OVERVIEW OF WORKING CAPITAL AND WORKING
Working capital and working capital financing
1.1.1 Definition and features of working capital
Every business requires cash for investment to establish essential assets and maintain continuous operations In addition to the initial investment in fixed assets, sufficient working capital is crucial for purchasing materials, covering labor costs, and supporting ongoing business activities Ultimately, at the conclusion of an operating cycle, the initial working capital is fully recouped as the company collects all sales revenue from its goods and services.
Working capital is essential for maintaining the continuous operations of a company, as it involves the use of current assets like cash and inventory It can be defined as the initial investment in these current assets necessary to ensure smooth business activities during a specific period This fundamental concept underscores the importance of working capital in supporting a company's operational efficiency.
Working capital, defined as the difference between current assets and current liabilities, is crucial for assessing a company's financial health Specifically, net working capital (NWC) is calculated by subtracting current liabilities from current assets This definition emphasizes the importance of both the assets and their liquidity in meeting a company's short-term obligations.
In this thesis, working capital is defined using the gross definition, which refers to the total amount of money invested in current assets to ensure the smooth and continuous operation of a company's business activities.
Working capital represents the capital invested upfront to generate current assets, and its characteristics are closely linked to those of current assets.
Working capital undergoes continuous transformation throughout various stages of production and business processes In manufacturing enterprises, it begins as monetary capital, transitions to raw materials for production, evolves into semi-finished and finished products, and ultimately reverts to its original monetary form once the product consumption process is complete.
Secondly, at the end of the operating cycle, working capital value is fully transferred into value of goods and services; and being recovered completely when a company collects sales.
The working capital cycle concludes following the business operating cycle, where the transformation and movement of working capital occur regularly and continuously This process establishes a recurring cycle of working capital that is essential for business operations.
To effectively manage working capital, enterprises must classify it based on specific criteria, which include its role in the operating cycle, its form, and its usage duration This classification is essential for optimizing working capital utilization and enhancing overall operational efficiency.
* By the role of working capital in operating process:
The classification is generally illustrated by the following figures:
F igure 1.1 WC classification by the role of working capital in business cycle
Working capital is categorized into three stages: storage, production, and circulation In the storage phase, it encompasses investments in essential materials, equipment, fuels, and tools for production As the process advances to production, this investment transforms into the value of work in progress, semi-finished goods, or prepaid expenses Finally, once the products are completed and ready for sale, a company can recoup its initial investment in storage through sales revenue.
This classification highlights the significance of various types of working capital in the production and business processes, enabling the selection of an appropriate investment capital structure It ensures a balanced production capacity across different stages of the enterprise's operational activities.
* By form of working capital:
Based on form of expression, working capital can be classified into:
- Capital of supplies and goods: Including inventory capital, work in progress, raw materials or fuels, finished products, semi-finished products, etc.
- Capital in cash: working capital is monetary capital such as cash in bank, cash on hand, investments in securities, etc.
Another way of classification is based on the basis of time, by which
Work in progress Half-finished goods
Short-term investmentMortgagesFinished productsReceivable
Temporary working capital refers to the difference between the current investment in short-term assets and the permanent working capital investment It is required for a limited duration and can be categorized into two types: seasonal working capital, which is needed during peak periods, and specific working capital, which addresses unique short-term financial needs.
- Permanent working capital: minimum level of working capital required to circulate from one form to another: from cash to inventory, inventory to receivables, receivables to cash, and so on.
Working capital represents the financial value of a company's working assets and reflects the relationship between these assets and their funding sources It serves as a crucial indicator of an enterprise's financial health at any given moment Funding for working capital can be sourced from both long-term and short-term options, including contributions from debtholders and shareholders.
Permanent capital serves as a long-term financial resource for businesses, ensuring consistent and stable operations This capital can take the form of long-term debts or shareholders' equity, allowing companies to meet their working capital needs effectively Businesses often secure funding through commercial bank loans or by issuing bonds Alternatively, they may utilize shareholders' equity, which can be accessed through internal sources like retained earnings and depreciation funds, or by issuing new shares.
