Some solutions to improving the efficiency of working capital management at son ha international corporation

Academy of Finance

Graduation thesis

DECLARATION
I hereby declare that this thesis is my own work and effort. It has not been
submitted anywhere for an award. Where other sources of information have
been used, they have been acknowledged.
Graduation thesis author

Phạm Thị Hồng Ngân

Pham Thi Hong Ngan CQ49/51.03

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ACKNOWLEDGEMENT

I would like to express my deep gratitude to all those who have given
me the possibility to complete this graduation thesis. In preparing this
graduation thesis, I have had generous help and advice from my teachers, my
colleagues, my family and my friends. I would like to express my great thanks
to all of them.
First of all, I would like to express my deepest gratitude to my
supervisor, Tran Thi Thu Nga, lecturer of Academy of Finance, who has given
immeasurable help, constant guidance with many careful instructions,

comments and valuable advice to me whenever I need. Without her support, I
am not able to have a complete thesis. And I really appreciate her patience in
reading and correcting my thesis.
Second, I wish to show my sincere thanks to all my teachers at
Academy of Finance, who have provide me with worthy lessons throughout 4
years of study.
Moreover, I have furthermore to thank the staffs of Son Ha
International Corporation for their valuable supports during the internship
period. Without their helps, it would be impossible for me to finish this
work.
Last but not least, I would like to send my loving thanks to my family
whose great love and care in both spirit and health to encourage me to
complete the thesis.

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ABSTRACT

This study investigated the factual state of working capital management
efficiency at Son Ha International Corporation from the viewpoint of a fourth
year student of Faculty of Foreign Language, Academy of Finance. The paper
aims at finding out the drawbacks in the company‟s working capital
management and the reasons, and more importantly suggesting main methods

to improve the efficiency of working capital management in the company. In
achieving these aims, the graduation paper surveys the current situation of
working capital management and assess that whether it is effective or not.
From received results, the study argues the most practical implications at Son
Ha International Corporation to improve the efficiency of working capital of
the company in the year to come.

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LIST OF ABBREVIATIONS
1. VND: Viet Nam dong
2. Son Ha International Corporation: SHI

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LIST OF TABLES

List

Page

Chart 2.1: Business result of SHI form 2012 to 2014 (million VN
dongs)

25

Chart 2.2: Density of working capital from 2012 to 2014

27

Chart 2.3: Comparing Working Capital with Fixed Capital and Total
Capital (million VN dongs)

27

Chart 2.4: Cash and cash equivalent from 2012 to 2014

34

Figure 1.1: Classification of working capital

7

Figure 2: Board of Son Ha International Corporation

23

Table 2.1: Working Capital Sources

29

Table 2.2: Working capital structure at SHI in 2014 and 2013 (million
VND)

31

Table 2.3: Efficiency of cash management at SHI in 2014

36

Table 2.4: The fluctuation of Receivables at Son Ha International
Corporation in 2014

39

Table 2.5: The efficiency of account receivables management at Son
Ha International Corporation in 2014

42

Table 2.6: Inventory structure at Son Ha International Corporation in
2014

44

Table 2.7: Efficiency of inventory management at Son Ha International
Corporation

46

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TABLE OF CONTENTS
DECLARATION....................................................................................................i
ACKNOWLEDGEMENT.....................................................................................i
ABSTRACT.........................................................................................................iii
LIST OF ABBREVIATIONS...............................................................................iv
LIST OF TABLES …………………………………………………………..…v
1. INTRODUCTION...........................................................................................1
1.1. Rationale of the study.....................................................................................1
1.2. Aims of the study............................................................................................2
1.3. Methods of study............................................................................................2
1.4. The scope of the study....................................................................................3
1.5. Organization of the study...............................................................................3
CHAPTER 1: THEORETICAL BACKGROUND OF WORKING
CAPITAL AND WORKING CAPITAL MANAGEMENT............................. 4
1.1 OVERVIEW OF WORKING CAPITAL.................................................... 4
1.1.1 Definition of working capital........................................................................4
1.1.2 Chracteristics of working capital.................................................................. 6
1.1.3 Classification of working capital.................................................................. 7

