fixed capital is that the fixed capital
only shifts its value into the value of product with a certain level of depreciation gradually while
the whole value of working capital is shifted into the value of product once. Therefore, the
movement and rotation of working capital is much larger than those of fixed capital. Another
feature between working capital and fixed capital is worth considering and studying, namely the
scale of current assets and fixed assets. There is no a certain model in the proportion of two
groups of assets. In practice, the most decisive factor to the scale of two groups of assets is the
enterprise’s sectors. Satish B.Mathur (2007) surveyed and counted the proportion of current
assets and fixed assets according to the sectors as follows:
Table 1.1: Proportion of short-term assets and long-term assets in the sectors
Current assets (%) Fixed assets (%) Sectors
10-20 80-90 Hotels & Restaurants
20-30 70-80 Electricity Generation & Distribution

30-40 60-70 Aluminum, Shipping
40-50 50-60 Iron & Steel, Basic Industrial Chemicals
50-60 40-50 Tea plantation
60-70 30-40 Cotton Textiles, Sugar
70-80 20-30 Edible Oils, Tobacco
80-90 10-20 Trading, Construction
1.1.3. Classification of working capital
Working capital may be classified on different ways only with the aim at managing and
use working capital effectively. Three main classification criteria are: (1) the role in the
production process, (2) the source of working capital, (3) expression patterns.
1.1.3.1. Based on the role of working capital in the production process
The classification of working capital based on this criterion helps to evaluate the
allocation of working capita in each stage of the rotating process of working capital. Thanks to
that, managers will take appropriate measures in order to create a structure of working capital, to
increase the rotating speed of working capital and to improve the efficient use of working capital.
According to Dang Thuy Phuong (2000), based on this classification, working capital consists of
three types as follows:
• Working capital in the reserve stage includes the types of capital such as main material
capital, additive material capital, fuel capital, spare parts capital, packing material capital and
tool & instrument capital.
• Working capital in the production process includes types of capital such as: goods-in-
process capital, home-made end-product capital and prepaid item capital.
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• Working capital in the circulation includes end-product capital, cash capital, short-term
investment, and capital during the payment process.
1.1.3.2. Based on the source of working capital
This classification can help us see the structure of working capital of a enterprise. Thanks
to that, enterprises can actively take measures to mobilize, manage and use working capital more
effectively. According to this classification, working capital can be classified into two types
(Dang Thuy Phuong, 2000):

• Equity, the capital owned by the enterprise; that enterprise has full rights to possess,
rights to use, rights to control and dispose.
• Liability, including capital from borrowing loans from financial institutions; capital by
issuing bonds and capital during the process of payment (accounts payable for customers, other
enterprises during the process of payment).
1.1.3.3. According to the expression patterns
According to this classification, working capital is divided into four categories (Erik
Rehn, 2012)
• Cash and cash equivalents. Separating these items helps businesses easily monitor their
fast payment ability and take flexible measures to ensure their payment ability as well as enhance
the profitability of working capital.
• Accounts receivable. The study of accounts receivable helps businesses have a complete
understanding and take appropriate commercial credit measures in order to meet the needs of
customers, to improve sales of goods sold as well as to improve working capital efficiency.
• Inventory. For manufacturing companies, inventory plays an important role as a safe
cushion in the different stages of the business cycle when operations in the different stages are
not always synchronous. Inventory helps enterprises protect themselves against the volatility and
uncertainty of demand for their products.
• Other current assets, including advances; prepaid expenses; pending expenses; and
collateral, deposits and short-term deposits.
1.1.4. Structure and determinants of working capital
The structure of working capital is the proportional relationship among components of
gross working capital at a certain time (Tran Ngoc Tho, 2003). The study of working capital
structure helps us to see the situation of working capital collocation and each capital’s proportion
in each circulation period to identify the key working capital management and find the optimal
method to enhance working capital efficiency. For different corporations, working capital
structure is not the same. Thanks to analyzing working capital structure with different
classification criteria and changes in working capital over time, corporations have better
6
understanding about the unique characteristics of working capital that they are managing and