Temporary capital refers to short-term financing options, typically within a one-year timeframe, that businesses utilize to address their immediate working capital needs This type of funding can be obtained through various short-term financial instruments, including short-term loans, bills of exchange, bank overdrafts, and factoring.
Working capital provides essential security for businesses, as it is primarily supported by permanent capital for regular needs and temporary capital for short-term requirements However, the demand for working capital can vary significantly across different periods for each business Consequently, a strategic combination of permanent and temporary capital is crucial, enabling flexible management of financial resources to meet varying operational demands.
Working capital management
1.2.1 Definition and objectives of working capital management
Effective management of working capital is essential for ensuring smooth company operations, making it a top priority for businesses Addressing the challenge of optimizing working capital management is crucial for operational success.
Working capital in accounting refers to a company's current assets and liabilities with maturities under one year, essential for its normal business operations Net working capital is calculated as the difference between current assets and current liabilities A positive net working capital indicates that a firm can meet its short-term financial obligations, with higher values reflecting greater liquidity and solvency.
From a financing perspective, working capital refers to the funds a company allocates to its short-term assets necessary for daily operations These current assets are crucial as they frequently turnover, enabling the firm to maintain continuous operations.
Working capital management is the process of managing and monitoring activities related to working capital.
Effective working capital management involves the strategic planning, selection, implementation, and assessment of decisions concerning a company's working capital This process focuses on balancing costs and benefits to optimize outcomes for both the business and its owners Key decisions revolve around managing essential components of working capital, such as cash, inventory, and accounts receivable, as well as current liabilities like short-term debts and accounts payable.
Effective working capital management is essential for a company's operational success, as it directly influences cash flow and the ability to meet short-term financial obligations This managerial accounting strategy focuses on optimizing the balance between current assets and current liabilities, ensuring that the business maintains sufficient liquidity to cover its operating expenses and debt Prioritizing efficient working capital management is crucial for any organization aiming to sustain its operations and financial health.
Effective working capital management ensures a company's continuity by maintaining adequate cash flow to meet short-term debts and operational expenses It focuses on achieving the optimal working capital level that satisfies demand while minimizing costs The primary objectives of working capital management include enhancing liquidity, maximizing profitability, and maintaining operational efficiency.
To determine the optimum levels of investments in various categories of current assets.
To distribute optimal mix of temporary and permanent capital.
To decide appropriate means of short-term financing.
1.2.2 The content of working capital management
1.2.2.1 Determination of working capital needs and working capital financing a, Working capital needs
Enterprises engage in ongoing business and production activities that require maintaining adequate working capital This capital is essential for purchasing materials, balancing accounts receivable and payable, and ensuring the smooth operation of the company.
Working capital is the essential minimum amount needed to sustain a company's normal production and business activities This financial resource guarantees smooth and uninterrupted operations, assuming the company remains a going concern Various methods exist for determining the required working capital, with several popular approaches available for businesses to consider.
Working capital needs are calculated based on the direct calculation of each working capital component The formula to determine the needs for working capital as follows:
WCN = [Inventories + Accounts receivable] – Account payable
+ Inventory is the minimum necessary capital to reserve raw materials, unfinished products, semi-finished products and finished products.
+ Accounts receivable is a legally enforceable claim for payment held by a business for goods supplied and/ or services rendered that customers/ clients have ordered but not paid for.
+ Accounts payable is the aggregate amount of an enterprise’s short-term obligations to pay suppliers for products and services which the entity purchased on credit.
Based on Percentage of Sales:
This method assumes a direct correlation between a firm's working capital and its sales If historical data shows a consistent relationship between sales and working capital, this can be utilized to forecast future working capital needs Essentially, as sales levels increase, the requirement for working capital also rises.
There are three steps involved in the estimation of working capital needs
Step 1 : To estimate total current assets as a % of estimated net sales.
