UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ Nguyen Thi Kim Hue SOLUTION TO REDUCE CASH CONVERSION CYCLE AT THM., LTD COMPANY ID: 22130025 MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR. PHAM PHU QUOC Ho Chi Minh City – Year 2016 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT This thesis becomes a reality with the kind support and help of many individuals. I would like to extend my truthful thanks to all of them. Foremost, I would like to express my gratitude and sincere thanks to my advisor, PhD.
Pham Phu Quoc for his guidance, imparting his knowledge and expertise my study. Special thanks to members of THM Company for cooperating, supporting and providing necessary information regarding this thesis. My thanks and appreciations also go to my group mates who have cooperated with me to complete this thesis and classmates who have willingly helped me out with their abilities. Finally, I must express my very profound gratitude to my parents and to my spouse, for providing me with unfailing support and continuous encouragement throughout my years of study and through the process of researching and writing this thesis.
This accomplishment would not have been possible without them. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONTENT INTRODUCTION .1 First tentative problem.2 The second tentative problem.3 The third tentative problem .4 Ratio analysis and Dupont Model. ALTERNATIVE ANALYSIS AND CHOICE OF ALTERNATIVES .53 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of tables Table 1: THM ROA and ROE Table 2: Customer response about slow payment Table 3: Overall THM account receivable Table 4: Receivable Turnover ratio Table 5: Payable turnover ratio Table 6: THM inventories classify Table 7: THM inventories consolidated Table 8: Inventories turnover Table 9: THM sale revenue Table 10: THM cash conversion cycle Table 11: THM current ratio/quick ratio Table 12: THM Asset turnover Table 13: THM financial leverage ratio Table 14: THM profit Table 15: The solution assessment procedure LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com INTRODUCTION These days, the economic difficulty has affected significantly to development and profitability of Viet Nam companies. In a competitive market with hundreds company were born each day, with the same service, products, maintaining sales and innovating product to satisfy customers play an important role in the development process of entrepreneur.
Besides, company financial management decision has affected significantly to their performance that working capital management is an important component of this., Ltd company is running business as a 1st level agent of paint firm Dulux and Jotune, distributing the paint products to main customers, those are departments and the 2nd level painting agencies in HCM City. Company name: Cong ty TNHH Thuong mai va xay dung The He Moi Tax code: 0302696827 Head office: No 229, Tan Ky Tan Quy street, Tan Son Nhi Ward, Tan Phu district, HCMC. Phone: 0835367276 Established from 1999, THM supply paint Product including: interior and exterior line, as well as primes, brushes and rollers product line. Ms Nguyen Thu Nguyet is a managing director at present.
From time to time, THM has built up the relationship between agencies and Construction Company to meet the customer demand.000 VND 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Staffs: 1 general director, 1 accountant, 1 warehouse manager, 1 sale leader and 20 staffs. Company structure: (THM,2014) In 2011, revenue of company achieved nearly 84 billion with 2 types of above clients. From the starting of 2012, the painting firms wanted THM., Ltd focus to develop distributing toward only departments with the expect return 1000 billion revenues each year for this segment, so THM trended to cut the distribution for the 2nd level agencies in HCM city. Unfortunately, the freeze of real estate affected significantly to the business of THM., Ltd, sale went down dramatically and create a bad prospective, inventories increase for department segment and lack of the product for agency revenue decreased accompany with profitability through fiscal years until 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
In addition, the account receivable ware also high so THM had lack of money to generate and pay to supplier. The board of director faced too many difficulties to find out the way that can improve THM situation, achieving the target sale that paint firm appointed 50 billion revenues per year instead of 26 billion at current. The sale growth also needs to be increased 30% per year, according to Dulux and Jotune put target to THM. So in order to achieve requirement of these 2 big firms, THM have to face hardest dilemma to maintain the sale and control profitability since they have to pay quite high cost inventories.
The results of previous study revealed that firms with shorter cash conversion cycles (CCCs) seem to outperform the other firms included in their sample in terms of profitability. In recent years, the cash conversion cycle has become an increasingly popular tool for analyzing a firm’s cash management. According to Haskin, 2013, cash conversion cycle for a manufacturing company can be defined as a function of [days of accounts receivable + days of inventory – days of accounts payable]. The length of cash conversion cycle is used to measure the impact of accounts receivable, inventories and payments to supplier on the firm’s profitability, cash conversion cycle assist in measuring the performance and current assets management of the firm’s (Uyar, 2009).
