Working capital and some solutions to improve its management efficiency at agricare vietnam co ltd

Graduation thesis

Academy of finance
DECLARATION

I here with formally declare that this thesis is the presentation of result
of my own research during the time of internship in Agricare Viet Nam
Co.,Ltd, and has not been submitted for a degree to any other universities or
institutions. To the best of my knowledge, the thesis does not contain material
previously published or another people, except where due acknowledgement
is made in the text.
Ha Noi, 9 May, 2016
Student

Dinh Thi Thien Hue

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance
ACKNOWLEDGEMENTS

During graduation thesis, I have collected a lot of knowledge about
working capital at Agricare Viet Nam Co.,Ltd. First of all, I would like to
thank all professor lecturers whose experience helped me a lot in developing
the thesis.
I also express my great gratitude to my supervisor M.A Tran Thu Hoai

for her inspiring guidance, suggestions and critical evaluation of the work for
the successful completion of my thesis.
Secondly, I would like to give thanks to all lecturers at Academy of
Finance for their enthusiasm through the teaching and support process.
Thirdly, I would like to express my sincere thanks to all staff of Agricare
Viet Nam Co. Ltd for giving me assistance and corporation that helped me in
writing this thesis.
Last but not least, I would like to thank my parents and friends for their
care, support, encouragement, without which my thesis would not have been
accomplished.

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance
ABSTRACT

In the context of development of global economy, Vietnam enterprises
have less competitive advantages than international companies. Agricare Viet
Nam Co.Ltd, as many other companies, has to face many difficulties from
globalization. In this study, author analyzed working capital management of
Agricare Viet Nam Co.Ltd to assess its efficiency and effectiveness. From the
results, author drew out the current situation of working capital management,
identified strength, weakness and other outstanding points. In the end of study
are some recommendations that might be applied to improve the efficiency
and effectiveness of working capital management.

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance
LIST OF ABBREVIATIONS

No

Abbreviations

Full Phrase

1.

AR

Accounts Receivables

2.

A/R

Account receivables

3.

CCC

Cash conversion cycle

4.

EOQ

Economic order quantity

5.

FA’s

Financial accounting statement

6.

JIT

Just in time

7.

P&L

Profit and loss

8.

WC

Working capital

9.

WCM

Working capital management

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance
LIST OF TABLES

Table 2.1 Business performance results of Agricare Viet Nam from 2012 to
2014
Table 2.2 Cash and cash equivalents
Table 2.3 Cash management efficiency ratios
Table 2.4 Receivables management efficiency ratios
Table 2.5 Inventories management efficiency ratios
LIST OF FIGURES
Figure 1.1 Classification of working capital
Figure 1.2 Typical inventory cycle

Figure 1.3 EOQ and Inventory Cost
Chart 2.1: Structure of current asset of Agricare Viet Nam in 2014
Chart 2.2: Comparing working capital from 2012 to 2014
Chart 2.3: Comparing working capital with fixed capital and total capital
Chart 2.4: Cash and cash equivalent in total working capital
Chart 2.5: Proportion of receivables in total working capital
Chart 2.6: Proportion of inventories in total working capital

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance
TABLE OF CONTENT

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Dinh Thi Thien Hue


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Academy of finance

Introduction
1. Rationale of the study
In the market economy, capital is one of the most important factors for

enterprises to survive and develop beside others factors such as human
resources, the inventions, patents, technical management....Generally, in the
commercial activity and particularly in the commercial enterprises, capital is
also an effective tool to enhance the competitiveness of enterprises.
Therefore, every business which wants to exist and develop has to concern
about the capital creation and management.
Working capital is one of the two components of capital. For commercial
businesses, working capital accounts for a large proportion of the total capital
approximately 75% - 95%. Working capital management is an important area
of financial management in every business function. Working capital
management deals with the administration of the liquidity components of
firms’ short-term current assets and current liabilities (Baker and Powell,
2005; Brigham and Ehrhardt, 2005; Gitman, 2009). The most important
current assets are cash, debtors or account receivables, stock or inventory and
current liabilities consisting of creditors or account payables, accrued
expenses, taxation liabilities, short-term debt such as commercial bills, and
provisions for current liabilities such as dividends declared but not yet paid .
This is the reason why working capital management has become a hot topic
for all enterprises, and improving working capital efficiency is the target for
all business.
Recognizing the important of working capital management in the firm’s
survival , growth and after my internship time in Agricare Viet Nam Co.Ltd, I
had a chance to work in Finance- accounting department where had overall

