Working capital and company’s working capital financing
1.1.1 Definition and features of working capital
To effectively engage in production and business activities, enterprises require both fixed assets and current assets Current assets are typically categorized into two types: those utilized for production purposes and those designated for circulation.
Currents assets use for production: Including raw materials, fuels, components, work in progress and part- finished goods.
Currents assets use for circulation: Including assets in circulation such as finished goods waiting for consumption, receivables, cash.
In business operations, current assets are continuously converted between production and circulation, facilitating a smooth and uninterrupted production process To establish these current assets, enterprises must allocate a specific amount of funds known as working capital.
Working capital refers to the funds a company allocates for essential short-term assets needed for its daily operations It represents the investment a firm makes in current assets to support its manufacturing processes and ensure smooth operational activities.
Working capital has main following characteristics:
- Short-Term Needs: Working capital is being utilized in acquiring current assets which will be converted to cash for a short period only.
- Circular Movement: Working capital is being converted to cash constantly which will just be turned as a working capital all over again.
- Liquidity: It is very liquid for it can be converted as cash any time without losing anything.
- Less Risky: Investments in current assets such as working capital come with less risk for it is just for the short term.
1.1.2.1 Classified according to the form and liquidity
Capital in cash and receivables.
- Cash: includes cash in hand, cash in bank and cash in transit.
- Account receivables: includes mainly accounts receivables and advance payments.
Capital and materials and goods: includes raw 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 operating process
Working capital in the reserved state includes the types of capital, such as material capital, additive material capital, fuel capital, tools and instruments, …
Working capital in the production process includes types of capital, such as: the cost of semi-finished product, unfinished product, pre-paid expenses.
Working capital in circulation includes finished goods, the capital for the payment process, short-term investment and cash.
This classification highlights the significance of different types of working capital in production and business processes, enabling companies to select an optimal capital structure for investment This approach ensures a balanced production capacity across various stages of operation.
Arranging effective working capital financing is essential for a business's success Insufficient or inappropriate financing can lead to significant challenges, including delays in meeting financial obligations To mitigate capital costs and facilitate smooth daily operations, enterprises must carefully evaluate and select an optimal capital structure.
Three fundamental strategies for financing working capital include the moderate approach, conservative approach, and aggressive approach Each strategy varies in the ratio of long-term to short-term financing utilized for permanent and temporary working capital Additionally, these approaches present distinct trade-offs between risk and profitability.
Three basic strategies are used in financing working capital:
A balanced financial strategy aligns the maturity of financing with the maturity of assets, ensuring that fixed assets and permanent working capital are funded by long-term sources, while temporary working capital is supported by short-term financing.
Utilizing this model reduces reinvestment and interest rate risk, although it may lead to lower profitability due to increased interest expenses associated with a higher reliance on long-term financing for permanent working capital.
Long-term financing Non current-Assets
A conservative financing strategy minimizes risk while offering lower profitability compared to other working capital options Businesses typically utilize long-term financing to support not only their noncurrent assets and permanent working capital but also to cover a portion of their temporary working capital needs.
- The advantages of a conservative approach: a higher level of liquidity and solvency, so such businesses can easily access short-term borrowing to cover emerging needs in working capital.
- However, it also results in lowest profitability because long-term financing usually has a higher cost than short-term financing
This method utilizes short-term financing to cover both temporary and a portion of permanent working capital, while the remaining portion of permanent working capital is supported by long-term financing sources.
- The advantage of this working capital financing strategy is that short-term financing is mostly cheaper compared with long-term financing, which allows a reduction in interest expense.
An aggressive financial strategy often leads businesses to rely heavily on short-term borrowing to manage both permanent and temporary working capital needs This frequent dependence heightens the risk of refinancing, making companies more susceptible to disruptions in their access to short-term funds.
When selecting a working capital financing strategy, managers must consider the varying risk and profitability associated with different approaches Additionally, it is crucial to evaluate factors such as sales variability and cash flow stability to ensure the chosen method effectively maximizes the company's wealth.
Working capital management
1.2.1 Definition and objectives of working capital management
Effective working capital management is crucial for a company's financial health and operational success It reflects strong business management by ensuring a balanced approach to growth, profitability, and liquidity.
