Working capital management at advanced network systems vietnam limitted company

ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUẢN TRỊ VÀ KINH DOANH
---------------------

PHẠM THỊ KIM DUNG

WORKING CAPITAL MANAGEMENT AT ADVANCED
NETWORKS SYSTEM VIET NAM LIMITED COMPANY
QUẢN TRỊ VỐN LƯU ĐỘNG
TẠI CÔNG TY TNHH THIẾT BỊ VIỄN THÔNG ANSV

LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

HÀ NỘI - 2020


ĐẠI HỌC QUỐC GIA HÀ NỘI
KHOA QUẢN TRỊ VÀ KINH DOANH
---------------------

PHẠM THỊ KIM DUNG

WORKING CAPITAL MANAGEMENT AT ADVANCED
NETWORKS SYSTEM VIET NAM LIMITED COMPANY
QUẢN TRỊ VỐN LƯU ĐỘNG
TẠI CÔNG TY TNHH THIẾT BỊ VIỄN THÔNG ANSV
Chuyên ngành: Quản trị kinh doanh
Mã số: 60 34 01 02
LUẬN VĂN THẠC SĨ QUẢN TRỊ KINH DOANH

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS. PHẠM THỊ THANH HÒA

HÀ NỘI - 2020


DECLARATION
The author confirms that the research outcome in the thesis is the result of
author‟s independent work during study and research period and it is not yet
published in other‟s research and article.
The other‟s research result and documentation (extraction, table, figure,
formula,

and other document) used in the thesis are cited properly and the

permission (if required) is given.
The author is responsible in front of the Thesis Assessment Committee,
Hanoi School of Business and Management, and the laws for above-mentioned
declaration.
Hanoi, September 3rd, 2019

i


ACKNOWLEDGEMENT
I would like to take this opportunity to express my deepest gratitude and
appreciation to the people who have given me their assistance throughout my
studies during the preparation of this thesis. They are 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 especially like to thank my advisor, Assoc. Prof. Pham
Thi Thanh Hoa, for her continuous encouragement and especially for her academic
and creative guidance. She has been my source for inspiration thoughout my thesis.

Without her support, I would not be able to complete my thesis. And I really
appreciate her patience in reading and correcting my thesis.
I am indebted to all my teachers at Academy of Finance for their guidance
and help with valuable lessons thoughout four years of study.
Moreover, I would also like to thank all of you and your colleagues who
have been working at ANSV Co., Ltd, who helped me answer the survey
questionnaire as a data source for analyze and produce research results of this
graduate thesis.
Last but not least, many thanks to my family, friends and classmates for their
great love and care in both spirit and health during preparation for the
undergraduate thesis in Finance.
Finally, I have to give myself credit because I endured to the end of my
thesis instead of giving up, losing my mind or getting sick due to the stress.

Student

Pham Thi Kim Dung

ii


TABLE OF CONTENTS

DECLARATION ........................................................................................................ i
ACKNOWLEDGEMENT ......................................................................................... ii
LIST OF ABBREVIATIONS .....................................................................................v
LIST OF TABLES .................................................................................................... vi
LIST OF CHARTS .................................................................................................. vii
INTRODUCTION.......................................................................................................1
Chapter 1: THEORETICAL BACKGROUND OF WORKING CAPITAL AND

WORKING CAPITAL MANAGEMENT..................................................................2
1.1. Working capital and the sources of working capital ............................................2
1.1.1. Definition and characteristics of working capital .........................................2
1.1.2. Classification of working capital ...................................................................3
1.2. Working capital management of business ...........................................................4
1.2.1. Definition and objectives of working capital management ..........................4
1.2.2. The content of working capital management ................................................5
1.2.3. The criteria evaluating working capital management of the Company. ......17
1.2.4. Factors affecting working capital management efficiency ..........................22
Chapter 2: CURRENT SITUATION OF WORKING CAPITAL MANAGEMENT
AT ANSV CO., LTD. ...............................................................................................25
2.1. Overview of ANSV CO., LTD ..........................................................................25
2.1.1. Foundation and development .......................................................................25
2.1.2. Characteristics of business operations .........................................................26
2.1.3 An overview of financial situation ...............................................................29
2.2. current situation of working capital management at ansv company ..................41
2.2.1. Determining working capital requirements. ................................................41
2.2.3 Current status of working capital financing .................................................48
2.2.4. Cash management. .......................................................................................52
2.2.5 Receivables management..............................................................................61
2.2.6 Inventory management .................................................................................69
iii