utilizing.
According to Jani, Virendra C. (2007), there are many factors affecting the scale and
structure of working capital; and it is hard to rank their importance and effect. However, the
following factors are considered as the determining ones to working capital structure
• Factors of production: specification, corporation’s production technology, complexity
of manufactured products, the length of the production cycle, the organization of the production
process, etc.
• Factors of supply and demand: the distance between enterprises and providers, the
providing ability of the market, delivery maturity and the volume of provided materials at each
delivery; seasonal characteristics of the types of provided materials, etc.
• Factors of payment: Payment method is selected in accordance with sale contracts,
payment procedures, payment discipline compliance, etc.
1.2. Working Capital Management
1.2.1. Definition and components
Working capital is an index related to the amount of money that a business needs to
maintain its operations and regular business (calculated by subtracting total current liabilities
from total current assets). Therefore, working capital management focus on solving the problems
surrounding the management of current assets and current liabilities of the business and their
relationship to ensure that the business can afford to make payment for maturing financial
obligations during the coming short-term time and to make payment for its operating cost (Jani,
Virenda C.,2007). Analysts often use this index as the basis for measuring the performance as
well as short-term financial strengths of the business. Weighed & Vischer (1998) has referred to
the management of working capital with three main current assets supporting policies: aggressive
policies, moderate policies (matching policies) and conservative policies
Working capital is one of the six aspects of financial management, along with financial
planning and control; financial accounting & information and technology systems; analysis &
interpretation of financial reports; cost and management accounting; and capital budgeting.
According to Satish B.Mathur (2007), management of current assets continues to be divided into
three main contents of management: cash management; account receivable management;
inventory management; account payable management.

1.2.2. Assessing the working capital performance
Working capital plays an important role in daily business activities of one enterprise.
Therefore, in order to better improve their business appearance, enterprises should pay attention
to working capital during the process of making short-term financial decisions. Three frequently-
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used methods to assess working capital efficiency are such as ratio analysis, funds flow analysis
and budgeting (Jani, Virendra C., 2007).
• Ratio analysis: Most frequently-used ratios are: Current ratio, Acid test ratio, Absolute
liquid ratio, Cash position ratio, Inventory turnover ratio, Receivables turnover ratio, Payables
turnover ratio, Working capital ratio, Working capital leverage, and Ratio of current liabilities to
tangible net worth, etc. Some ratios in this category are mentioned in the section 1.3.5. General
assessment and management through working capital metrics.
• Funds flow analysis: This method is related to total input & output capital in the
accounting period.
• Budgeting: As a part of the overall budget planning of enterprises, working capital
budgeting is estimated and set out working capital policies proposed by enterprises. The working
capital budgeting is correct or not (compared with actual performance and plans), which
contributes to the assessment of working capital management quality and its benefit for
enterprises.
According to Mai Thanh Son (2004), of three methods above, ratio analysis is frequently
used to evaluate working capital efficiency in Vietnamese companies. The five most important
criteria are presented as follows:
1.2.2.1. The rotating speed of working capital
The rotating speed of working capital measures how effectively a company is using its
working capital. A high or low ratio indicates whether procurement, production reserves and
consumption in that enterprise are reasonable; whether reserves is used efficiently; how high or
low the cost of production & business process is, etc. This ratio can be assessed through two
ratios: working capital turnover and time of working capital circulation:
(1) Working capital turnover in the period (L
t

)

• M
t
: The total working capital turnover during the period t. In a year, the total working
capital turnover is determined by net sales of the enterprise
• AWC
t
: Average working capital in the studied period
(2) Time of working capital circulation (K)
or
• AWC
t
: Average working capital in that period.
• M
t
: The total working capital turnover during the period
8
• N
t
: Estimated numbers of days in the analysis period (360 days a year, 90 days a
quarter, 30 days a month).
• L
t
: Working capital turnover in the period.
1.2.2.2. The capital saving due to increasing the rotating speed of working capital
The capital saving is an indicator to reflect the working capital which could be saved by
increasing the rotating speed of working capital during this period in comparison with the
previous. The working capital saving due to increasing the rotating speed of working capital is
represented by two criteria:

(1) The absolute saving level of working capital (V
as
)
With the unchanged working capital circulation, thanks to increasing working capital
rotation speed, corporation needs less capital as well as can save an amount of working capital
for other utilization. The amount of less capital is the absolute saving level of working capital.