1.1.3.1 On the basic of concept..............................................................................7
1.1.3.2 On the basic of time...................................................................................8
1.2

WORKING CAPITAL MANAGEMENT IN BUSINESS......................9

1.2.1 Definition of working capital management.................................................. 9
1.2.2 Objectives of working capital management..............................................10
1.2.3 Assessment criteria...................................................................................11
1.2.3.1 Cash management.................................................................................... 11
1.2.3.2 Inventory management.............................................................................12
1.2.3.3 Accounts receivables management.......................................................... 13

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1.2.3.4 Some ratios assess the efficiency of working capital management.........15
1.2.4 Efficiency of working capital management................................................ 17
1.3 FACTORS AFFECTING WORKING CAPITAL MANAGEMENT
EFFICIENCY.....................................................................................................17
1.3.1 External factors...........................................................................................18
1.3.2 Internal factors............................................................................................19
CHAPTER 2: CURRENT SITUATION OF WORKING CAPITAL
MANAGEMENT AT SON HA INTERNATIONAL CORPORATION........21

2.1 OVERVIEW OF SON HA INTERNATIONAL CORPORATION.........21
2.1.1 General information of Son Ha International Corporation.........................21
2.1.2 Foundation and development of the company............................................21
2.1.3 Logo‟s meaning..........................................................................................22
2.1.4 Organization of management of Son Ha International Corporation...........23
2.1.5 The company main business activities........................................................23
2.2.

CURRENT

SITUATION

OF

WORKING

CAPITAL

MANAGEMENT AT SON HA INTERNATIONAL CORPORATION
(SHI) FROM 2011 TO 2013.............................................................................. 24
2.2.1 Business result at Son Ha International Corporation..................................24
2.2.2 Structure and sources of working capital at Son Ha International
Corporation (SHI)................................................................................................26
2.2.2.1 Working capital structure at Son Ha International Corporation..............26
2.2.2.2 Sources of working capital at Son Ha International Corporation (SHI) .. 29

2.2.3 The practical of working capital management at Son Ha International
Corporation..........................................................................................................31
2.2.3.1 General Working capital Management at Son Ha International
Corporation..........................................................................................................31

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2.2.3.2 The current situation of cash management of Son Ha International
Corporation..........................................................................................................34
2.2.3.2.1 Overview of cash and cash equivalents in total working capital from
2012 to 2014........................................................................................................ 34
2.2.3.2.2: Analyzing financial ratios for cash management at Son Ha
International Corporation.....................................................................................36
2.2.3.3 The current situation of account receivable management of Son Ha
International Corporation.....................................................................................38
2.2.3.3.1 Overview of account receivable management from 2012 to 2014.......38
2.2.3.3.2 Analyzing financial ratios for account receivables management..........42
2.2.3.4 The current situation of inventory management of Son Ha
International Corporation.....................................................................................44
2.2.3.4.1 Overview of inventory management from 2012 to 2014......................44
2.2.3.3.2 Analyzing financial ratios inventory management............................... 46
2.3

ASSESSMENT

OF

CURRENT

WORKING

CAPITAL

MANAGEMENT AT SON HA INTERNATIONAL CORPORATION........47
2.3.1 Company‟s achievements in managing working capital............................47
2.3.2 The shortcomings in managing working capital and the reasons...............48
CHAPTER 3: SOME SOLUTIONS TO IMPROVE EFFICIENCY OF
WORKING

CAPITAL

MANAGEMENT

AT

SON

HA

INTERNATIONAL CORPORATION.............................................................52
3.1

ORIENTATIONS

AND

OBJECTIVES

FOR

FUTURE

DEVELOPMENT OF SON HA INTERNATIONAL CORPORATION......52
3.1.1 Prediction of Economic-Social context in 2015......................................... 52
3.1.2 Orientations and objectives for the future development at Son Ha
International Corporation.....................................................................................54

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3.2 SOME SOLUTIONS TO IMPROVE EFFICIENCY OF WORKING
CAPITAL

MANAGEMENT

AT

SON

HA

INTERNATIONAL

CORPORATION............................................................................................... 56
3.2.1 Precisely determining the working capital requirement of the company. .. 56