2.2.7. The criteria evaluating the efficiency of working capital management ......77
2.3 Evaluating the management of working capital .................................................80
2.3.1 Achievements. ..............................................................................................80
2.3.2 Shortcomings and reasons ............................................................................81
2.3.3 Reasons of shortcomings ..............................................................................83
Chapter 3: SOME SOLUTIONS TO IMPROVE EFFICIENCY OF WORKING

CAPITAL MANAGEMENT AT ANSV COMPANY .............................................86
3.1. Orientations and objectives for future development at ANSV company ..........86
3.1.1. Economic-Social context .............................................................................86
3.1.2 Orientations and objectives for the future development of ANSV company......88
3.2. Some solutions to improve working capital management at ANSV company..89
3.2.1. Determining the right working capital requirements. ..................................89
3.2.2 Improving the efficiency of inventory management ....................................90
3.2.3 Improving the efficiency of receivables management ..................................92
3.2.4. Strengthening the management and improvement of personnel organization ...96
3.2.5. Improving the management of cost .............................................................96
3.2.6. Improving the rotation of working capital by promoting access to new
technologies in manufacturing ...............................................................................97
3.3. The conditions for implementing the measures .................................................98
3.3.1 Some proposals to Department of Telecommunications - Ministry of
Information and Communications .........................................................................98
3.3.2 Some proposals to State. ...............................................................................99
3.3.3 Some proposals to Commission for the Managenment of State Capital at
Enterprises ...........................................................................................................100
3.3.4 Some proposals to Vietnam Post and Telecommunications Group ...........101
CONCLUSION, LIMITATION, IMPLICATION .................................................102
REFERENCE ..........................................................................................................104

iv


LIST OF ABBREVIATIONS

BEP

Basic Earnings Power

CA

Current Assets

CL

Current Liabilities

EOQ

Economic Order Quantity

JSC

Joint Stock Company

NWC

Net Working Capital

ROA

Return on Assets

ROE

Return on Equity

VND

Viet Nam dong

WC

Working Capital

WCM

Working Capital Management

WCR

Working Capital Requirements

CTIN

Post and Telecommunication and
Informatics Joint Stock Company

POT

Post and Telecommunication
Equipment Joint Stock Company

v


LIST OF TABLES

Table 2.1 The situation of assets in 2016, 2017, 2018 of ANSV Company ........... 32
Table 2.2. The structure of capital sources in 2016, 2017 and 2018 of ANSV
Company. .................................................................................................................. 35
Table 2.3. INCOME STATEMENT IN 2016, 2017, 2018 OF ANSV COMPANY 38
Table 2.4. Profitability ratios 2016, 2017, 2018 of ANSV company ....................... 40
Table 2.5 The actual working capital requirements 2016, 2017, 2018 of ANSV
company .................................................................................................................... 42
Table 2.6. The expected working capital requirements determined on the basis of
actual net of revenue in 2016, 2017, 2018 of ANSV company ............................... 43
Table 2.7 The allocation working capital in 2016, 2017 and 2018 of ANSV
company .................................................................................................................... 45
Table 2.8. Working capital resourse of ANSV in 2016, 2017, 2018 ........................ 48
Table 2.9. The situation of fluctuations by cash of ANSV Company in 2016, 2017
and 2018 .................................................................................................................... 54
Table 2.10. Liquidity ratios in 2016, 2017 and 2018 of ANSV company ................ 56
Table 2.11. The indicators for evaluating the situation of managing cash in 2016,
2017 and 2018 of ANSV company. ......................................................................... 59
Table 2.12 Detail of accounts receivables 2016, 2017, 2018 of ANSV company ... 63
Table 2.13. The situation of receivables management policy in 2016, 2017 and 2018
of ANSV company .................................................................................................... 65
Table 2.14. The situation of accounts receivable and payable in 2016, 2017 and
2018 of ANSV company ........................................................................................... 67
Table 2.15. Inventory structure in 2016, 2017 and 2018 of ANSV company .......... 73
Table 2.16. The efficiency of use inventory in 2016, 2017, 2018 of ANSV company ... 75
Table 3.1. Table of quality monitoring using inventory, finished products of ANSV
Company ................................................................................................................... 91
Table 3.2. ANSV debt monitoring table for age customers ...................................... 95