Step 2 : To estimate current liabilities as a % of estimated net sales
Step 3 : The difference between the two above, is the net working capital as a % of net sales.
This method is based on the principle of history repeats itself. For estimating, relationship of sales and working capital is worked out for say last 5 years.
- This method is very simple to understand and calculate.
- Its assumption is difficult to be true for many organizations.
- If there is no linear relationship between the revenue and working capital, this method is not useful.
- Not applicable in new start-up projects because there is no past.
This is a statistical estimation tool that establish trend relationship and for working capital estimation.
This method expresses the relationship between revenue & working capital in the form of an equation.
Working capital = Intercept + Slope*Revenue
Slope is the rate of change of working capital with unit change in revenue Intercept is the point where regression line and working capital axis meets.
Time which is needed to convert raw material into finished goods,finished goods into sales and account receivable into cash is called operating cycle.
The operating cycle method calculates the working capital requirement by assessing the time needed for various current assets and the delay in payments for purchases and expenses.
Working Capital Requirements = Estimated Cost of Good Sold x OperatingCycle
The items of current assets and current liabilities are calculated as follows:
+ Raw material inventory = (Annual output x material cost per unit x inventory holding period) / Total Periods
+ Work-in-progress Inventory = (Annual output x Manufacturing cost per unit x Inventory holding period)/ Total Periods
+ Finished Goods Inventory = (Annual output x total cost per unit x inventory holding period)/ Total periods
+ Account Receivable (Debtors): (Annual credit sales units x total cost per unit x credit period allowed) / Total periods
+ Prepaid Expenses = (Annual Expenses x Advance Period)/ Total Periods.
+ Account Payable (Creditors) = (Annual output x raw material cost per unit x credit period)/ Total periods.
+ Outstanding Wages = (Annual output x labor cost per unit x time lag)/ Total periods
+ Outstanding Overhead = (Annual output x overhead per unit x time lag)/ Total periods.
+ Outstanding Expenses = (Annual expenses x Time lag)/Total periods. b, Working capital financing policies
The company is not only concerned about the amount of current assets but also about the proportions of short-term and long-
There are some working capital policies:
This policy aims to mitigate the risks associated with financing current assets by utilizing a significant proportion of long-term funding sources The company not only aligns its current assets with current liabilities but also maintains a surplus to address potential uncertainties.
This strategy involves financing permanent assets and a portion of temporary current assets with long-term funding In the absence of temporary current assets, the company maintains liquidity by investing excess funds in marketable securities While this represents the lowest risk working capital policy, it does not guarantee the optimal use of funds.
Figure 1.2 Conservative financing policy model
This strategy promotes a high level of working capital and current assets, including inventory, accounts receivable, and crucially, liquid cash or bank balances As a result, it enhances customer satisfaction and ensures smooth company operations Additionally, it increases solvency and safety, while a higher working capital mitigates the risks associated with refinancing that can arise from reliance on short-term financing sources.
One significant drawback of this strategy is the higher interest costs associated with long-term financing, which can lead to elevated rates of interest Additionally, there is a possibility of idle funds, which may not be utilized effectively.
An aggressive working capital financing policy stands in contrast to conservative strategies, as it entails a higher risk by necessitating substantial investments in current assets To implement this approach, businesses must either reduce their current assets or the level of debt they carry This type of policy is commonly adopted by companies aiming for rapid growth.
Under aggressive policy, a company finances a part of its permanent current assets with short-term financing.
Figure 1.3 Aggressive financing policy model
Determinants of working capital management
Scale of business organization and management
This is an important factor affecting to working capital management.
If the manager determines properly needs for capital, chooses the right financing method, the organization will use, manage the capital effectively and contribute to raising the efficiency.
Days sales inventory = Average Inventory
Cost of goods sold per year x 360
Effective working capital management is crucial for businesses, as it ensures stability through various business cycles and can even lead to an increase in working capital Conversely, poor capital management can result in gradual capital loss and disruptions in production and business operations.