3.2.2 Accurately finding the reasonable sources to finance working capital
and balance the working capital structure............................................................58
3.2.3 Managing the payment process more effectively....................................... 61
3.2.4 Improving the management of inventories................................................. 63
3.3 Recommendations to improve the efficiency of working capital
management at Son Ha International Corporation........................................66
3.3.1 Some proposals to State Level....................................................................66
3.3.2 Some proposals to Son Ha International Corporation................................ 67
CONCLUSION..................................................................................................69
REFERENCES

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1. INTRODUCTION
1.1. Rationale of the study
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. Enterprises that have paid a lot of attention in managing
capital and using them efficiently gain a lot of opportunities to generate much
more working capital internally, thereby lowering costs, improving their
performance and boosting their competitive position.
However, in fact, because of remnants of the global financial crisis,
geopolitical challenges and negative effects of the Ebola epidemic in West
Africa, domestic enterprises have to face a lot of difficulties as well as the
shortage of capital for many years. The challenge of efficiently managing and
using working capital becomes an urgent problem of all businesses. More and
more enterprises make losses because the ways they manage their working
capital is inefficient. This not only affects the survival and development of
enterprises but also adversely affects the whole national economy stability. The
waste of capital, using capital inefficiency and overlapped capital has limited
competitiveness and development among businesses. Therefore, to get rid of this
bad situation, businesses should ask themselves “How to improve the efficiency
of working capital management?.” This is not a simple question, but a hard
question that enterprises can not deal with immediately. They should have an
appropriate, proper and reasonable strategy that can draw different ways to
improve the efficiency of working capital management, simultaneously focus on
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capital management activities in utilization to gain optimum profitable target and
keep sustainable development.

To be aware of the importance of working capital and be inspired of the
necessity of effectively managing working capital of during training time at SON
HA International Corporation, as well as based on knowledge and practical
experiences I got during the internship, I‟m going to choose the topic: “Some
solutions to improving the efficiency of working capital management at Son Ha
International Corporation” as my graduate thesis title.
1.2. Aims of the study
- To provide the knowledge and information of working capital
management activities at Son Ha International Corporation
- To understand the situation of working capital management activities at
Son Ha International Corporation
- To identify and analyze the causes of the drawbacks of Son Ha
International Corporation‟s working capital management.
- To suggest main methods to improve and strengthen the efficiency of
working capital management
1.3. Methods of study
Based on knowledge at university, books and self-accumulation and to
achieve these above objectives, several methods of studying the thesis are used
as follow:
- Figure collection: from websites of Son Ha International Corporation,
books, magazines, internet and internal information of the corporation.
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- Inductive, deductive and statistical method
- Figure comparison, data evaluation, judgment and conclusion.
- Method of analyzing, summarizing, synthesizing materials and books
from the theoretical background.
1.4. The scope of the study
The research focuses on the efficiency of working capital management at
Son Ha International Corporation from 2012 to 2014 and suggestions to improve
this activity.
1.5. Organization of the study
Besides the Contents, Introduction, Conclusion and References, the thesis
consists of 3 chapters.
 Chapter 1: This chapter provides a general overview of working capital
and the necessary of improving the efficiency of working capital
management
 Chapter 2: The main part of the thesis. It gives the overview of the
development of Son Ha International Corporation and the current
management of working capital in this corporation.
 Chapter 3: This chapter gives the orientations for the future development
of Son Ha International Corporation and provides some practical
recommendations and solutions to improve the efficiency of working
capital management of this company.

