UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ----------------------------------------------- NGUYEN DIEP PHUOC HOA ID: 22140016 LATE PAYMENT FROM CUSTOMER PROBLEM IN HP COMPANY MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR. NGUYEN PHONG NGUYEN Ho Chi Minh City – December 2016 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT First, this thesis cannot be finished without the kind support of many people. I would like to express my deepest gratitude to all of them; especially, my parent, for their love and unconditional encouragement. Furthermore, I give my appreciation to my advisor, Dr.
Nguyen Phong Nguyen, for his guidance, imparting his knowledge and expertise my study. Special thanks to members of HP Company for cooperating, supporting and providing necessary information to contribute to my thesis. Last but not least, warmest thanks to all my classmates who always support and help me to complete this thesis. 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com EXECUTIVE SUMMARY Late payment of bill remains a concern for many small and medium enterprises and can put a strain condition on the company’s cash flow, which lead to the inefficiency revenue and profit.
Late payment was seen as a major contributory factor to small businesses financial distress and failure, which hamper growth and innovation. 1 Poor payment practices will reduce company’s overall corporate earnings, hinder abilities to expand and lessen business growth. Late payment also has a serious effect on all the small and medium firms, which tend to operate with limited cash flow and put their company survival at risk. It is evident that one of the main factors in late payment is the mismanagement of financial activities and passive role assigned to trade credit in organizations.
2 This thesis is conducted to indicate the consequences on performance of HP Company from late payment as well as the main reasons caused the late payment. Besides that, the thesis aims at finding and advising the possible solutions and practices for effective trade credit policy to prevent this issue in the future. 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONTENTS CHAPTER 1: INTRODUCTION. SITUATION & SYMPTOMS ANALYSIS.
7 CHAPTER 2: PROBLEM IDENTIFICATION. The first tentative problem: Intense Competition. The second tentative problem: Matetial price fluctuation. The third tentative problem: Late payment from customer.
The central problem: Late payment from customer. Justify the existence of problem. Justify the importance of problem. 27 CHAPTER 3: CAUSE VALIDATION.
Potential Cause 1: Credit Policy. Potential cause 2: Poor financial management. Potential cause 3: Economic situation. Potential cause 4: Legal and Regulatory Framework.
32 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 Justify the links between the potential causes and central problem. FINAL CAUSE EFFECT MAP. 35 CHAPTER 4: SOLUTION ANALYSIS. SOLUTION 1 - IMPROVE TRADE CREDIT POLICY.
Setting credit standard. Varying credit terms. Applying penalties for late payment. Put more effort on credit collection.
SOLUTION 2 - BANK GUARANTEE. Setting credit standard. Varying credit terms. Applying penalties for late payment.
Put more effort on credit collection. 47 CHAPTER 6: SUPPORTING INFORMATION. 70 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 1.1 Revenue and profit after tax of HP.2 Cash and current liabilities of HP .1 Account Receivable and Total Asset of HP .2 Receivables’ ratios of HP. 24 LIST OF FIGURES Figure 2.1 Copper price trend from 2011-2015 .1 Receivable turnover ratio of HP and TAYA.2 Day’s sales outstanding of HP and TAYA .3 Aging of HP’s accounts receivable in 2015.
26 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION Nowadays, the issue about late payment has been concerned as an important disturbance for small and medium enterprises all over the world. Payments, which implies a major problem as monies, is needed to pay for materials, labor… and general overheads expended during the progress of the work. 3 Late payment is defined as a payment made to the seller after the due date has passed. Howorth et al 3(p308) also addressed the high risk consequences of slow payment that: The impact of slow or no payment can be devastating.
Slow payment erodes the profitability of the sale or, where profit margins are tight, eliminates it together. Uncertainties over the timing of payment make cash-flow management and banking relationships even more difficult. Where slow payment progresses to protracted default and bad debt the whole viability and survival of the business can be risk. This paper is about the problem of late payment of HP Company and its impacts on the company.
The first section consider some symptoms and bad outcomes can be observed from different angles in HP Company- a manufacturer of electric wire and cable. This is followed by the argument to identify the real core problem and all the debates supported to the issue- late payment from customer. Next chapter are the determinants that make the inefficiency in collecting money from the customers of HPC. In drawing conclusions the author consider all possible solutions will be suggested for improving the efficiency of company management.
4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. COMPANY BACKGROUND Established in 2006, Hoang Phat Wire & Cable (HP Company) is a trusted company specializes in the manufacturing of wire and cable with different kinds of market such as household uses, professional uses, and other electrical needs. All products bearing HP brand must go through extensive and qualified management process to ensure quality and durability. Under motto "Take trust - Give quality", HP aims to make sure the products are higher quality than requests to satisfy customer.
After nearly 10 years operating in the electrical materials market, HP always tries to upgrade the latest technology in order to improve company performance. Full name: Công ty TNHH Sản xuất Dây và Cáp điện Xây lắp Hoàng Phát. English name: HP-Petrocable. Head office: 53 Street 19, Tran Nao, Binh An Ward, District 2, HCMC.