In any business, the human factor is crucial to success When employees possess strong professional experience in capital management, the organization operates effectively However, without continuous skill development, staff may struggle, leading to potential waste and loss of capital.
To effectively mobilize additional capital resources, the company must seek external funding while offering investors a competitive return, which constitutes the cost of capital It is crucial to evaluate these costs carefully when selecting a financing model, ensuring that the chosen approach minimizes capital expenses while maintaining financial stability.
Enterprises must carefully choose an optimal business capital structure while ensuring a balanced proportion of working capital components for effective capital management Additionally, it is crucial to maintain flexibility in management, allowing for adjustments to the capital structure based on the specific circumstances of the enterprise and prevailing market conditions.
Working capital requirements vary significantly across industries; for instance, the tourism sector typically demands less working capital compared to the manufacturing industry As a result, businesses must carefully assess their working capital needs based on their specific industry to prevent unnecessary capital waste.
Economy situation in each period
Every stage of a business is linked to the overall economy of the country and the specific industry it operates within Consequently, it is crucial for enterprises to assess their working capital in alignment with their operational activities and strategic plans for each period.
+ Customers: Determine the financial ability of customers, especially debit customers to help businesses determine the ability to purchase, the ability to meet payment requirements for debts
+ Enterprises: The relationship between businesses also affects working capital A reputable enterprise in the market will need less working capital than other businesses.
A competitive company can attract a significant customer base, leading to increased product sales and enhanced business operations To achieve this, it is essential to maintain adequate working capital, ensuring timely production and effective service to meet customer demands.
Such as natural disasters, fire etc cause the loss of assets of the enterprise,including inventory, cause bad effect to businesses that owe money.
WORKING CAPITAL MANAGEMENT OF
Overview of Red Star Vietnam Co., Ltd
2.1.1 The establishment and development of Red Star Vietnam
General information of Red Star Vietnam Co., LTD.
- Transactional name: Công ty TNHH Sao đỏ Việt Nam
- Transactional name in English: RED STAR VIETNAM CO., LTD
- Head office: 1 st and 2 nd , AC Building, No 3, Lane 78, Duy Tan Street, Dich Vong Hau, Cau Giay, Hanoi, Vietnam
- Branch office: Block A, 24A Building, D5 Street, 25 Ward, Binh Thanh District, Ho Chi Minh City, Vietnam
- Director: Mr Hoang Anh Tuan
The establishment and development of Red Star Vietnam
Red Star Vietnam Co., LTD was established on May 20 th 2003,operating under the business registration certificate No 010136091 ofHanoi Department of Planning and Investment with registered capital ofVND 20,000,000,000.
From 2003 to 2020, Red Star Vietnam experienced consistent growth, with annual business turnover and pre-tax profits increasing each year Established under corporate law, the company possesses legal status, civil rights, and obligations, and is fully accountable for its business activities within its managed capital It has its own seal, assets, and centralized funds, and is authorized to open bank accounts in compliance with state regulations.
Red Star Vietnam is a prominent leader in industrial automation, dedicated to delivering comprehensive solutions in measurement, testing, and analysis With a vision to be a top-tier company in its field, Red Star Vietnam specializes in providing high-quality measurement equipment, establishing itself as a trusted name in Vietnam and across Asia.
2.1.2 The business characteristics of Red Star Vietnam
Red Star Vietnam has the main business line about Sciences & Engineering, Materials Sciences As follows:
Sales encompass a wide range of products, including scientific and technical equipment, laboratory and testing apparatus, industrial and educational tools, as well as office IT solutions Additionally, the offerings extend to electrical goods, refrigeration units, agricultural, forestry, and aquatic products, alongside fine arts handicrafts, transportation means, cosmetics, and medical equipment.
- Purchasing agent, sales agent, consignment.
- Service installation, maintenance, product warranty company business.
- Trade in machinery, laboratory equipment, and environment.
- Sales of equipment for the pharmaceutical industry.