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CHAPTER 1:
THEORETICAL BACKGROUND OF WORKING CAPITAL AND
WORKING CAPITAL MANAGEMENT
1.1 OVERVIEW OF WORKING CAPITAL
1.1.1 Definition of working capital
Every enterprise is regarded as a cell of the economy. Enterprises conduct
business activities in order to create products and services for the society and
maximize profits.
To carry business activities, enterprises need an adequate amount of
business capital and it is broadly divided into two groups: Fixed capital and
Working capital. Fixed capital refers to the funds invested in fixed assets of a
firm in the form of land, building, machinery etc. Working capital refers to the
funds invested in the current assets of a firm such as raw materials, work-inprogress, finished goods, receivables, cash etc.
From the viewpoint of manufacturing process, working capital means a part of
capital, which is required to keep the flow of production smooth and continuous.
Working capital also refers to the „circulating capital‟ which is required to
meet the day to day operations of a business firm. Working capital may be
defined by various authors as follows:
According to Weston & Brigham: “Working capital refers to a firm’s
investment in short term assets, such as cash amounts receivables, inventories
etc” (1)
Mead, Baker and Malott also state that: “Working capital means current
assets”(2)
Pham Thi Hong Ngan CQ49/51.03
(1) (2) (3) ICWAI Working Capital (Part 1) - Financial Management. & International Finance study
material, Copyright © 2009 Institute of Cost and Works Accountants of India, page 203.

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J.S.Mill also acknowledged: “The sum of the current assets is the working
capital of the business” (3)
Last but not least, the accounting principles of board of American Institute
of Certified Public Accountants has defined the working capital as under:
“Working capital is represented by the excess of current assets or 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”
Thus, we can understand working capital as the funds available to use for
day-to-day operations of an enterprise. In other words, the capital invested into
the business to carry on the continuous operational activities is called the
„working capital.‟ It is undeniable that working capital is considered as flesh and
blood of an enterprise and lack of working capital in a business will result in
interruption or discontinuation of its day-to-day operational activities.
Working capital of a business is invested in its current assets and current
liabilities. It is defined as the difference between current assets and current
liabilities. Current assets are the most liquid of your assets, meaning they are
cash or can be quickly converted to cash. Current liabilities are any obligations
due within one year.
Working capital (WC) is calculated by subtracting a corporation‟s current
liabilities from its current assets as follow:
Working Capital = Current Assets - Current Liabilities (1)
Whenever the total current assets exceed the total current liabilities, it
results in a „positive working capital.‟ Positive working capital is essential for
your company to meet its continuous operational needs. The availability of

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(1) Corporate Finance Syllabus, copyright © 2014 Academy of Finance, Chief author PhD.
Vu Van Ninh, page 208

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working capital influences your company's ability to meet its trade and shortterm debt obligations, as well as to remain financially viable.
Whenever the total current liabilities exceed the total current assets, it
results in a „negative working capital.‟ The danger of having negative working
capital is that a corporation may be unable to meet its short-term liabilities.
Negative working capital may also be a sign of trouble ahead. If negative
working capital remains over a long period of time, this may be an indication
that sales volumes are on the decline.
1.1.2 Chracteristics of working capital
Working capital takes part in all production cycles and to be used
completely in the production process. Therefore, it can not keep the originally
physical form. According to the Article “Current Assets and Their Key Features
in Working Capital Management” - eFinanceManagement.com and Corporate
Finance Syllabus, Academy of Finance, working capital can have following
characteristics:
- Working capital in the rotation process always changes the forms of
expression.
- Working capital transfers all the values right in a time and get a full
refund after each business cycle.
- Working capital completes a circuit after a business cycle.

- Working capital is very liquid for it can be converted as cash any time
without losing anything.
- Investments in current assets such as working capital come with less
risk for it is just for short term.

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- Since working capital is a short term asset that will last for a year only,
there will be no need for adoption of a special accounting system.
1.1.3 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:
Classification of working capital

Basis of concept

Gross Working
Capital

Basis of time

Net Working
Capital

Permanent
Working Capital

Temporary
Working Capital

Seasonal Working
Capital

Reserve Working
Capital

Special Working
Capital

Regular Working
Capital

Figure 1.1: Classification of working capital (1)

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(1) ICWAI Working Capital (Part 1) - Financial Management. & International Finance study material,
Copyright © 2009 Institute of Cost and Works Accountants of India, page 203.