vi

LIST OF CHARTS
Chart 2.1 The structure of capital at end of 2016, 2017, 2018 ................................. 31
Chart 2.2 The structure of capital sources at end of 2016, 2017, 2018 .................... 34
Chart 2.3 Profitability ratios 2016, 2017, 2018 of other telecommunication
equipment companies ................................................................................................ 40
Chart 2.4 Capital financing model of ANSV company at 31/12/2016 ..................... 48
Chart 2.5 Capital financing model of ANSV company at 31/12/2017 ..................... 49
Chart 2.6 Capital financing model of ANSV company at 31/12/2018 ..................... 49
Chart 2.7 Liquidity ratios of other telecommunication equipment company in 2016,
2017, 2018 ................................................................................................................. 57
Chart 2.8 Accounts receivable turnover of telecommunication equipment companies
in 2016, 2017 and 2018 ............................................................................................ 66
Chart 2.9The efficiency of use inventory of telecommunication equipment companies
in 2016, 2017 and 2018 of ANSV company ........................................................... 76

vii


INTRODUCTION
1. Rational of the study

Nowadays, in our country economic situation, besides the enterprises doing
business effectively, many businesses are still confused in capital management.
Even, many businesses cannot simply reproduce, leading to losing business capital
after every business cycle and businesses are always in a lack of capital, lossmaking business situation. Those enterprises are always in the risk of bankruptcy.
There are numerous of reasons for that reality, ineffective capital management is the
most indispensable one.
Capital is not only a category of commodity economy, but also one of the
most important factors impacting on the production and good circulation. Therefore,

it‟s vital for all businesses to pay attention to the working capital management to
maximize the company‟s profitability for it‟s survival and development. Working
capital management plays an important role in operating expense changing, cost of
products, then impacts considerably on company‟s profitability. Thus, working
capital management is a pressing issue for all businesses
Advanced Networks System Viet Nam Co., Ltd has precursor which was a
joint venture company, so it was provided capital regularly and fully. However,
after the joint venture‟s revulsion of capital, ANSV transformed into a two-member
limited liability company. In the process of transition, the Company met many
difficulties in working capital management.
In the process of working at Advanced Networks System Viet Nam Co.,
Ltd, grasping the situation combined with the studying of basic arguments about
working capital and working capital management, the author realized that the
working capital management at Advanced Networks System Viet Nam Co., Ltd
was really necessary and urgent. Therefore, on the basis of the contribution to
working capital management of the Company, and the guidance of Assoc. Prof.
Dr. Pham Thi Thanh Hoa, the author chose the issue of "Working capital
management at Advanced Networks System Viet Nam Co., Ltd" as the subject of
the master‟s thesis.
1


The thesis focuses on studying the current status of working capital
management at Advanced Networks System Viet Nam Co., Ltd to break out the
strengths and weaknesses as well as the problems to propose some solutions which
improve business efficiency to the Company.
2. Overall of the reseach