2.1.2.2 The function of the company
Red Star Vietnam serves as a vital link between customers and manufacturers by delivering products and services directly from suppliers and the company's warehouse Acting as a knowledgeable consultant, the company assists individual households in selecting the right consumer products to meet their needs Additionally, Red Star Vietnam gathers valuable insights on customer preferences and product quality, enhancing its role as a direct contact point for consumers.
2.1.2.3 The organizational structure of the company a General organization of management
Red Star Vietnam has organized the management apparatus according to a unified centralized model.
The Managing Director directly assigns departments within the organization to enhance the professional capabilities of functional areas while maintaining control and oversight This structure is effectively implemented in both the Hanoi and Ho Chi Minh City branches, ensuring stable operations Additionally, the Accounting Department is organized to support these objectives.
Red Star LLC, as a small business, integrates its accounting and financial functions, with tasks from the finance department overlapping with those of the accounting department Consequently, the accounting data reports serve as the foundation for informed financial decision-making.
Chart 2.1: Organization chart of Red Star Vietnam
Functional departments of Red Star Vietnam :
The Managing Director serves as the legal representative responsible for overseeing the daily operations of Red Star Vietnam, ensuring alignment with the objectives, plans, and resolutions set by the Board of Members, as well as adhering to legal regulations This role entails accountability to both the law and the Board of Members for the execution of assigned rights and responsibilities.
Red Star Vietnam's Board of Members receives expert advice and assistance in key areas such as corporate organization, innovation, and development This includes support in personnel arrangements, recruitment processes, and the inspection and resolution of complaints, as well as measures for preventing corruption Additionally, the organization focuses on labor management, payroll systems, and benefits policies, while prioritizing the training and development of human resources, along with implementing reward systems and social welfare initiatives.
Advise and assist PV Red Star Vietnam’s Board of Members in administration - management; secretary - general tasks; clerical tasks - archive; and management of security and defense of Red Star Vietnam.
Organizing the management of clerical work, receiving guests, organizing meetings The main task is:
- Receiving guests for the managing director.
- Stamp, receive written work, letters, newspaper; text security.
- Classifying documents to the director, customer service, meeting.
- Receiving procured materials and items, ensuring they match the purchase order specifications, and applying receipt and storing procedures
- Storing materials and items as per applied storing rules, and maintaining them from fire or damage.
- Responsibility for maintaining the warehouse, keeping it clean and organized at all times.
- Input data on parts into centralized computer system and correlate it with work requests in the system for expense tracking associated with the work orders.
The logistics department plays a crucial role in the supply chain by planning and processing orders, managing the efficient storage of goods, and overseeing packaging, transportation, and delivery Its primary objective is to ensure that all related information flows seamlessly from the point of origin to the point of consumption, effectively meeting customer requirements.
Currently, Red Star Vietnam has 25 officers and employees.
Table 2.1 Labor structure of Red Star VietNam
1 Classified according to the level of labor
2 Classified according to labor contract
-Labor contract is for a period 1-3 years 0
2.1.2.5 The stages of product distribution
It can be said that Red Star Vietnam is an intermediary that helps to connect distributors' products to consumers The business has been constantly
Red Star Vietnam is dedicated to enhancing its prestige and expanding its customer network across both the industry and government sectors nationwide The company collaborates with renowned production partners like Hitachi, Leica, and Yasuda to source products, which are then stocked for resale to smaller distributors or transferred to other branches This strategic approach ensures efficient customer service and a streamlined distribution process.
Figure 2.1 The stages of product distribution on the customers’ side
In order for the contract with any customer to be the most effective and comprehensive, in the profile of Red Star always prepare:
+ Information about products and services of the company that is suitable for each target company customers.
+ Make detailed plans for meeting customers such as: determining the object, time, location.
+ Prepare quotation, product catalog and company introduction.
After establishing your business, the next crucial step is to identify potential customers Initially, your first clients may come from online sources or personal connections However, as your company gains a solid reputation in the market, the majority of your clientele will likely be existing customers or referrals from satisfied clients.