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1.1.3.1 On the basic of concept.
From the conceptual point of view, working capital is classified into two parts.
They are 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)
Net working capital 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 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)
1.1.3.2 On the basic of time
From the timely point of view, 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 continously required by a firm or
carrying out its business activities and that cannot be converted into cash in
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(1) (2) Working Capital Management Basics, MBA Notes, Copyright © 2013

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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.
 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…
1.2

WORKING CAPITAL MANAGEMENT IN BUSINESS

1.2.1 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
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successfully without an adequate amount of working capital because it is
considered as the flesh and blood of an enterprise. Hence all enterprises
definitely need to find ways to manage their working capital on their own
effectively and efficiently.
According to Corporate Finance Syllabus, Academy of Finance, copyright
© 2014, page 208: “Working capital management is the process of managing
and monitoring activities related to working capital”
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.
1.2.2 Objectives of working capital management
In today‟s economy, if enterprises want to maximize profits, one of the
important tasks they have to do is managing working capital efficiently. Thus,
efficiency working capital management becomes a significant issue that every
business needs to concern about. The concept of efficiency of managing working
capital must be understood as the objectives of working capital management on
two aspects (According to Corporate Finance Syllabus, Academy of Finance,
copyright © 2014, page 208).

 First, effectively manage the day-to-day activities of the business to firstly
improve the firm‟s profitability.
 Second, ensure the firm has sufficient liquidity to meet its short-term
obligations.

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1.2.3 Assessment criteria
Working capital management is concerned with the problems how to
manage effectively current assets, current liabilities and the relationship between
them. The intention is to have optimum investment in working capital. The level
of current assets to be maintained should be sufficient enough to cover its current
liabilities with a reasonable margin of safety. Significant amounts of working
capital can be invested in inventories of raw materials, work-in-progress and
finished goods or account receivables. Moreover, the company also needs an
adequate amount of working capital to carry out day-to-day activities. The
various sources available for financing working capital requirements should be
properly managed to ensure that they are obtained and utilized in the best
possible manner. Therefore, when assessing the efficiency of working
management, we should study three main criteria: Cash management,
Receivables management and Inventory management.
1.2.3.1 Cash management
Cash is regarded as the business's lifeblood. If managed well, the company

remains healthy and strong. Vice-versa, the company goes into bad situation.
Companies need to carry sufficient level of cash in order to ensure they can meet
day-to-day expenses. Cash is also required to be held as a cushion against
unplanned expenditure, to guard against liquidity problems. It is also useful to
keep cash available in order to be able to take advantage of market opportunities.
Cash management is one of the key areas of working capital management.
Cash management is important for any new or growing business. Every firm
should have adequate cash, neither more nor less. Inadequate cash will lead to

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production interruptions, while excessive cash remains idle and will impair
profitability.
So what is cash management?
We can understand the term “cash management” as the way to achieve the
objectives of the firm: maximum profitability with maximum liquidity of the
firm. It is the management's ability to recognize cash problems before they arise,
to solve them when they arise and having made solution available to delegate
someone carries them out.
Cash management is a critical activity for companies of all sizes. Assuring
that a company has sufficient funds when and where they are needed is a
challenge for financial managers.
Especially, to assess the cash management efficiency, we usually use a

formula called “liquidity ratios”. Liquidity ratios are used to determine a
company‟s ability to meet its short-term debt obligations. Investors often take a
close look at liquidity ratios when performing fundamental analysis on a firm.
Since a company that is consistently having trouble in meeting its short-term
debt is at a higher risk of bankruptcy, liquidity ratios are a good measure of
whether a company will be able to comfortably continue as a going concern.
1.2.3.2 Inventory management
Inventory plays an important part in the working capital of many business
concerns. Inventory is a major item of current assets. This includes raw
materials, work-in-process and finished goods. Raw materials consist of those
units or input which are used to manufactured goods that require further
processing to become finished goods. Finished goods are products ready for sale.
Thus, inventory may be defined as “Stock of goods that is held for future use”.
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Since inventories constitute about 50 to 60 percent of current assets, the
management of inventories is crucial to a successful working capital
management. Working capital requirements are influenced by inventory holding.
Hence, there is a need for effective and efficient management of inventories.
Inventory management helps business maintain a trade off between
carrying costs and ordering costs which results into minimizing the total cost of
inventory. It also facilitates maintaining adequate inventory for smooth
production and sales operations. Moreover, it helps avoids the stock-out problem