Practically speaking, working capital management not only is a critical part of
business in every enterprise but also contribute considerably to the economic

development, therefore it has been considered by many researchers as well as managers.
Relating to working capital management theory, there are numerous number of
authors researching, analyzing as well as summarizing definitions, overal principles
and thesis mentioned in popular textbooks such as Short-term financial
management, Nguyen Tan Binh, Le Minh Duc (2010), published by Statistic
Publisher; Business Finance textbook of Assoc. Prof. Dr. Bui Van Van and Assoc.
Prof. Dr. Vu Van Ninh, published by Finance Publisher in 2015; Textbook of
Commercial Enterprise Management of Assoc. Prof. Dr. Hoang Minh Duong
published by Labor - Social Publisher.
In terms of practical research on working capital management, there are many
valuable works of researchers and Masters in many different fields. Each practical
study summarizes the issues affecting working capital and working capital
management as well as suggests solutions to improve the efficiency of working
capital using for enterprises. The details are as follows:
-

Author Nguyen Thi Hong Lan with research topic of working capital
management at Phu Yen Mineral Joint Stock Company - Master's thesis - Da
Nang University in 2012. The thesis has systematized the general theoretical
basis on working capital in the enterprise, analyzed the current situation of
working capital management, then given solutions to improve working
capital management at Phu Yen Mineral Joint Stock Company;

-

Topic "Working capital management at Song Da 10 joint stock company,
Song Da Group of author Nguyen Tien Nhat also mentioned some basic
theoretical issues about working capital management in the company in the
2

period of 2008 to 2010. The author has evaluated, commented on the
achievements as well as issues then give some basic solutions to improve
working capital management at the Company;
-

Author Tran Van Nha with the research topic "Working capital management at
Da Nang Food Joint Stock Company" MBA thesis - Danang University - 2012.
The thesis presents primary problems of working capital in the enterprise,
mentions methods to evaluate the efficiency of working capital management,
analyzes the situation of working capital management, thereby giving solutions to
improve the efficiency of using working capital in the Company.

All of the above works have researched on many aspects relating to financial
management in both theoretical and practical aspects. In general, studies have
mentioned the following issues:
-

Giving basic and theoretical issues, methods of analyzing the efficiency of
working capital management

-

Evaluating the current status of working capital management

-

Proposing measures to improve the efficiency of using working capital for
each research object

-

The projects applied to studying enterprises and operate in Vietnam.

Although there have been many works relating to the research topic, these
projects are still limited and incomplete in the implementation process as well as the
results. In addition, working capital management in a commercial enterprise
deploying projects in the telecommunication sector is very different from
enterprises of other industries in the economy, bearing particularities and following
particular management regulations.
Unless specific studies, applying the general theoretical basis of working capital
management and combining with specificities of business lines, it is impossible to
have an overall and reality view about working capital management to achieve
business efficiency. Therefore, the thesis will be a new research direction to help
improving working capital management at Advanced Networks System Viet Nam
Co., Ltd to meet the requirements and actual conditions.
3


3. Aims of the study

The research objective of the thesis is to propose solutions to enhance working
capital management at ANSV Co., Ltd. in the coming time. To achieve this goal,
the dissertation performs the following research tasks:
- Systematizing theoretical issues about working capital management
- Analyzing and evaluating the current status of working capital management at
Advanced Networks System Viet Nam Co., Ltd.
- Proposing solutions to improve working capital management at Advanced
Networks System Viet Nam Co., Ltd.
4. Objects of the study

Objects of the study of thesis is working capital management at Advanced
Networks System Viet Nam Co., Ltd
5. Scopes of the study

-

Content: The thesis studies, systematizes and analyzes the contents of

working capital management at the Company.
-

Scope: This research is conducted at Advanced Networks System Viet Nam

Co., Ltd
-

Time: Data on working capital management is collected in 2016 and 2017,

2018 and other relevant periods (if any)
6. Methods of the study

-

Analysis and synthesis method: used to systematize the theoretical basis of

working capital management. The thesis studies textbooks and documents relating
to research topic, then analyzes, synthesizes and systematizes in a scientific way to
serve the research process.
-