However, the company still reaches new customers in need and in accordance with criteria that it can meet.
Red Star is dedicated to enhancing customer convenience by gradually fostering strong relationships, which enables a deeper understanding of customer needs This commitment is evident in their attentive customer care and prompt responses to inquiries.
Red Star Vietnam focuses on the interests and needs of customers and towards customers; feedback and design consistent orders with customers
After making a quotation and persuading customers, Red Star will sign a contract with the customer.
* On the Red Star Vietnam side:
Figure 2.2 The stages of product distribution on the company’s side
Upon receiving customer orders, the company reaches out to international suppliers to facilitate purchases The transaction department diligently seeks suppliers that align with the customer's criteria, including quality, price, and delivery time, ultimately selecting the most suitable option to place an order Additionally, they may leverage information from past orders to request quotes from previously engaged suppliers.
Contract of orders Send to suppliers
To initiate the purchasing process, the employee will create a purchase contract Red Star Vietnam primarily collaborates with partners from Japan, ensuring a well-defined procedure that includes generating purchase orders and contracts This process is then submitted to the head of the censorship section for review of price, quantity, and contract terms.
The suppliers will collate and review the order to deliver timely as required by the order and delivery.
- Step 4: Delivery ( Return if damaged)
Upon delivery of goods by the supplier, the receiving or importing department is tasked with counting and inspecting the items for any damage If any goods are found to be damaged, the company staff will initiate the exchange or return process with the suppliers.
Finally, the payment for goods to suppliers is done at the accounting & finance department.
The company hands over the product to customers based on time, location, and quantity as stated in the signed contract.
2.1.2.6 The advantages and disadvantages of business activities
Working capital management of Red Star Vietnam Co., Ltd
2.2.2.1 Determining the needs for WC
In the service trade sector, working capital is crucial for business operations, necessitating a high ratio of available funds Any disruption in working capital financing can significantly hinder a company's activities and overall performance.
Effective management of working capital is essential for Red Star Vietnam The company utilizes the Percent of Sales Method, an indirect approach, to determine its working capital requirements.
The followings will show details of the forecast of working capital needs for the year 2018:
Calculating the average balance of items in 2018 < Unit of measure:
Table 2.9: The appropriated in 2017 and 2018 of Red Star Vietnam
3 Tax and payables to the State 418,792,139 334,727,200
( Source: Red Star Vietnam’s Balance Sheet 2018 and 2019)
Calculating the percentage of items on sales:
Calculating added working capital needs < Unit of measure: VND>
This means that Red Star Vietnam Company needs to raise its permanent working capital by 5,339,057,102 VND to gain the expected net sales in 2019.
Determining the financial needs for the operation in 2019
On the basis of actual data from the balance sheet in 2019, the financial needs for the operation in 2019 could be calculated in the following tables:
Table 2.10: The constitution of working capital needs
( Source: Red Star Vietnam’s Balance Sheet 2018 and 2019)
- The expected working capital capital requirements in 2019:
- The different between actual and planned working capital needs:
2.2.2.2 Financing the needs for WC
Non-current Liabilities: VND 0 Owner’s Equity:
Diagram 2.1 Red Star Vietnam’s structure of funds at the end of 2017
Diagram 2.2 Red Star Vietnam’s structure of funds at the end of
Diagram 2.3 Red Star Vietnam’s structure of funds at the end of
From 2017 to 2019, the company maintained a positive net working capital (NWC), indicating that a portion of its current assets was financed by permanent capital NWC increased from VND 14,407 million at the end of 2017 to over VND 17,265 million by the end of 2018 However, in 2019, NWC slightly decreased to VND 16,128 million as the company shifted towards using more short-term financing for its current assets The detailed current liabilities of Red Star are presented in the table below.