and suggests the proper inventory control system to be applied by a firm to avoid
losses, damages and misuses.
A good inventory management is important to the successful operations of
most organizations. Inventory management refers to an optimum investment in
inventories. It should neither be too low to effect the production adversely nor
too high to block the funds unnecessarily. Excess investment in inventories is
unprofitable for the business. Both excess and inadequate investments in
inventories are not desirable. The firm should operate within the two danger
points.
The purpose of inventory management is to determine and maintain the op
timum level of inventory investment.
1.2.3.3 Accounts receivables management
Besides cash and inventories, receivables are one of the three primary
components of working capital. Receivables mean the book debts or debtors and
these arise, if the goods are sold on credit. Receivables occupy second important
place after inventories and thereby constitute a substantial portion of current
assets in several firms. The capital invested in receivables is almost of the same
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amount as that invested in cash and inventories. Receivables provide protection
to sales from competitions. Company that manages efficiently receivables will
avoid losses and gain lots of profits. Thus, management of accounts receivable is
one of the most important tasks that every enterprise should pay attention to

achieve the goals they set up.
As mentioned above, accounts receivables management is very important
and complicated because it is related to the organization and preservation of
working capital. It includes two main tasks: determining the credit policy and
monitoring accounts receivables.
(i) Determining the credit policy means that manager must first decide on
its credit standards. The decision of how much credit risk to assume plays a large
role in determining how much money a firm ties up in its receivables. While a
restrictive policy can result a lower sales volume, the firm will have a smaller
investment in receivables. After a firm decides on its credit standards, it must
next establish its credit terms. The firm decides the length of the period before
payment has been made (the “net” period) and chooses whether to offer a
discount to encourage early payments. If it offers a discount, it must also
determine the discount percentage and the discount period. The last step in the
development of the credit policy is to decide on a collection policy. The content
of this policy can range from doing nothing if a customers is paying late, to
sending a polite letter of inquiry, to changing interest on payments extending
beyond a specified period, to threatening legal action at the first late payment.
(ii) Monitoring accounts receivables is after establishing a credit policy. A
firm must monitor its accounts receivables. It is aimed to analyze whether its
credit policy is working effectively or not. Two tools that firms use to monitor
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the accounts receivables are the Days Sale Outstanding (DSO) (or average
collection period) and the aging schedule.
Days Sale Outstanding (DSO) = (Receivables) / (Average Sales Per Day) (1)
The “accounts receivable days” are the average number of days that it
takes a firm to collect on its sales. A firm can compare this number to the
payment policy specified in its credit terms to judge the effectiveness of its credit
policy.
- Aging schedule.
An aging schedule categorizes accounts by the number of days they have been
on the firm‟s books. It can be prepared using either the number of accounts or
the dollar amount of the accounts receivable outstanding.
1.2.3.4 Some ratios assess the efficiency of working capital
management (i) Liquidity Ratios:
These ratios are probably the most commonly used of all the business
ratios.
 Current ratio: the current ratio shows the ability of your business to
generate cash to meet its short-term obligations
(2)

Current ratio

=

Current assets
Current liabilities

 Quick ratio: also known as acid test ratio. It gives users a better picture of
their ability to meet their short-term obligations, regardless of your sales
levels.
(3)

Quick ratio = Current assets – Inventory
Current liabilities

Pham Thi Hong Ngan CQ49/51.03

15


Academy of Finance

Graduation thesis

Cost of sales
Average stock held through the year

360 days
Inventory turnover

 Cash ratio: As the name implies, this ratio is simply the ratio of cash and
equivalents compared to current liabilities. This ratio looks only at assets
that can be most easily used to pay off short-term debt, and it disregards
receivables and short-term investments.

(4)

Cash Ratio =

Cash and Equivalents
Current Liabilities

(ii) The efficiency ratios:
Efficiency ratios measure how effectively the company utilizes these
assets, as well as how well it manages its liabilities.
 Inventory turnover ratio: illustrates how well a company manages its
inventory levels.
(5)

Inventory turnover ratio =

 Days’ sales in inventory: It tells the business owner how many days, on