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”
1.2.1.2 Objectives of working capital management.
Efficiency working capital management becomes a significant issue that every business needs to concern about The good management of working capital will help businesses accomplish the following goals:
Effective working capital management is essential for maintaining liquidity, as insufficient working capital can hinder a business's ability to meet financial obligations on time This can result in delayed payments to employees, suppliers, and creditors, ultimately leading to diminished employee loyalty, loss of supplier discounts, and a tarnished credit rating Furthermore, failure to make payments may force a company to liquidate assets to settle debts with creditors.
Effective working capital management is crucial for enhancing profitability, as it enables businesses to meet financial obligations while increasing earnings By selecting the appropriate methods for capital mobilization, firms can lower their capital costs and improve both profits and return on equity (ROE) Additionally, optimizing working capital helps prevent losses from idle funds and boosts inventory turnover and receivables, ultimately leading to higher after-tax profits for the company.
1.2.2 The content of working capital management
1.2.2.1 Determination of working capital needs and working capital financing a Determination of working capital needs
A company's production and business operations are conducted consistently and require adequate working capital to maintain a smooth workflow This capital is essential for managing inventory, balancing receivables and payables, and ensuring that the production process runs efficiently.
Working capital refers to the essential minimum of current assets necessary for maintaining smooth and continuous business operations Insufficient working capital can result in intermittent business activities, while excessive working capital can lead to capital wastage Balancing working capital is crucial for operational efficiency and financial health.
With the concepts of working capital needs are the minimum capital, working capital needs are determined according to the formula:
Working capital needs = Inventory capital needs + Receivable capital needs – Supplier payable
Internally, inventory capital needs are minimum amount of needed capital to reserve raw materials, unfinished products, semi-finished goods and finished goods of enterprises.
The working capital requirements of a business are shaped by various factors, including the size of the enterprise, market conditions, supply prices, and advancements in science and technology Accurately identifying these influencing factors enables businesses to determine their working capital needs more precisely, allowing for effective and economical management of their working capital.
To determine the working capital needs of enterprises, we can use two methods: direct method and indirect method.
According to this method, the capital required for inventories, accounts receivable, accounts payable is directly identified and then aggregated into the total demand for working capital.
Demand of Working Capital = Estimated Inventory + Estimated Receivables – Estimated Payable + Desired level of cash balance
Estimated Inventory = The average consumption level of each type of day x The number of stock days of each type inventory
Estimated receivables = The average revenue per day in the period x The average collection period
Estimated payable = The average purchase turnover in the planning period x The average payment period for venders
The direct method effectively highlights the working capital needs for various goods and materials at each stage of business operations, providing a close alignment with the enterprise's actual requirements However, this method is complex and time-consuming, making it challenging to determine the working capital needs of the business efficiently.
The indirect method analyzes the actual utilization of a company's working capital during the reporting period, considering factors such as changes in business size, the turnover rate of working capital, and fluctuations in working capital demand This approach helps determine the working capital requirements for the upcoming planning year.
- Method of adjusting for the percentage of working capital demand compared to the reporting year:
This approach focuses on the real demand for working capital during the reporting year, adjusting it based on the scale of the business and the turnover of working capital projected for the planning year.
- Method based on the total working capital turnover and working capital turnover in the planning year:
This method calculates the demand for working capital by assessing the total working capital turnover, or net revenue, along with the projected working capital turnover for the upcoming planning year The following formula can be utilized to estimate or calculate the required working capital effectively.
Working Capital Demand = Net revenue
- Method based on percentages of sales:
This method is based on the fluctuation in proportion of the working capital components revenue during the reporting year to determine the working capital requirement through planning year revenue.
Percentage of sales methods = Component of working capital
Working capital requirements = Estimated sale in the coming year x (Percentage of current asets on the net sales in the previous year – Percentage of current liabilities in the previous years)
Indirect methods offer a simple and quick way to estimate working capital requirements; however, they come with limitations, as the accuracy of the forecasts is generally lower compared to direct methods.
Once the level off working capital requirements has been determined, a firm has to how the same will be finances There are three types of financing:
+ Long-term financing: shares (equity and preference), retained earning, long-term debts, debentures.
+ Short-term financing: short-term bank loans, commercial papers, factoring receivables…
+ Spontaneous financing: automatic sources off short-term funds, trade credit and outstanding expenses
Working capital is essential for maintaining a smooth production process, and an effective working capital structure enables businesses to utilize their funds efficiently and economically This ensures that they can promptly address any arising working capital needs The composition of working capital varies based on the unique characteristics of each enterprise To evaluate the efficiency of working capital management, it is crucial to focus on three key areas: cash management, receivables management, and inventory management.