Table 2.7 Red Star Vietnam’s current liabilities from 2017 to 2019
3 Tax and payables to the State
10 Current loans & finance lease liabilities
( Source: Red Star Vietnam’s Balance Sheet from 2017 to 2019)
At the end of 2019, Red Star Vietnam's temporary capital was primarily sourced from current deferred revenue (39.97%), current trade payables (30.57%), current loans and finance lease liabilities (27.32%), tax obligations, and payables to the State and employees (1.01% and 1.13%, respectively) The significant share of current trade payables and deferred revenue indicates the company's strengthened relationships with suppliers and customers Notably, a decrease in current trade payables during the 2018-2019 period reflects Red Star Vietnam's commitment to timely debt repayment, fostering business continuity Conversely, the rise in current deferred revenue suggests a solid reputation among customers, which aligns with the company's efforts to meet consumer preferences and expand market share for revenue growth Nonetheless, it remains essential for the company to closely monitor its capital allocations and develop a prudent repayment strategy to maintain its reputation.
The company's current loans & finance lease liabilities have decreased from almost VND 14,500 million to VND 11,237 million at the end of
In 2019, the company demonstrated a notable decrease in its credit loans, which has alleviated financial pressure and enhanced its financial autonomy Despite this progress, it is essential for the company to implement strategies that leverage financial resources effectively to boost Return on Equity (ROE) and enhance overall profitability.
Red Star Vietnam’s working capital management comprises several key components, including cash and cash equivalents, short-term financial investments, current receivables, other current assets, and inventory The distribution of each working capital item by value is illustrated in Table 2.6 below.
Table 2.6 Red Star Vietnam’s structure of working capital from 2017 to 2019
( Source: Red Star Vietnam’s Balance Sheet from 2017 to 2019)
As seen in Table 2.6, the current assets are constantly changing From
Between 2017 and 2018, the company's current assets surged by over 54%, exceeding VND 61,155 million However, from 2018 to 2019, there was a slight decline in current assets to VND 57,248 million, marking a decrease of nearly VND 4,000 million, or 6.39% This trend indicates a strategic shift towards reducing current assets while increasing investments in non-current assets, particularly in investment properties.
Over the past three years, inventory has been the largest component of the business's assets, peaking at over VND 23,000 million by the end of 2018, which represented a significant increase from nearly VND 15,000 million at the end of 2017 However, by the end of 2019, inventory decreased to VND 21,954 million This trend highlights the company's focus on exporting raw materials to support its production and service operations.
Current receivables represent a significant portion of a company's current assets, ranking as the second highest category In contrast, short-term financial investments held the largest share at the end of 2017 and 2018, with current receivables accounting for VND 19,000 million (47.69%) at the end of 2017, which decreased to VND 25,676 million (41.99%) by the end of 2018 This decline in current receivables is a positive indicator, reflecting the company's effective management of debt collection and a reduced risk of bad debts.
Cash and cash equivalents represent the most liquid assets and serve as a crucial indicator of a company's solvency For Red Star Vietnam, these assets constitute the third largest portion of its working capital, showing a consistent upward trend over the past three years By the end of 2017, cash and cash equivalents exceeded VND 5,140 million, accounting for 12.97% of total assets This figure rose significantly in subsequent years, with increases of VND 3,500 million (67.28%) in 2018 and VND 6,217 million (72.31%) in 2019 While the growth in cash reserves enhances liquidity, solvency, and investment opportunities, rapid business expansion necessitates careful management to prevent capital wastage from excessive cash holdings Therefore, the company must implement a more effective cash management strategy.
Red Star Vietnam has seen a growing trend in its short-term financial investments, which, while still a small portion of its overall portfolio, is becoming increasingly significant By the end of 2018, short-term investments reached over VND 3,560 million, marking the first year this target was recorded This figure rose slightly to VND 3,780 million by the end of 2019 The company is strategically focused on short-term investments due to their appealing nature and potential for high returns.
Between 2017 and 2019, Red Star Vietnam experienced fluctuations in its other current assets, which represented a small proportion of total current assets Notably, in 2018, these assets reached their lowest point at VND 21 million, accounting for just 0.03% By the end of 2019, however, this figure surged to over VND 1,229 million.