• V
as
: The absolute saving level of working capital
• AWC
0
, AWC
1
: Average working capital in the reporting year and the planning year
• M
1
: Total circulation of working capital of the plan year.
• K
1
: Time of working capital circulation of the plan year.
(2) The relative saving level of working capital (Vrs)
The nature of the relative working capital saving level: thanks to increasing working
capital circulation speed, enterprises can raise the total rotation of working capital ( to create a
great net sales) but need no further increase or have an insignificant increase in the scale of
working capital.

• Vrs: The relative saving level of working capital due to increasing working capital
turnover.
• M1: the total rotation of working capital (net sales) of the planning year.

• K0, K1: The time of working capital rotation of the reporting year and the planning
year.
1.2.2.3. Coefficient of working capital.
Coefficient of working capital reflects the amount of needed working capital to get a unit
of net sales. The lower this coefficient is, the higher working capital efficiency is.
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1.2.2.4. Coefficient of working capital profitability.
This indicator reflects how much profit a unit of working capital can create (before or
after corporate income tax). The higher coefficient of working capital profitability is, the higher
working capital efficiency is:

1.2.3. Objective and necessity of enhancing Working Capital efficiency
1.2.3.1. Business objective of the corporation
In the market economy, the principal objective of corporation is to maximize its value. In
order to assure this objective, the corporation often sets up and makes long- term and short -term
financial decisions. Managing and using working capital efficiently is a key part in short -term
financial decisions and has a great influence on the objective of maximizing the value of
corporation. According to Chopde et al. (1997), corporation makes an effort to manage working
capital efficiently thanks to the following motivations:
• Liquidity ratios and paying the due payment on time make the corporation’s reputation
higher, which helps corporation be able to get more preferred credit limits, interest rate, and loan
terms thanks to its good credit history.
• To ensure the stability of the inputs to let corporation operate continuously, without
interruption of production.
• To obtain chances from the market such as purchasing and storing a great number of
materials, finished products when the market price goes down, then reselling them when the
market is in equilibrium with higher price and getting profit. This transaction just can be done
when corporation has enough funds to do it at that time.
• To increase the ability of corporation to response to economic crisis

1.2.3.2. The important role of working capital in corporation
In the market economy, a corporation that wants to run business must have capital.
Working capital is of importance to raise corporation’s capital. It appears and plays an important
role in all stages of the production process. At the stage of reserving and producing, working
capital guarantees production to be manufactured continuously, ensuring technology process. As
regard of goods circulation, working capital assures reserved finished products to meet the
consumption demand continuously, rhythmically and meet the demand of the customers. Short
time for circulating working capital and big cycle of circulation make management and usage of
working capital take place daily and regularly. Having such an important role, increasing speed
of working capital circulation and enhancing working capital efficiency is a certain request.
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1.2.3.3. The meaning of enhancing working capital efficiency
Enhancing the efficiency of working capital can increase working capital circulation’s
speed and shorten working capital’s time at stages of reserving, manufacturing, and circulating,
then decrease the number of used working capital and save working capital in circulation.
Thanks to the increase of working capital circulation’s speed, corporation can reduce the number
of used working capital but still remain the same production and business; or with the constant
working capital scale, corporation still can expand the scale of production. Increasing the
working capital circulation’s speed has good effect on lowering production cost, which helps
corporation have enough capital to meet production need, fulfill the obligation to pay taxes to the
state budget, and meet the need of economic, social development in country.
1.2.3.4. The fact of working capital efficiency in corporation
In fact, there are many reasons causing corporation’s inefficient business, even failure in
the market. There are objective and subjective reasons; however the most popular reason is still
the capital inefficiency in purchasing, reserving, manufacturing, and consuming goods. This
leads to working capital inefficiency, low working capital circulation’s speed , less profit and
may even causes loss of business; consequently, the corporation is out of control of working
capital resulting in the inability to the business, solvency.
1.3. Assessment and management of working capital
1.3.1. Principles of Working Capital Management