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Graduation thesis

Academy of finance

responsibility for using, managing capital, and contributing to company
growth and profitability. I choose the topic “Working capital and some
solutions to improve its management efficiency at Agricare Vietnam
Co.Ltd” as topic of the thesis.
2. Aims of the study
The main objective of the study is to analyze the working capital
management and suggest some methods to improve the efficiency of the
process. The specific aims of the thesis include:
●

To provide a source of information on capital concepts encompassing
definition capital, the importance of working capital .

●

To get a better understanding of working capital management at
Agricare Viet Nam Co.Ltd.

●

To evaluate the current situation of organization and management of working
capital at Agricare Viet Nam Co.Ltd .

o

To offer business management recommendations on managing working
capital.

3. Method of the study
For this study the following approach was adopted. Firstly, relevant
literature, publications and studies are reviewed in order to get in-depth
information on fixed capital management in general and this concept at
Agricare Viet Nam in particular. The company’s background is also studied
and reviewed. Secondly, data related to working capital management at the
firm including financial statements and other required documents will be
collected and examined. Finally, the information obtained is analyzed,
processed to evaluate the working capital management efficiency.

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance

4. Scope of the study
Due to the limited time and the scale, this dissertation emphasizes on
working capital management at Agricare Viet Nam Co.Ltd in the period from
2012-2014 and propose some solutions for improvement.
5. Organization of the study
Apart from the Introduction, Conclusion, Reference and Appendix, the
thesis is divided into three main parts as follows:
●

Chapter 1: LITERATURE REVIEW. This chapter provides general
background on capital and working capital management.

●

Chapter 2: THE STUDY. This chapter gives the data and analysis of the
enterprise’s working capital management.

●

Chapter 3: SOLUTIONS AND RECOMMENDATIONS. This chapter
suggests some recommendations to improving working capital management
efficiency at Agricare Vietnam Limited Liability Company.

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Dinh Thi Thien Hue


Graduation thesis

Academy of finance
CHAPTER 1

LITERATURE REVIEW OF WORKING CAPITAL MANAGEMENT
1.1. Introduction of working capital in enterprises
1.1.1. Definition of working capital
In accounting and financial statement analysis, working capital
involves a firm’s current assets and current liabilities that have maturities of
less than one year and are needed for a normal business cycle. The net
working capital is the difference between current assets and current
liabilities. The current assets primarily include cash and short-term

investments in marketable securities, inventories of raw materials, work-inprogress and finish goods as well as accounts receivables. If the current
assets excess the current liabilities, this indicates that the firm has ability to
meet its short-term financing obligations. The greater the net working
capital is the more liquid or solvent the firm is.
According to a financing perspective, working capital is the amount a
firm invests in short-term or current assets that required for day-to-day
operation. Current assets regularly turn over and play a key role for a firm to
continuously operate. If consider a business as a machine, the current assets
could be seen as “lubricating oil” helping the “engine” of non-current assets
to well function.
1.1.2. Classification of working capital
The amount of funds needed for meeting requirements normally varies
from time to time in every business.
However, business always needs a certain amount of assets in the form
of working capital if it is to carry out its functions.
This permanent need and the variable requirements are the basis for a
convenient classification of working capital as regular, permanent, or variable
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Academy of finance

as follows:

Figure 1.1 Classification of working capital
1.1.2.1 Permanent or fixed working capital