Statistical method: used to correct and systematize primary and secondary

documents on working capital management from Advanced Networks System Viet
Nam Co., Ltd then the author synthesizes into tables, documents which can reflect
characteristics for effective indicators of working capital. Primary data is used in the
research phase by technical interview directly with employees who have been
working at ANSV Co., Ltd. Secondary data uses data collected from internal
4


documents, reports and information of ANSV Co., Ltd. from 2016 - 2018, data
sources collected from outside such as central ministries, publications have been
published (textbooks, articles, magazines, internet, dissertations, ...).
-

Comparison and evaluation methods: used to make comparison relatively,

absolutely fluctuate trends of indicators, to help the author understand the
relationship, development speed, popularity and fluctuate trends in economic
indicators, systematize, reflect the efficiency of working capital management to
evaluate the current status of working capital management at Advanced Networks
System Viet Nam Co., Ltd
-

Experts interview: used to determine current situation of working capital

management, to help understand about the stage of working capital management at
Advanced Networks System Viet Nam Co., Ltd (number of interviewees was 05).
This method collected primary data, the comments of expert were summazied and

used to analyze the causes.
7. Structure of the study

Beside the introduction, conclusion and references, the thesis includes 3
chapters as follows:


Chapter 1: THEORETICAL BACKGROUND OF WORKING

CAPITAL AND WORKING CAPITAL MANAGEMENT.


Chapter

2:

CURRENT

SITUATION

OF

WORKING

CAPITAL MANAGEMENT AT ANSV CO., LTD.


Chapter 3: SOME SOLUTIONS TO IMPROVE EFFICIENCY

OF WORKING CAPITAL MANAGEMENT AT ANSV CO., LTD

5


Chapter 1: THEORETICAL BACKGROUND OF WORKING CAPITAL
AND WORKING CAPITAL MANAGEMENT.

1.1. Working capital and the sources of working capital
1.1.1. Definition and characteristics of working capital
1.1.1.1 Definition of working capital
Besides fixed assets, every enterprise wanting to carry out the activities of
production and business must own current assets. The current assets structures are
various based on different types of business. However, in a manufacturing
enterprise, there are two components of current assets: operating current assets and
circulating current assets, in which:
Operating current assets: include assets in the stage of production storage
such as main raw materials; auxiliary materials; fuels… and assets in the stage of
production such as semi-finished products; unfinished products;…
Circulating current assets: include products/goods whose have not been
consumed (inventories), cash and receivables.
In the manufacturing and operating process, operating current assets and
Circulating current assets are always moving, transforming and interchanging. To
ensure the manufacturing and operating process carry out continuously, the
enterprise must have a particular number of current assets. Therefore, the enterprise
has to give some advance of capital called working capital for current assets to set
up this type of asset.
So, the enterprise’s working capital is the advance money that enterprise use
to invest in setting up current assets which are necessary for enterprise‟s
manufacturing and operating activities.
1.1.1.2 Characteristics of working capital.

When joining in manufacturing business operation, working capital
incessantly changes morphological expression. From the form of money to different
forms and when finishing product consumption process, working capital comes
back to the first form that is capital in cash.
2


The movement of working capital through stage is described as follows:
Work-in-

Cash &
Equivalent

progress and

Inventories

finished

cash

goods

Cash &
Equivalent
cash

This movement of working capital is called “capital circulation”
When joining in manufacturing business operation, since dominated by the
characteristic of current assets, working capital has 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.
Since these characteristics of working capital, so that, working capital
management method is on quota, it means working capital quota for each product
unit, capital quota for each cycle of manufacturing business operation. However, in
market economy, it is usually difficult to determine working capital requirement
toward each cycle of manufacturing business operation, therefore we usually base
on important target: most economical of working capital.
1.1.2. Classification of working capital
In the enterprise, the content of organization and management of working
capital plays an important role, which is an important part of the management of
financial activities of enterprises. Managing working capital to ensure reasonable,
economical and efficient use of working capital. The more efficient the use of
working capital is, the more products that can be produced, ie the better the
procurement process, the production and consumption processes. Working capital
has many types that participate in a production and business cycle and often change
3


material form, so want to manage working capital well need to proceed sorting
according to the following criteria:
1.1.2.1 According to expression patterns

 Capital in cash and receivables:

- Cash: includes cash on hand, bank deposits and cash in transit.
- Accounts receivables: includes mainly accounts receivables and advance
payments.