According to Sharma R.K. & Gupta S.K (2000), four fundamental principles of a policy
of working capital management efficiently include principle of risk variation, principle of capital
cost, principle of equity position, and principle of maturity of payment
Principle of risk variation: The inverse relationship between profitability and liquidity of
assets explains this principle. There are many chosen funding policies for working capital to
apply, which depends on corporation’s risk appetite such as aggressive policy, moderate policy,
or conservative policy. However, the goal of working capital management is to determine a
reasonable trade-off between profit and risk.
Principle of capital cost: The different working capitals have different capital cost as well
as corresponding risk levels. Managing of working capital efficiently always aims to get balance
between cost and risk. The basic principle is the higher the risk, the greater the cost of capital.
Principle of equity position: According to this principle, each penny invested in current
assets has to generate net worth for corporation. The scale of current assets is determined by
other criteria. For example, current assets equals X% of total sales or equals Y% of total assets of
corporation.
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Principle of maturity of payment: According to this principle, a corporation tries to fulfill
due financial obligations from its equity. Normally, the shorter the due time of fulfillment in
comparison with the time of the cash inflow is, the later corporation fulfils those obligations.
1.3.2. Models of reserve and inventory management
Reserve, inventory is an important part of working capital and is necessary stepping-
stone for corporation’s normal operation. Inventory is categorized into 3 types: raw materials for
the manufacturing process, unfinished products and finished products (Dang Thuy Phuong,
2000). Reserved materials do not directly generate profit but have a huge role to help the
production process normally regulate. Effective management of reserved materials will
contribute to enhance the efficiency of working capital. Therefore, the corporation has to
calculate a reasonable amount of reserved materials. If that amount is so big, it is costly and
leads to capital accumulation; if that amount is too small, it makes production process
interrupted, which results in a series of consequences such as lose its market or reduce
corporation’s profit (Eugene F. Brigham & Joel F. Houston, 2009).

Inventories in the manufacturing process are the raw materials in the stages of production
line. If the longer production line is and the more the production stages are, the more inventories
are in the production process. These are small stepping- stones to make production process
continuous. According to Jani, Virendra C. (2007), there are four current ordering systems of
Inventory including (1) Economic Order Quantity System (EOQ); (2) Fixed Period Ordering
System; (3) Single Order and Scheduled delivery System; and Timely Supply System (or Zero
Reserve)
EOQ (Economic Ordering Quantity System) method: This model is based on the
assumption that the supply of goods every time is equal. According to this model, the optimal
order quantity is:

Where:
• Q*: Optimal order quantity
• D: Demand quantity
• C
2
: Cost to place a single order (shipping and transaction management cost)
• C
1
: Inventory- holding cost per unit (insurance and preservation cost …)
Method of Fixed Period Ordering System: Daily used materials are not a fixed number
but constantly change. Therefore, in order to ensure the stability of production, corporation needs
to maintain an amount of safe reserved inventory depending on its specific situation. The amount
of safe reserve is the reserve of goods in addition to the reserves at the time of ordering.
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Method of Single Order and Scheduled Delivery System: Theoretically it is assumed only
when the previous quantity of goods is over, do corporation store the new one into warehouse
but in fact, it is never. However, if the order is too early, the number of material inventory will
increase. Therefore, corporation has to determine time for new orders.
Time for a new order = Quantity of daily used materials * Length of delivery time

Method of Timely Supply System (or Zero Reserve): According to this model, a number of
corporations in business closely related to each other form relationships. When having an order,
they will mobilize unfinished goods and products from other corporations without reserving.
Applying this model will minimize cost of reserve. However, this model creates ties between
corporations, which sometimes makes corporation lose its initiative in business.
1.3.3. Cash management models and highly liquid securities
Cash is understood as cash in hand, money in payment account of a corporation in a
bank. Cash itself is an asset that does not bear interest, however, cash maintenance in business is
very important because of some following reasons: Ensuring daily exchange, compensating for
the banks about services that the banks offer for the corporations; meeting provisional needs in
case of unexpected changes of cash inflow and cash outflow of the corporation, benefiting
advantages from good purchasing negotiation. Cash management mentions to management of
paper money and bank deposits. This kind of management closely relates to management of
assets that associate with cash, for example highly liquid securities. Some mathematics models
are researched to identify the optimal rate of cash that the corporations should hold, for instance:
(1) Operating Cycle Model; (2) Inventory Model; (3) Stochastic Model; (4) Probability Model …
(Jani, Virendra C., 2007). In which, two models: Inventory Model of William J. Baumol and
Stochastic Model of M.H. Miller and Daniel Orr are the most popular and shown below:
Inventory Model was developed when William Baumol found the EOQ inventory
management model that can be used for cash management model. In business, corporations have
to hold cash which is necessary for payment bills; when the cash quantity goes down; the
corporations have to supplement cash by selling highly liquid securities. The cost for holding
cash is opportunity cost and the interest that the corporations lose. The cost for goods order is the
cost for selling securities. Therefore, using EOQ model, we have the quantity of optimal cash
holding (M*):