A part of the investment in current assets is as permanent as the
investment in fixed assets. It covers the minimum amount necessary for
maintaining the circulation of the current assets. Working capital invested in
the circulation of the current assets and keeping it moving is permanently
locked up.
The permanent or fixed working capital is of two kinds:
(a) Regular working capital
It is the minimum amount of liquid capital required to keep up the
circulation of the capital from cash to inventories to receivables and back
again to cash. This would include a sufficient amount of cash to maintain
reasonable quantities of raw materials for processing into finished goods to
ensure quick delivery etc.
(b) Reserve margin or cushion working capital:
It is extra capital required to meet unforeseen contingencies that may
arise in the future. These contingencies may crop up on account of rise in
prices, business depression, strikes, lock-outs, fires and unexpected
competition. It is needed over and above the regular working capital
requirements.
1.1.2.2

Variable working capital
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Graduation thesis

Academy of finance

The variable working capital fluctuates with the volume of business. It
may be sub-divided into: Seasonal and Special working capital.
(a) Seasonal working capital:
It refers to liquid capital needed during the particular season. According
to Gestenberg( 1959:282), “Beyond initial and regular working capital, most
businesses will require at stated intervals a large amount of current assets to
fill the demands of the seasonal busy periods”.
During the season, the business enterprises have to push up purchase of
raw materials (sugarcane by sugar mills, wool by woollen mills) and employ
more people to convert them into finished goods and thus require large
amount of working capital.
(b) Special working capital:
It is a part of the variable capital which is needed for financing special
operations such as the organisation of special campaigns for increasing sales
through advertisement or other sale promotion activities for conducting
research experiments or execution of special orders of the Government that
will have to be financed by additional working capital.
The distinction between permanent and variable working capital is
important in arranging the finance for an enterprise. Permanent working
Capital should be raised in the same way as fixed capital is procured.
It is undesirable to bring regular working capital into business on a shortterm basis because a creditor can seriously handicap the business by refusing
to continue lending permanently. Its only recourse is to curtail operations
unless another lender can be found. Variable capital requirement can, however
be financed out of short term loans from the banks or inviting public deposits.
1.1.3 Role of working capital
Working capital may be regarded as the lifeblood of the business.
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Dinh Thi Thien Hue

Graduation thesis

Academy of finance

Without insufficient working capital, any business organization cannot run
smoothly or successfully. In the business the working capital is comparable to
the blood of the human body. Therefore the study of working capital is of
major importance to the internal and external analysis because of its close
relationship with the current day to day operations of a business. The
inadequacy or mismanagement of working capital is the leading cause of
business failures. Working capital is a prevalent metric for the efficiency,
liquidity and overall health of a company. It is a reflection of the results of
various company activities, including revenue collection, debt management,
inventory management and payments to suppliers. This is because it includes
inventory, accounts payable and receivable, cash, portions of debt due within
the period of a year and other short-term accounts.
The needs for working capital vary from industry to industry, and they can
even vary among similar companies. This is due to several factors, including
differences in collection and payment policies, the timing of asset purchases,
the likelihood of a company writing off some of its past-due accounts
receivable.
1.1.4 Structure of working capital
Working capital structure refers to the elements of working capital and it
shows which of the components is responsible for the sizeable amount of
working capital. It is encapsulated in the concept of working capital
management, which refers to the financing, investment and control of net
current assets within the policy guidelines. It may be regarded as the lifeblood
of the business and its effective provision can do much to ensure the success
of the business, while its inefficient management or lack of attention may lead

to the downfall of the enterprise.
According to Peter and Eddie (2006), working capital in terms of five
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Graduation thesis

Academy of finance

components:
● Cash

and equivalents:

This most liquid form of working capital requires constant supervision. A
good cash budgeting and forecasting system provides answers to key
questions such as: Is the cash level adequate to meet current expenses as they
come due? What is the timing relationship between cash inflow and outflow?
When will peak cash needs occur? When and how much bank borrowing will
be needed to meet any cash shortfalls? When will repayment be expected and
will the cash flow cover it?
● Accounts

receivable:

Many businesses extend credit to their customers. If you do, is the
amount of accounts receivable reasonable relative to sales? How rapidly are
receivables being collected? Which customers are slow to pay and what

should be done about them?
● Inventory:

Inventory is often as much as 50 percent of a firm's current assets, so
naturally it requires continual scrutiny. Is the inventory level reasonable
compared with sales and the nature of your business? What's the rate of
inventory turnover compared with other companies in your type of business?
● Accounts

payable:

Financing by suppliers is common in small business; it is one of the
major sources of funds for entrepreneurs. Is the amount of money owed
suppliers reasonable relative to what you purchase? What is your firm's
payment policy doing to enhance or detract from your credit rating?
● Accrued

expenses and taxes payable:

These are obligations of your company at any given time and represent a
future outflow of cash.
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1.1.5 Factors affecting working capital
●

Nature of Business:
The requirement of working capital depends on the nature of business.
The nature of business is usually of two types: Manufacturing Business and
Trading Business. In the case of manufacturing business, it takes a lot of time
in converting raw material into finished goods. Therefore, capital remains
invested for a long time in raw material, semi-finished goods and the stocking
of the finished goods.
Consequently, more working capital is required. On the contrary, in case
of trading business the goods are sold immediately after purchasing or
sometimes the sale is affected even before the purchase itself. Therefore, very
little working capital is required. Moreover, in case of service businesses, the
working capital is almost nothing since there is nothing in stock.

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Graduation thesis
●

Academy of finance

Manufacturing Cycle:
Working capital requirement of an enterprise are also influenced by the
manufacturing cycle. It refers to the time involved to make finished goods
from the raw materials. During the process of manufacturing cycle funds are

tied up longer the manufacturing cycle, the larger will be working capital
requirement and vice-versa

●

Production Policy:
Working capital requirement is also determined by its production policy.
If a firm produces seasonal foods, its production and sales volume fluctuate
with different seasons. This type of fluctuating policy affects the working
capital policy of the firm.

●

Credit Policy
Credit policy affects the working capital of a firm. Working capital
requirement depends on terms of sales. Different term may be followed by
different customers according to their credit worthiness. If the firm follows
the liberal credit policy, then it requires more working capital. Conversely, if a
firm follows the stringent policy, it requires less working capital.

●

Availability of Credit:
Availability of credit facility is another factor that affects the working
capital requirement. If the creditors avail a liberal credit terms, the firm will
need less working capital and vice-versa. In other works, the firm can get
credit facility easily on favorable conditions. Thus, it requires less working
capital to run the firm otherwise more working capital is required to operate
the firm smoothly.

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Graduation thesis
●

Academy of finance

Growth and Expansion:
Growth and expansion also affects the working capital requirement of
firm. However, it is difficult to precise; determine the relationship between
the growth and expansion of the firm and working capital needs. Therefore,
the other things being the same growing firms needs more working capital
than those static ones.
●

Price level Change:
Price level change also affects the working capital requirement of a firm.

Generally, a firm requires maintaining the higher amount of working capital,
if the price level rises. Because the same level of current assets needs more
due to the increasing price,it will affect to working capital of a firm. In
conclusion, the implications of changing price level of working capital
position will vary from firm to firm depending on the nature and another
relevant consideration of the operation of the conserned firm.
●

Operating Efficiency:

Operating efficiency is also an important factor, which influences the
working capital requirements of the firm. It refers to the efficient utilization of
available resources at minimum cost. Thus, financial manager can contribute
to strong working capital position through operating efficiency. If a firm has
strong operation efficiency then it needs lesser amount of working capital and
vice-versa.

●

Profit Margin:
The level of profit margin differs from firm to firm. It depends upon the
nature and quality of product has a sound marketing management and enjoy
the monopoly power in the market, then it earns quite high profit and viceversa. Profit is sources of working capital because it contributes towards the
working capital as a policy by generating more internal funds.
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Graduation thesis
●

Academy of finance

Level of Taxes
The level of taxes also influences working capital requirement of firm.
The amount of taxes to be paid in advances is determined by the prevailing
tax regulations. But the firm’s profit is not constant, or can not be
predetermined. Tax liability in a sense of short-term liquidity is payable in
cash. Therefore, the provision for tax amount is one of the important aspects

of working capital planning. If tax liability increase, it needs to increase the
working capital and vice-versa.
●