Factory: Street No. 1, Tan Dong Hiep B Ward, Di An, Binh Duong. As any other companies, employees or labor force is the top-priority in HP. To operating in industrial sector, it requires a labor force with skills so the worker is the primary labor source in HP.
They applied ISO 9001-2008 QMS, the Quality Management System that authorized by Australia to ensure all the steps from the beginning of the sale contract to the production to minimize the risks. Those employees mostly were employed from 2009. 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Factory Department Number of employee Head of the Factory – Manager Of 1 Manufacturing Vice Manager of Factory – Manager of 1 Product Designing and Inspection Quality Inspection Manager (KCS) 1 HR-Factory Manager 1 Production Accountant 2 Team leader 6 Workers 12 Office Department Number of employee General Director - Owner 1 Vice Director – Sales Manager – Owner 1 Salesman 2 Accountant Office 4 Administrative Office 1 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. SITUATION & SYMPTOMS ANALYSIS Profitability is the primary purpose of all business enterprises by getting more revenue, sustainable development and fairly competition in today’s competitive market conditions.
Profitability is measured by a few accounting ratios, such as return on equity (ROE), return on capital employed (ROA). 4 Here the author also suggests using these ratios to measure the company’s profitability of HP- Petrocable. Before conducting interviews with HP’s members, company’s annual reports are provided to analyze. Financial documents reveal the basics of the company’s situation during the period of 4 years.1 Revenue and profit after tax of HP 2012 2013 2014 2015 Net revenue 22,381,489,117 18,188,447,455 17,126,725,795 19,837,389,350 % change in revenue in comparison with 0% -19% -23% -11% year 2012 Profit after taxes 1,310,442,828 (1,070,641,122) 2,386,536,522 1,598,383,625 % change in profit in comparison with year 0% -182% 82% 22% 2012 (HP’s Income Statement, 2012-2015) 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com In comparison to TAYA Vietnam, which is another manufacturer of wire and cable, the data also indicates the poor outcome from HP.
ROA of HP was extremely low in comparison to the industry of electric and electrical equipment and became negative in 2013 at -2%. During the period of 3 years from 2013 to 2015, TAYA Vietnam’s ROA remain at a high level from 5. It can be easily noticed the ineffective in working of HP in the last 4 years. The figures below will show the details.33% Industry: Electronic & Electrical 6.1 Return on assets of HP, TAYA and the industry In comparison to the industry electric and electrical equipment and a competitor – TAYA Vietnam, HP’s cash ratios are the worst.
While TAYA Vietnam’s ratios reached the highest point in 2014 after that in 2015 the ratio was nearly the same with the industry, there was a significant gap between HP’s ratio and the others. The comparisons with the 8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com industry and TAYA Vietnam, it can be easily noticed the ineffective in working of HP in the last 3 years.2 Cash and current liabilities of HP 2012 2013 2014 2015 Cash and cash equivalents 52,916,303 457,981,525 103,230,790 160,529,332 Current liabilities 62,028,954,149 51,331,923,180 55,747,781,123 63,974,558,247 Cash Ratio 0.61 Industry: Electronic & Electrical 1.2 Cash Ratio of HP, TAYA and the industry 9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Currently, low cash is considered as a serious issue in HP Company. One maxim is: “revenue is vanity, cash flow is sanity, but cash is king” and it seems like HP use it up their cash balance. The cash and cash equivalent hold a very small amount in comparison to the current liabilities, this make the cash ratio very small and cause more difficulties to the business.
This situation has made HP managers try to research a best way to enhance their profit and improve company competence on the market as soon as possible. Conducting interviews with members of HP, they reveal many issues which have influences on the company’s performance and cash is one of the most challenging troubles in recent years. According to Mrs. Ngoc, the owner and director of HP, “We are facing a very challenging trouble, the shortage in cash make our company situation more and more difficult”.
Low level of cash is considered as a big trouble in the company, but that should be recognized as the symptom or what we can see from an “iceberg”, the real problem and underlying causes need to be found and analyzed to improve the situation. 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 2: PROBLEM IDENTIFICATION 2. The first tentative problem: Intense Competition. In the interview with Mr.
Hoanh, co-owner and Sales Manager in HP Company, he revealed that “There are many reasons can explain for the low level of cash in these recent years. It was hard to introduce and sales product these days because of the intense competition. Intense competition in the construction material industry reduced our market share and profits due to strong competitors and later rival, both groups compete very intensively by low price strategy”. Currently, the demand for power cable serving the construction and manufacturing industries such as automobiles, electronics and telecommunications are growing.
However, the Vietnam wires and cables market were developing a number of unstable factors, significant impact on the survival and sustainable development of enterprises. This uncertainty has many different causes, arise from different sides, especially the low price strategy. Besides the "giants" in the business, to survive, there are some new firms chasing for profit and enticing the customer so they use temporary and unfair solutions such as: offer the low price to entice the customer for the first time or even they reduced product quality to decrease the price.