• M*: Total of disbursing cash per annum.
• C
b
: Cost for one selling of liquid securities.

• i: Interest.
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Baumol model shows that the higher the interest is, the less cash quantity the
corporations hold, and on the other hand, the higher cost from selling liquid securities, the more
cash quantity the corporations hold. According to Baumol model, the cash residue is not practical
in case of supposing the corporations pay the cash stably. However, this theory is not always true
in real-life.
Stochastic Model of Miller Orr is a close combination of simple model and the real life.
According to this model, the corporations will identify the up limitation and the down limitation
of cash, in which the corporations start to purchase or sell highly liquid securities in order to
balance the anticipated cash. This model is shown in the graph below:

The planned cash is identified as follows:

The anticipated fluctuation range of cash depends on three following factors: (1) The rate
of daily budget revenue and expenditure large or small; (2) Fixed cost of purchasing and selling
securities; (3) the higher the interest is, the less cash quantity the corporations hold, and
therefore, the quantity of fluctuating cash will reduce. The fluctuation range of cash is identified
by the formula below:

Includes:
• d: fluctuation range of cash ( the range between the up limitation and the down
limitation of the reserved cash)
Cash balance
Time
Upper limit
Cash rate as
planned
Lower limit
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• C
b
: The cost of one liquid securities purchasing and selling transaction
• V
b
: The variance of budget revenue and expenditure
• i: interest
In large corporations, the daily inflow and outflow cash of the corporations is very high,
so the cost for securities purchasing and selling will become small in comparison with the lost
opportunity cost because of holding an amount of idle cash; therefore, the securities purchasing
and selling action should happen day by day in these corporations. On the other hand, we also
find that why the small and medium corporations hold a significant amount of cash balance.
1.3.4. Management models of receivables
Commercial credits, an efficient and indispensable instrument with every corporation,
which can make the corporations stay stable in the market, but also bring the risk for
corporations’ action. Thus, the corporations need to give analysis, researches and decisions
whether they should provide commercial credits for that customer or not. That is the main
content of the management of receivables.
+ Analyzing credit capacity of the customers: In order to provide credits for the
customers, at first, the corporations have to analyze the credit capacity of the customers. This
work includes: (1) building an appropriate credit standard; (2) verifying credit qualification of
potential customers. If customers’ credit capacity is suitable with minimum credit standards that
the corporations have given, the commercial credits can be granted. The establishment of credit
standards of financial managers has to reach to the suitable balance. If the credit standards are
too high, it will remove a lot of potential customers and reduce the profit, if the standards are too
low, the revenue can increase, but there will be a lot of highly risky credits and money collection
cost is also high.
+ Analyzing and evaluating offered credits: After analyzing credit capacity of the
customers, the corporations conduct the analysis and evaluation of the offered commercial
credits. the analysis and evaluation of the offered commercial credits is conducted in order to

decide whether issuing or not based on NPV calculation of cash flow.