 Capital in materials and goods: includes materials, work in
progress, semi-finished products and finished products.
This classification helps the business assess the level of inventory reserves,
the solvency and liquidity of the investment assets in enterprise.
1.1.2.2 Based on the role of working capital in the production process

 Working capital in the reserved state includes the
types of capital such as material capital, additive material capital
fuel capital, tool & instruments,…

 Working capital in the production process includes
types of capital, such as: goods in process, homemade endproduct, prepare items…

 Working capital in circulation includes finished
product, cash, short-term investment and the capital during the
payment process.
This classification shows the role of each type of WC in the process of
production and business, from which to choose appropriate structure of capital to
invest, ensuring the balance of production capacity among stages in the process of
production and business of enterprises.
1.2. Working capital management of business
1.2.1. Definition and objectives of working capital management
1.2.1.1. Definition of working capital management
In market economy condition, its mechanism sets up the requirements of
management and organization, which requires enterprises to find themselves exists
4

and grows direction. To snap up bargain and overcome the challenge, to keep firm‟s
foothold in the competition, firms need to make right decision about creating and
managing manufacturing business capital in general and working capital in
particular most efficiency and to make profit for firms.
“Working capital management is the process of managing and monitoring
activities related to working capital” (Vu Van Ninh, 2014)
1.2.1.2. Objectives of working capital management

 First, effectively manage the day-to-day activities of
the business to firstly improve the firm‟s profitability.
The timely and sufficient mobilization of capital, savings on using capital help
firms to seize business opportunity, increase revenues and profits for corporation.
Choosing the right form and method of mobilizing capital can help firms to decrease
the cost of capital, contribute to increase profits and ROE for firms. On the other hand,
with maximum mobilizing of amount WC for manufacturing business operation can
help firms to avoid loss by blocked funds, increase inventory turnover, receivables,
which contribute to grow up profits after tax for firms.

 Second, ensure the firm has sufficient liquidity to meet its
short-term obligations.
Working capital is prerequisite for business‟s operation. In operation process,
firms frequently have the requirements of working capital for regular operation like
developing corporations. If a enterprise doesn‟t mobilize timely and enough
capitial, firm‟s operation will be difficulty and not carry out. So that, ensuring the
operation of the business to jog on regularly and continuously depends more on the
mobilization of capital of firms.
1.2.2. The content of working capital management
1.2.2.1 Determining working capital requirements and the methods

The permanent working capital requirements is the minimum working capital
required to ensure the normal and continuous operation of the business. Under this
level, business production of enterprises will be difficult, even stalled, interrupted.

5


But if above the necessary level, the situation of capital stagnation and capital use is
wasteful and inefficient.
Working capital requirements is the minimum capital, necessary trade and is
determined by the formula:
Working
capital

=

requirements

Inventory
requirements

Account

+

Receivables

Account
-

Payable to
suppliers

In which Inventory requirements is the minimum capital needed to store
raw materials, fuel, work in progress, semi-finished products, finished products of
the enterprise
To determine working capital requirements, we can use direct method and
indirect method:
a) Direct method:
This method directly identifies the demand for capital for inventory, accounts
receivable, accounts payable to suppliers and then aggregates into the working
capital total of enterprises.
Determine capital demand for inventories: including inventories for
production reserve stages, production stages and circulation stages
Working capital requirements in production reserving (reserve capital demand
for main materials, auxiliary materials, fuel, ...): based on the demand of using
average capital per day and number of reserve days for each type to determine and
then aggregate. General formula:
VHTK = ∑ ∑
In which
VHTK