Other factors
Effective co-ordination between production and distribution can reduce

the need for working capital. The availability of credit to a firm depends on its
creditworthiness in the money market. If a firm has good reputation with
banks, suppliers and investors, it can get credit easily and with favorable
terms, which means less working capital is required.
1.2. Working capital management
1.2.1. Working capital management and its objectives
Working capital management is

the process of

managing and

monitoring activities related to working capital.
There are two main objectives of working capital management. It helps
managing effectively the day-to-day activities of the business to improve the
firm’s profitability and it ensures that the firm has sufficient liquidity to meet
its short-term obligations.
Working capital decisions related to maintaining an optimal balance of
each working capital components, allowing sufficient resources for the
operation and growth. The two important decisions associated with the level
of investment in working capital and the sources for financing working
capital, are required serious attention of firms’ managers. Managerial
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Graduation thesis

Academy of finance

decisions of working capital is short-term decisions, for instance, the decision
of whether to offer credit for customers, if yes, how many days and what level
of discounts are relevant? Another example of working capital decisions is
related to question: What should the firm do with the temporary surplus cash?
1.2.2. Managing working capital
Peter and Eddie (2006) mentioned in their book some methods to
manage working capital as the following:
1.2.2.1. Cash management
Cash is the most important current asset and is considered as the
“lifeblood” of a business, helping the business run a continuous basis. The
term cash includes currency, checks and balance in bank accounts.
The goal of cash management is:
●

To maintain an adequate level of cash on hand to meet the daily cash
requirement in operation

●

To maximize the amount of money that are available for investments
and obtain the maximum of interest earned on excess cash while ensuring the
safety.

The management of cash concerns with three important aspects:

●

Firstly, a firm should manage the cash balance. It is very important to find an
optimal holding cash balance in order to maximize the interest earned on
funds that are not immediately needed and reduce the cost associated with the
delays in transmission of funds. Holding a small amount of cash can increase
the opportunity to invest the excess cash with a good return but it also
increases the risk of insolvency, financial distress and thus bankruptcy. When
deciding the relevant cash holding levels, it is necessary to concern with
liquidity and risk of insolvency. Both excess and inadequate cash can
consequently degenerate a firm into problems. With insufficient cash in
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Graduation thesis
business, firms are unable to

Academy of finance
continuously operate and cannot repay

obligations, resulting in insolvency problem and may lead to the
disruption of manufacturing operation. On the other hand, with too much
cash on hand, firms lose opportunities of earning interests on the investments
of unused cash. Thus, firm needs to ensure the safety when deciding the level
of cash hold.
●

Secondly, a firm should controll the collections and disbursements of cash.
The objective of the managing is to speed up the collections and slow down
the disbursements of cash. Firms aim at maximizing the cash receipts and
speeding up the collections of cash by reducing the time it takes customers to
pay their bills and the time money is collected. Firms also want to delay their
payments so that they can keep cash to put in the bank or invest in money
market as long as possible. These help firms to increase the cash balance and
allow them to use temporary surplus cash for profitable investments.

●

Thirdly, the cash budget that involves the forecasts of the cash receipts and
payments for the next planning period, is used to improve the monitor of all
cash flows, estimate the cash needs for business and anticipate cash surpluses
or deficits. The cash inflows of a firm mainly consist of cash sales and
collection of accounts receivable and sometimes include interests. The
primary cash outflows include payments on purchases, labor costs,
repayments of loans, capital expenditures (i.e. fixed asset purchases) and
dividends.
The optimal cash balance may vary in different firms and in different
period of time. It depends on the following factors:

●

The forecasts of future cash inflows and outflows of companies

●

The efficiency of the firms’ cash flow management

●

The availability of liquidity assets to the firms
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●

Academy of finance

The companies’ borrowing capacity
●

The companies’ tolerance of risk

1.2.2.2. Inventory management
1.2.2.2.1 Inventory costs
A business may hold inventories for various reasons, the most common
of which is to meet the immediate day-to-day requirements of customers and
production. It will normally seek to minimize the amount of inventories held
and the cost of holding inventories.
These are some methods to manage inventories:
Just-in-time inventory management is the first and typical method. In
recent years, many businesses have tried to eliminate the need to hold
inventories by adopting “Just-in-time “(JIT) inventory management . The
essence of JIT is, as the name suggests, to have supplies delivered to a