Manufacturing companies typically concentrate their working capital on inventories and receivables Their inventories encompass finished goods, raw materials, fuel, tools, and work in progress, all essential for meeting production needs To maximize product consumption, companies implement a commercial credit policy, which enhances receivables and significantly contributes to their working capital.
Cash and cash equivalents typically represent a minor portion of working capital, as businesses strive to minimize idle cash in order to enhance profit margins Companies generally maintain only a small amount of cash and equivalents to cover upcoming liabilities and unexpected expenses.
Cash is essential for business operations, serving as the primary asset for settling debts and covering operating expenses It also acts as investment capital for long-term assets like property and equipment Effective management of cash inflows and outflows is crucial for maintaining business stability.
Overview of Thong Nhat Ha Noi Joint Stock Company
2.1.1 The establishment and development of Thong Nhat Ha Noi Joint Stock Company
2.1.1.1 General information of the comapny
Company name in Vietnamese: Công ty Cổ phần Thống Nhất Hà Nội Company name in foreign in language: Thong Nhat Ha Noi Joint Stock Company
Thong Nhat Ha Noi Joint Stock Company which was operated under Business License No 0100100424 dated the 16 December 1998 issued by Hanoi Department of Investment and Planning
The Company’s head office is located at: No 10B, Trang Thi Street, Hang Trong Ward, Hoan Kiem District Ha Noi, Vietnam
The Company’s factory is located at: Lot A2CN3, Tu Liem Small and Medium Zone, North Tu Liem, Ha Noi, Vietnam
Email: tnbike@thongnhat.com.vn
Annual accounting period commences from 1st January and ends as at 31st December.
The Company maintains its accounting records in VND.
The Company adheres to the Corporate Accounting System as outlined in Circular No 200/2014/TT-BTC, issued by the Ministry of Finance on December 22, 2014 Additionally, it complies with the amendments and supplements provided in Circular No 53/2016/TT-BTC, released on March 21, 2016, which updates certain articles of the original circular.
2.1.1.2 The establishment and development of the company
Thong Nhat Ha Noi Joint Stock Company (formerly known as Thong Nhat Bicycle Factory) was established on June 30, 1960.
In September 1993, Thong Nhat Bicycle Factory was changed into Thong Nhat Bicycle Company under Decision No 5563 / QD-UB dated 29/9/1993 of Hanoi People’s Committee.
In October 2004, ViHa Bicycle Company and Dong Da Motorbike Company merged into Thong Nhat Motorbike Company under Decision of Hanoi People’s Committee.
In November 2005, Thong Nhat Bicycle Company was transformed into Thong Nhat One Member Limited Liability Company under Decision
No 162/2005 / QĐ-UB dated 18/10/2005 of Hanoi People’s Committee;
In January 2011, Thong Nhat One Member Limited Liability Company was restructured under the Decision No 287/QD-TN issued by the Hanoi People's Committee, adopting a parent company-subsidiary model The company operates in compliance with the laws and regulations set forth by the City People’s Committee, as outlined in Decision 6139/QD-UBND dated December 30, 2011.
On 27/02/2017, Thong Nhat One Member Limited Company was changed to Thong Nhat Joint Stock Company in accordance with Decision
In 60 years of development with the brand over time, Thong Nhat has launched millions of products to serve all kinds of customers at all ages.
“Think Bike, Think about Unified” has become a mindset, habit and reliable address of consumers in the country and internationally.
At Thong Nhat Ha Noi Joint Stock Company, our business motto emphasizes "Prestige" and "Quality," guiding our commitment to adhere to stringent quality standards and registered trademarks, as certified by the National Office of Intellectual Property We prioritize "leading quality" in all our products and services, ensuring they meet customer expectations while aligning with industry standards Additionally, we are dedicated to promoting environmental protection, community health, and the interests of all stakeholders.
In addition to the achievements in production and business, the company also achieved the achievements:
– Vietnamese goods are popular with consumers;
– The title of high quality Vietnamese goods;
– Certificate of Merit for 5 consecutive years (2009 – 2014) to implement the campaign “Vietnamese people give priority to using Vietnamese goods”…
2.1.2 The business characteristics of Thong Nhat Ha Noi Joint Stock Company
2.1.2.1 Business field and main products
Main business activity of the Company are producing and assembling completed bikes; producing the parts and components of bikes.