: Inventory requirements

Mij

: The average daily amount of consumption for i Inventory

Nij

: Reserves days of i Inventory

n

: Types of inventories in need of reserves

m

: Stages need to reserve inventories

6


Working capital requirements in producting (Working capital requirements
to create unfinished products, semi-finished products, prepaid expenses ):
Vsx = Pn x CKsx x Hsd
In which :
Vsx

:

Operating working capital requirements

Pn

:

Average Production costs of products per day

CKsx

:

Producing cycling (day)

Hsd

:

Ratio of unfinished product and semi-finished products (%)

Working capital requirements in Circulating (including finished products reserves,
account receivables, account payables):
Determine fnished products requirements: is the minimum capital used to
form the inventory of finished products in stock, waiting for consumption,
determined according to the formula:
Vtp = Zsx x Ntp

In which:
Vtp : Finished products requirements
Zsx : Average Cost price per day planning period
Ntp : Reserves days of finished products

+ Determine account receivables requirements:
Vpt = Dtn x Npt

In which:
Vpt : Accounts receivables
Dtn : Average sales per day
Npt : Average period (day)

Determine account payable requirements:
Vpt = Dmc x Nmc

In which:
Vpt : Account payables for planning year
Dmc : Purchasing sales the average day of the planned period
Nmc : Average payment period for suppliers

 Direct method have advantages and disadvantages following below:
7


Advantages: it clearly reflects the demand of working capital for each type of
material and good in each stage of business. It can evaluate exactly the capital
needs of enterprises.
Disadvantages: complex calculation, take more time to determine working capital
requirements.
b) Indirect method:
This method is based on the analysis of the actual working capital use of the
company in the reporting year, the change in business size, the rotation speed of
working capital in the plan year or the fluctuation of working capital demand
according to the turnover of reporting year to determine the working capital demand
of the company in the plan year. There are some of methods:
Using adjusted rate of WC requirements between reporting and planning year :
Essentially, this method is based on the practice of the demand of WC in this
year to adjust according to the size of business and WC turnover in next year,
following formula:
VKH = ̅̅̅̅̅ x

x (1+ t%)

In which:
VKH : Working capital of planning year
̅̅̅̅̅ : Average using actual working capital of
reporting year
: Working capital rotation of planning year
: Working capital rotation of reporting year
t% : Rate of shorten rotation period working
capital of planning year

Operating Cycle Method:
This is probably best of the methods because it takes into account the actual
business or industry situation into consideration while giving an estimate of
working capital. The longer the working capital operating cycle, the higher would
be the demand of WC and vice versa. Following formula can be used to estimate or
calculate the working capital:
8


Working

Capital

Requirements

=

Net revenue
WC turnover in next year

 Advantages: this method is simple. It can help firm to evaluate
instantly working capital requirements for planing year, so as to determine
resonable soures.
 Disadvantages: the result of this method isn‟t high exactly.
Percentage of Sales Method: It is the easiest of the methods for calculating the
WCR of the company. This method is based on the principle of „history repeats
itself‟. It is a financial planning method based on the premise that predicted
sales are the driven, and most of the financial variables on the balance sheet
and income statement are functions of the forecasted sales.
 Advantages: This method is a simple prediction, not count to
changes in factors in future that will change the ratio of WC to turnover, so
this method is more suitable for forecasting WC
 Disadvantage: When using this method, requires operator to
understand the business characteristics of the company and must
understand the rules of the relationship between revenue to assets,
resources and appropriation of profits of enterprises.
1.2.2.2 The allocation of working capital
Working capital is a necessary condition for ensuring normal and continuous
business operations. Therefore, the organization of reasonable WC structure is a
great significance for enterprises, basis of the efficiency of WC usage, and
foundation for the development of each enterprise. Enterprises use working capital
effectively when they allocate WC in each stage: the purchase of reserved materials,
production and consumption of products in a reasonable way. Resonable allocation
increases the rotation of capital from one type to another types, from one form to
another forms, contributing to shorten the cycle of working capital, improving
production efficiency of enterprises.
Because of the difference of business characteristics, WC structure is also
different for each business. Therefore, the analysis of WC structure is necessary. It
9