• NPV: Net present value of changing from paying at sight to credit sales
• Q, P: The goods quantity per month and the unit price if the customers pay at sight
• Q’, P’: The quantity and the unit price in case of credit sales
• C: Cost of debt conversion and compensating sponsor for receivables
• V: Variable cost for an unit of goods
• R: gaining required profitability monthly
15
• r: percentage rate of unpaid sale goods
If NPV>0, it means that credit sales bring higher effectiveness than payment at sight,
which is profitable for corporations, so the credits are accepted.
+ Inspecting receivables: Inspecting receivables is an important content in managing
receivables. Doing this job well will help the corporations timely to change commercial credit
policies in order to fit the actual situation. Normally, so as to inspect receivables, we use criteria,
methods and models such as average money collection period, arranging “age” of receivables;
identifying receivables’ residue, etc. With this inspecting and managing methods, corporations
can see the influence of commercial credit policies and have timely adjustment, which is
appropriate to each customer, each specific credit.
1.3.5. Evaluating and overall managing via working capital metrics
According to Banomyong (2005), WCM metrics (Working capital management metrics)
used including following criteria:
Metric Calculation
DSO
Average collection period

DPO
Receivables payment period

DIO

Circulating inventory period

CCC
Circulating money cycle (budget cycle

1.3.6. Basic methods of enhancing working capital efficiency.
Planning working capital is one of the very first important and necessary duties for
corporations. The content of planning working capital in corporations normally consists of some
parts namely the working capital need plan, the working capital source plan and working capital
usage plan over time.
+ Planning working capital: In order to build an exact and adequate working capital plan,
at the first phase, corporations have to identify working capital need for production and business
activities accurately. Identifying working need for production and business activities accurately
and suitably ensure the corporations’ production and consumption of products are conducted
continuously at one side; in the other side, the corporations will avoid stagnant material
situations, capital wasted usage, does not cause the artificial tension about operating capital need
of the corporations. After identifying regular working capital need, in order to ensure the
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continuous production, it is necessary for the corporations to have the plans that response that
capital need by steady and stable capital sources. In actual production in corporations, about
working capital needs for production and business, the capital usage in different period in one
year is normally dissimilar. The reason is that in short period such as quarters, months, beside the
specific need of necessary operating capital, there is also temporary need which generates
because of many reasons
+ Organizing, managing the working capital scientifically and stably: The managers have
to choose working capital management models which are appropriate to operating activity
conditions of corporations when they apply these models. While applying scientific working
capital models, corporations should know how to combine models to create the consistency in
overall working capital management of corporations. Good working capital management
facilitate for the corporations to give solutions timely and actively to resolve arising issue, ensure

plan’s working capital implement, avoid drain, waste so as to enhance the effectiveness of using
working capital.
+ Shortening production and business cycle, decreasing the production cost via applying
scientific and technological progress into production: Business cycle of corporations relies on
time length of phases: reserve, production and circulation. When the corporations apply scientific
and technological progress into production, which ensures the production of high-quality
products, high productivity and decline the price. This also means that the time of direct
production phase will be shortened. On the other hand, the enhanced effectiveness in production
will have positive influence to reserve and circulation phase: high products’ quality, reducing
price will ensure the faster products’ consumption of corporations, decrease the time in
circulation phase; so that, corporations will be more active in reserve, create a faster working
capital circulation.
+ Good organization in financial based on continuous improvement of financial
management staff’s qualification: Human resources have always been recognized as an
important factor determining the success or failure of a business venture. Using working capital
is a part in financial management of a business, which is conducted by financial staff, so, their
capacity and qualification have direct impact on financial organization in general and working
capital efficiency in particular.

17
CHAPTER 2: RESEARCH AND IMPLEMENTATION METHODOLOGY AT EVN

2.1. Introduction to EVN
2.1.1. Creation and development history
According to the Decision No: 562/QĐ-TTg on October 10th 1994 of the Prime Minister,
EVN was established which based on rearranging the units of Ministry of Energy; EVN
organized and operated by order of the regulation attached with the Decree No: 14/CP on
January 27th 1995 of the government. On June 22nd 2006, the Prime Minister gave the Decision
No: 147/QĐ-TTg about approving a model project of establishment of EVN and the Decision
No: 148/2006/QĐ-TTG about ascertaining the parent company – EVN. Until June 25th 2010,