business just in time for them to be used in the production process or in a sale.
By adopting this approach the inventories holding costs rest with suppliers
rather than with the business itself. On the other hand, a failure by a particular
supplier to deliver on time could cause enormous problems and costs to the
business. Thus JIT can save cost, but it tends to increase risk.
Second, it is the budgeting future demand. One of the best means of a
business trying to ensure that there will be inventories available to meet future
production and sales requirements is to make appropriate plans. The budgets
should deal with each product that the business makes and/or sells. It is
important that every attempt is made to ensure that plans are realistic, as they
will determine future ordering and production levels.
1.2.2.2.2 Inventory management model
The most popular inventory management method is Economic Order
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Graduation thesis

Academy of finance

Quantity (EOQ). This method is used to calculate the optimal inventory level,
at which the carrying costs and ordering costs are minimized.
Figure 1.2. Typical inventory cycle

The model’s assumptions associated with certainty, for example,
demand for each year is known and there is a constant replenishment. The
inventory’s usage and delivery can be predicted. Thus, stock-out costs are
avoided and inventory management only concerns to achieve the optimal

balance between ordering costs and carrying costs.
Figure 1.3. EOQ and Inventory Cost

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Graduation thesis

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The carrying costs increase when the order quantity increases whereas
the ordering costs decrease when the ordering frequency decreases and larger
orders are made. The EOQ model allows to calculate an economic order- is
the optimum size of order at a minimum total cost combined of the carrying
costs and ordering costs.
●

Total annual = Number of order per period x Cost of each order
ordering cost
= (Total annual demand/Order size) x Cost of each order
= (D/Q) x F

●

Total carrying cost = Carrying costs per unit x Average inventory level per
period (in units)
= C x (Q+0)/2 = C x Q/2

●

The total cost is: TC = F x D/Q + C x Q/2
The economic order quantity EOQ or Q* is determined to give the
lowest total cost. The Q* corresponds to the minimum total cost is calculated
differentiating total cost with respect to Q and equating to zero. The
solution is provided as:
EOQ = Q* = 2DF / C
Where:
Q: is size of inventory
D: is total annual demand
F: is the cost of each order (fixed cost of reordering) C: is carrying cost per
unit
1.2.2.3. Receivable management
Account receivables are assets representing amounts owed to the firm as
a result of the sale of goods or services in the ordinary course of business.

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Kelly and McGowen (2010) suggest that credit customers who pay late or
don’t pay at all only aggravate the problem. Thus, it is important for the
financial manager or account receivables manager to establish a good policy
that controls the advantages of offering credit with the associated costs. The

firm should establish its receivables policies after carefully considering both
the benefits and costs of different policies. Three factors should be analyzed:
●

Profits. The firm should investigate different possibilities and forecasts the
effect of each on its future profits. The cost of funds tied up in receivables,
collection costs, bad debt losses, and money lost discounts for early payment
should be compared with additional sales or losses of sales as a result of each
proposed policy

●

Growth in sales. Sometimes firms are willing to accept short term setbacks
with respect to profits if a new policy enables the firm to increase its sales
significantly. A firm may adopt a certain policy to gain a foothold in
previously closed market. Because growth is so important 16 aside from
profits, it should be viewed as a separate factor in determining receivables
policies.

●

Possible problems. In spite of increase sales and profits, some policies may be
accompanied by obvious and annoy problem
1.2.3. Working capital management efficiency ratios
1.2.3.1 Classification of ratio
Basically on the basis of working capital management it can be
characterized into following ratios

●

Activity Ratio: Activity ratio is an indicator of how rapidly a firm converts
various accounts into cash or sales. The sooner management can convert
assets into sales or cash, the more actively the firm run. This ratio is also
called Asset Management Ratio. As the assets basically categorized as fixed
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Academy of finance

assets and current assets and again further the current assets classified
according to individual components of current assets . Inventories, Debtor,
and Receivables .
1.2.3.1. Working capital allocation ratios
Van and Ninh (2013) mentioned in corporate finance some financial
ratios for the purpose of working capital management:
●

Cash to working capital
Cash to working

Cash and marketable securities

capital

Working capital

X100

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