helps us to see the situation of WC allocation and the proportion of each capital in
each rotation stage, thus identifying the key of working capital, finding the method
of efficient WC usage in each specific condition and in each firm. Thereby,
contributing to raising the efficiency of production and business of enterprise
Working capital structure.
Working capital structure reflects the proportional relationship between the
working capital components in the total working capital of the enterprise at a given time
The study of the structure of the structure will help us to see the situation of
allocation of resources and the proportion of each capital accounted for in the
rotation period to determine the key management of explosives and find all optimal
measures to improve efficiency use of working capital in specific conditions
Some of factors affecting to structure of working capital:
Factors about supplies, reserved materials, finished goods: The distance
between enterprises and suppliers of materials; possibility of providing of market;
delivery period and volume of materials supplied; the distance of business and
consumption market;…
The factors about manufacturing: Characteristics of technique; complexity of
manufactured products; the level of organization and production management of enterprise.
The factors about payment: Factors about withdrawing money of goods sold
such as resonable payment method, payment procedures,…; the implementation of
payment discipline among units, implementation of payment contracts, choice of
the form of payment also affect the structure of working capital.
Moreover, structure of WC is also affected by the charecteristics of season
production, the level of organization and management. In each stage, depending on
firm‟s abilities and conditions, each firm will choose itselfs resonable structure to
make sure that manufacturing business operations is the most efficient.
1.2.2.3. The working capital financing
a) The matching principle of funding model: All fixed assets and permanent

current assets are regularly secured by permanent capital resourses, the entire
temporary current assets are secured by temporary capital resourses.
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Advantages: help enterprises limit risks in payment, higher safety level.
Reduce costs in using capital.
Disadvantages: certainty is guaranteed but has not yet created the flexibility
to use the capital, which is usually the source, the certainty is more assured

Money
Temporary current assets
Temporary
capital
resourses

Permanent liquid assets

Permanent
capital
resourses

Fixed assets

Time

b) The conservative funding model: All fixed assets and permanent current assets
and a part of temporary current assets are secured by permanent capital
resourses and the remaining part of temporary current assets is secured by
temporary capital resourse

Advantages: Solvency and safety is high level.
Disadvantages: enterprises have to use long-term and medium-term loans,
so businesses have to pay more for using capital
Money

Temporary
capital
resourses

Temporary
liquid assets

Permanent liquid assets

Permanent
capital
resourses

Fixed assets

Time

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c) The aggressive model: The total fixed assets and part of the permanent current
assets are regularly secured by permanent capital resourses, while a part of
permanent liquid assets and the total temporary liquid assets secured by
temporary capital resourses.
Advantages: The cost of capital will be lowered because of the use of more

short-term credit, the use of capital will be more flexible. In fact, most businesses
choose this model
Disadvantages: The possibility of having risks is higher than the above two
models, so enterprises need to have experience and dynamism in organizing capital
sources
Money

Temporary
capital
resourses

Temporary liquid assets

Permanent
capital
resourses

Permanent liquid
assets

Fixed
assets

Time

1.2.2.3. Cash manegement
Cash is the most liquid asset and determines the solvency of the enterprises.
However, cash which itself is not profitable, it is only profitable when it is invested
for a certain purpose. To this characteristic of high liquidity assets of enterprises,
capital in cash is also vulnerable to loss, fraud and abuse.

Therefore, cash management of enterprises has a basic requirement to ensure
absolutely safety, high profitability, beside it must meet timely payment needs by
cash of enterprises.
The goal of cash management is (1) to maintain an adequate level of cash on
hand to meet the daily cash requirement in operation and (2) maximize the amount

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