Since it represents the number of days a firm's cash remains tied up within the operations of the business at THM, we have recognized that CCC is also a powerful tool for assessing how well THM is managing its working capital and the lower the cash conversion cycle, the much healthy finance a company generally become. 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Studies on this relationship have consistently found that more efficient cash conversion cycles lead to higher small firms (Garcia Teurel and Martinez Solano, 2007). These findings lend credence to cash conversion cycle as an important management tool that warrants further investigation, especially at the small firm level. Understanding the important of cash conversion cycle that affected by account receivable, inventories and sale revenue were reasons of decrease profitability, we have selected THM Company for our result since THM is a kind of small company with simple managing structure.
EXECUTIVE SUMMARY This study target to analyze factors influence the profitability of THM by using the existing relevant study theories and information from in-depth interview to suggest feasible ways to help to enhance and control the profitability. After interviewing the directors of THM and executives in other painting enterprises, we found out some key factors could influence the THM profitability that are relation to the cash conversion cycle, an effective tool to measure working capital management in organization. The information will be supporting by ratio inventories turnover, account receivable, account payable, sales trend analysis, and assess THM situation by comparison with the previous year to validate the result from interview. The next step should be explored ratio analysis and Dupont model, we mention some other ratio to validate the situation of THM with more comprehensive assessment and finding was assessed relevant and match up with the finding from in depth- interview above.
4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com After receiving the finding from in depth- interview and ratio analysis from secondary data of Financial department, three main causes were assessed to be relevant to long cash conversion cycle that make profitability decrease over fiscal year: account receivable policy, the planning to manage inventories and the strategy to increase sale in short- time and long- term and solution for THM are the ways to reduce cash conversion cycle based on 3 that main incident. Solution was suggested based on the basically recommendation from previous relevant theories, the ratio analysis in comparison average industry ratio combined with recommendation from THM stakeholder. The first are how much shortening the account receivable turnover should be and the way to collect them efficiently. Secondly, how much balance inventories turnover should be and the way to manage them more exactly and finally are some recommendation to boost sales revenue that is proper with THM capacity.1 Problem Symptom Profitability is the primary goal of all business ventures.
All companies need to get more profit and develop sustainable in competitive environment. Profitability is measured by a few accounting ratios, such as return on equity (ROE), return on capital employed (ROA) (Kay 1976 and 1986). And here we also suggest using 2 these ratios to measure the company’s profitability of THM. Looking back at the balance sheet and income statement in 4 fiscal years from 2011 to 2014, we found out the net income and revenue of THM have decreased 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com dramatically, from nearly 84 billion VND down to nearly 26,5 billion VND.
ROA and ROE of the firm was extremely low in comparison to the industry of construction materials. In 2014, although the industry ROA and ROE ratio recovered and increased to 3% and 10%, respectively, THM’s ratios still felt sharply. This situation has made THM managers try to research a best way to enhance their profit and cut loss as soon as possible. The ROA and ROE became negative below over 4 years as below: Table 1: THM ROA and ROE 2014 2013 2012 2011 THM Net income -252,311,429 -45,377,948 26,389,069 1,185,546,709 THM ROA -0.6% ROA of industry 3.6% ROE of industry 10.0% Source: All of the data above is gathered from THM financial report from 2011 to 2014 and the average ratio is cited from cophieu68.
Here are some potential causes that directly affect from decrease to negative of profitability. The approach to study the problem is most likely based on qualitative method especially in-depth interview and ratio analysis combined with Dupont model from the secondary data of the income statement of Finance Departments. Sample of 5 people who are managers and experienced employees at THM was target for in- depth interview and ratio analysis combined with Dupont model will be executed. 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 First tentative problem According to Ms Nguyet, general director of THM, she said that “THM Company had not enough cash to operating business, the cash receivable collected was not enough to give payment to supplier each month”.
We always have a gap from cash account receivable and account payable, since customer mostly intended to delay them whereas Dulux and Jotune still keep their payment policy”. If increase credit, we can get risk to collect account receivable, if reduce it, we can decrease sale target that firm appointed, so hard to make decision”. Ms Nguyet also complain that the account receivable increase dramatically so she tended to limit the credit for their clients. When was asked about this problem, Ms Ngan, financial controller believed that the account receivable affected to the cash conversion cycle of company, this lead to the profitability consolidated decreased each fiscal year.
“Customer frequently pay debit note us very slow and we are facing hard to collect account receivable”. When was asked about the policy to create debit note, she said that “THM has no their own clearly policy, we just based on the belief at frequent customer and we had no plan to verify them before selling as a bank, the belief is based on debt history of each customer, who pay enough in the past will be acceptable to debit for the upcoming period. Some customer has debt up to 6 months to 12 months and cannot make payment on time. 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.