The company offers a wide range of products that meets the needs of different types of customers with varying ages, incomes and tastes.
- Children's bikes: MTB bike, TN TE bike, VIZVUZ balance bike
Many models of bicycles for kids and accessories to protect the safety of children, with designs from 2 wheels to 3 wheels, 4 wheels and many different designs and eye- catching colors.
- Common bikes: TN neo bike, GN bike
City bicycles are an excellent solution for balancing daily commuting activities, whether it's for school, work, or leisure They are designed to be strong and durable, making them ideal for conveniently carrying both items and passengers.
- Sports bikes: MTB bike, DH bike
If you are a cyclist, sport bike is the best choice The sport bike has a bigger, thicker wheel with many interlocking spikes to help overcome rough obstacles
- Imported bikes: matt bike, cross way bike, ride bike
Many high-end bicycle models are imported from reputable brands to sastify the customers’s demand.
Sales & Marketing Financial & accounting Technical department
Figure 2.1 Thong Nhat Ha Noi JSC’s the organizational structure
(Source: Administration department of Thong Nhat Ha Noi JSC) The function of each department:
The General Shareholder’s meeting: the highest authority of the Company, having the right to decide on issues and duties prescribed by Law and the Company's Charter.
The Board of Management serves as the Company's governing body, possessing full authority to make decisions that align with the Company's objectives and interests, excluding matters reserved for the General Meeting of Shareholders This board is responsible for the ongoing oversight of the Company's business operations, internal controls, and risk management practices.
The Board of supervisors: checking the legality of the management activities of the Board of Directors, the executive activities of the Director
HR & Administration and the financial statements The Supervisory Board operates independently of the Board of Directors.
The Board of Directors holds the responsibility for overseeing and managing all manufacturing operations and activities within the company During the decision-making process, directors consult directly with various departments to ensure informed choices are made.
The Technical Department focuses on monitoring, inspecting, and supervising product quality while enhancing techniques and designing new products It also compiles technical documentation to train employee skills Meanwhile, the Sales Department is responsible for creating and executing business plans, directly engaging with customers and the distribution system This department receives support from other areas to successfully meet the company's sales objectives.
The financial and accounting department is responsible for overseeing financial activities to ensure the effective operation of business functions This department collaborates with other relevant teams to develop both annual and long-term strategic plans for the company, while also providing essential support to the board of directors in making informed financial decisions.
HR & Administration department: Assisting the administrative work;implementing recruitment Coordinating with other departments to manage human resources.
Figure 2.2 Accounting organizational structure of Thong Nhat Ha Noi JSC
The Chief Accountant plays a crucial role in assisting the company's director with the organization of the accounting department and ensuring that all accounting practices comply with Vietnamese Accounting Standards and the Vietnamese Enterprise Accounting System This includes the preparation of periodic financial statements, as well as overseeing the effective utilization and recovery of capital within the organization.
General accountant: Collecting original documents, checking the legality of vouchers, bookeeping the general journal, the general ledger.
Payable accountant: Pay full and timely salaries to officials and employees, monitor the debt for long-term, short-term loans, and other debts of the company and related parties.
Warehouse Accountant: Gather and classify purchasing documents using materials and fixed assets Monitor the use of supplies, promptly detect loss and shortage of supplies.
Tax accountant: Monitoring the implementation of obligations to the state, payables to state budget and refundable tax.
Cashier: Monitoring and managing cash fund, promptly reporting on receiving, spending and cash balance.
2.1.2.3 Manufacturing process and consumption market
(Source: Technical department of Thong Nhat Ha Noi JSC)
Thong Nhat Ha Noi JSC operates 500 showrooms across the domestic market and produces 60,000 bikes annually The company also exports 2,000 bikes to countries including Thailand, Sri Lanka, and Hong Kong With high production standards, their bikes are now competitive enough to enter the European market.
Manufactured and consumed products are mostly ordered Therefore, meeting the design and timing of customer orders is the company's strategy.
Thong Nhat bicycle factory has invested in advanced technologies from Europe, Japan, and Taiwan, utilizing modern machinery for production and assembly Their bicycles are renowned for high durability and contemporary designs that meet international standards Featuring high-strength steel frames, TIG welding technology, and a three-layer electrostatic painting process, Thong Nhat offers over 100 different bicycle models across four categories: kid's bikes, common bikes, sports bikes, and mountain bikes With a price point of VND 3 million per bike, their products cater to the middle-class market, ensuring quality and value.