Prime Minister promulgated the Decision No: 974/QĐ-TTg about replacing the parent company
– EVN to a state-owned one member limited liability company. On June 6th 2011, Prime
Minister gave the Decision No: 857/QĐ-TTg to approve the organization and operation
regulation of EVN with some main contents as below:
● Full name: Vietnam Electricity Corporation
● International trading name: Vietnam Electricity Corporation
● Company name in abbreviation: EVN
● Type of firm: One member limited liability company
● Head office: No 18, Tran Nguyen Han street, Ly Thai To, Hoan Kiem district, Hanoi
city
● Tel: (84-4) 2.2201371; Fax: (84-4)2.2201369
● Website: www.evn.com.vn
Some history landmarks during the establishment and development process of EVN
(EVN):
○ April 11th 1994: Establish the national electricity system moderation center.
○ January 1st 1995: Establish EVN
○ April 10th 2005: Open the Phu My Electricity center for public use
○ December 2nd 2005: Begin the construction of Son La hydroelectric power plant, the
largest one on Vietnam and Southeast Asia.
○ June 22nd 2006: Establish EVN
○ December 31st 2007: Establish Electricity trading company
○ July 4th 2008: Establish National Power Transmission Corporation
18
○ September 1st 2008: Establish EVN Finance stock company
○ November 25th 2009: The eleventh National Assembly, the sixth session passed the
policy about investment in Ninh Thuan nuclear power plant.
○ June 25th 2010: Change the parent company – EVN to member limited liability
Company.
2.1.2. Organizational structure
Chart 2.1: Organizational structure of EVN

Source: EVN’s annual report 2012
BOARD OF MEMBERS
GENERAL BOARD
INTERNAL
SUPERVISORY BOARD
GENERAL DIRECTOR
Deputy
General
Director of
production
Deputy
General
Director of
business
Deputy
General
Director of
(northern)
Deputy
General
Director of
(southern)
Deputy
General
Director of
Nuclear
Power
Deputy
General of

Accounting -
Finances,
Teleco
m.&
IT

Department of
Technique -
Production
Department of
Techno
.
&
Environ
.
Plan
Department of
Business
Offices
Department of
TTD
Department of
Organization
and
HR

Department of
Plan
Department of
PC

Department of
Investment
Department of
Investment
Management
Department of
Construction
Management
Department of
Telecoms and
IT
Department of
TTBV
Department of
QHCĐ
Department of
Accounting -
Finances
Department of
QHQT
Subordinate
units

Subsidiaries

Subsidiaries

Associate
companies

19
2.1.3. Business operation features
2.1.3.1. Features of business sectors
According to the Decision No: 857/QD-TTg on June 6th 2011 of the Prime Minister
approved the operation and organization Regulations of EVN, EVN have business sectors:
+ Main business sectors include:
- Produce, transmit, distribute and purchase electricity; Command and control the system
of producing, transmitting, distributing and dividing electricity in the national electricity system;
- Import and export electricity power;
- Invest and manage the investment capitals of electricity projects;
- Manage, operate, repair, maintain, fix, and improve electrical equipment, electrical
constructions and electrical experiments.
+ Other business sectors relating to the main ones:
- Export and Import electrical fuel, materials and equipment;
- Construct, supervise the setting up of accessories in electric plants, line equipment and
electrical substations, telecommunication equipment - information technology; produce
construction materials, insulated materials, labor safety equipment;
- Invest in public telecommunication business, electricity machinery;
- Consultant project management, consultant investment plan making; consultant bidding,
cost estimate and supervise electric plant building constructions, line building constructions and
electrical substations, telecommunication building constructions - information technology,
industrial and civil building constructions;
- Make financial investment, do capital business that the State gave to EVN.
- Generate human resources and co-operate human resource training with foreign
countries.
2.1.3.2. Features of products
Electricity sources in Vietnam are mainly from thermoelectricity and hydroelectricity.
Among the main electricity sources, hydroelectricity still accounts for a high density and plays
an important role in the structure. The hydroelectricity industry has no expense for fuel, low-rate
emission and can change its capacity quickly according to additional charge demand. However,

the hydroelectricity industry needs a high investment level at the beginning, a long building
construction period and it is the most passive source. In the electricity source developing plan in
the electricity arrangement VI of the Government, the density of the hydroelectricity will
decrease gradually in the total producing electricity source structure and increase other
thermoelectricity ones including coal thermoelectricity and gas thermoelectricity. The present