Designing bicycle Welding bicycle frame
2.1.3 Overview of financial performance of Thong Nhat Ha Noi Joint Stock Company
2.1.3.1 The advantages and disadvantages in operating process
With beautiful designs, reasonable prices and long-standing brands, Thong Nhat bicycle is the preferred choice of customers.
Over the past years, the company has built and accumulated strong resources such as capital, technology equipment, management level, staff capacity for development.
The system of more than 500 showrooms in Vietnam, the company's products are easy to reach consumers From popular products to high-end fashion, it suits the tastes of consumers.
In recent years, Vietnam has increasingly focused on promoting an environmentally-friendly lifestyle, with bicycles emerging as a key component of this movement Not only do bicycles enhance physical and mental well-being, but they also play a significant role in protecting the ecological environment As a result, the bicycle market in Vietnam is thriving and shows strong activity.
High production expenses and fluctuation of prices of raw materials have a strong influences on the company's profit.
The company currently operates exclusively in the northern region and central provinces, facing challenges in entering the southern market due to established bicycle centers that offer reputable quality at competitive prices Additionally, high transportation costs would further inflate the company's bicycle prices, hindering its ability to compete effectively in that region.
The emergence of renowned global bicycle brands has intensified competition in Vietnam's bicycle market These foreign brands are expanding quickly, leveraging substantial investments to establish their brand presence and distribution networks across various provinces and cities in Vietnam.
2.1.3.2 The situation of revenue, expenses and profit
TABLE 2.1: Income statement in 2018 annd 2019
1 Revenues from sales and services rendered 45,706 40,973 4,733 11.55%
3 Net revenues from sales and services rendered 45,689 40,964 4,725 11.53%
5 Gross profit from sales of goods and rendering of services 7,948 6,800 1,148 16.88%
10 Net profit from operating activities (9,550) (10,245) 695 -6.78%
15 Current corporate income tax expenses - - - -
16.Deferred corporate income tax expenses - - - -
17 Profit after corporate income tax (9,904) (10,540) 637 -6.04%
(Source: Financial statement of Thong Nhat Ha Noi JSC)
In 2019, the company experienced a revenue growth of 11.55% in sales and services, despite a significant increase in revenue deductions by 93.05% This resulted in a net revenue increase of 11.53%, amounting to 4,725 million VND for the period.
Assessment of working capital management
Chapter 2 highlights the company's significant efforts to overcome various economic challenges, ultimately leading to successful achievements in production and business operations.
First, the company’s capital structure was reasonable and suitable for the features of the company – a manufacturing company.
The business maintains a clear division of responsibilities between the cashier and the accountant, ensuring secure cash management By increasing the proportion of bank deposits within its cash capital structure, the company not only earns interest on its funds but also enhances safety and convenience in cash handling.
Third, businesses made better decisions on inventory management which leads to higher inventory turnover and lower cost of goods sold in comparison with the previous year.
Moreover, the company appropriated a large amount of working capital which saves a lot cost of capital.
At last, there was an improvement in the efficient use of working capital which avoids wasting the amount of working capital.
Other than certain achievements, the organization had a few shortcomings in utilizing working capital We can be seen that some fundamental downsides staying in working capital management as follows:
The working capital financing structure was precarious, relying heavily on temporary capital to fulfill most of the company's working capital needs This approach increased short-term debt pressure, necessitating a restructuring to achieve a more secure financial position.
The company failed to accurately assess its working capital management needs, as the percentage of revenue method revealed inconsistencies in projected revenue, resulting in an excess of unnecessary working capital.
The company's liquidity ratios are currently low due to a significant increase in short-term debt relative to its cash reserves To address this issue, it is essential for the company to implement an effective cash management policy that ensures it can meet its short-term financial obligations.
Despite challenges in the consumption market, inventory values remain elevated To mitigate capital backlog, the company should ensure adequate raw material stock, expedite the completion of unfinished products, and enhance sales efforts.
Account receivables have remained elevated, leading to an increase in provisions for bad debts This situation arises from the company's ineffective monitoring of debtor situations, resulting in prolonged and stagnant debts that hinder recovery efforts Consequently, this creates pressure on the company's capital cycle and escalates capital usage expenses necessary for operational needs.