Cash management is a critical activity for companies of all sizes; is the basis for a business to form and develop as well as fulfill its duties and goals.
Effective cash management is essential for business leaders, as it serves as a crucial tool for overseeing and executing business operations By ensuring access to accurate information, companies can address cash management effectively, making it a top priority for successful financial oversight.
Table 2.11: Red Star Vietnam’s cash and cash equivalents 2018 - 2019
( Source: Red Star Vietnam’s financial statement footnote 2018 and 2019)
Besides, it is necessary to consider additional net cash flows for the year of the company over the years:
Table 2.12: Red Star Vietnam’s cash flow of 2018 – 2019
1 Net cash flow from operating activity 6,588,799,051 (10,261,329,417) 16,850,128,468 (164.21)
2 Net cash flows from investing activities (8,528,825,790) 50,854,351 (8,579,680,141) (16,871.08)
3 Net cash flow from financing activity 8,157,564,101 13,514,000,000 (5,356,435,899) (39.64)
Net cash flows for the year 6,217,537,362 3,303,524,934 2,914,012,428 88.21
(Source: Red Star Vỉetnam’s Cash flow Statement 2018 and 2019)
At the end of 2019, cash and cash equivalents saw a significant increase, driven by two main sources: cash on hand and cash in bank Compared to the end of 2018, cash on hand surged by 298.07%, while cash in bank rose by 67.59%.
At the end of 2019, cash and cash equivalent was over VND 14,815 million, an increase of VND 6,217 million compare to the end of 2018 (equivalent to 72.31%).
The increase in net cash flows from 2018 to 2019 can be attributed to the company's enhanced sales and purchase strategies, particularly in its operating activities and discount policies.
In general, the proportion of cash on hand was smaller than the proportion of cash in hand due to the benefits of depositing money in a bank such as:
+ Help the company have good relationships with banks The company is currently using and has good relationship with some banks such as Bank for
Foreign Trade of Vietnam (Vietcombank); An Binh Commercial Joint Stock Bank (ABBank);… Facilitate loans and get preferential interest rates.
+ Minimize cash management costs, avoid money loss and convenient transactions quickly because most of the company's transactions have relatively large amounts of money.
Assessment of working capital management
By analyzing and assessing the working capital management in general and the particular items, including cash, account receivables, and inventories, here is achievements in working capital management:
In 2019, the company's total assets saw an increase, reflecting continuous business growth and development, despite a rise in working capital This positive trend indicates that the company has successfully maintained its financial stability while gradually enhancing equity and achieving self-financing for its production activities.
In recent years, the company's Net Working Capital (NWC) has consistently remained above zero, indicating sufficient liquidity to support ongoing business operations while also maintaining reserves for future use This trend is a positive indicator of the company's growth and financial stability.
Thirdly, although the trend is decreasing, the liquidity ratio still ensures that the indices are in the safe range, can still ensure the payment of the company.
The company has effectively managed its receivables, resulting in a significant increase in receivables turnover over the past year This improvement has helped the company reduce management costs and prevent capital stagnation.
Fifthly, Cash & Cash equivalents increased due to the strong cash flows from operating activities.
Besides the achievement, the company also face with some difficulties in the process of managing the working capital:
The return on working capital has declined due to a disproportionate increase in current assets compared to profit after tax, as the growth rate of profit was insufficient to match the rise in current assets.
Secondly, The company relies too much on short-term capital, short-term loans make a large number of interest payments In 2019, the company paid interest nearly 5 times that of 2018
Thirdly, Red Star Vietnam’s inventory turnover decreased decreased in
In 2019, the company faced challenges in inventory management, highlighting the need for improved strategies Additionally, the approach to assessing working capital requirements relied heavily on past results and experiences, which proved to be inaccurate This is primarily due to unexpected fluctuations in the prices of production inputs, resulting in unpredictable changes in raw material and initial production costs.
CHAPTER 3: SOLUTIONS TO IMPROVE WORKING
MANAGEMENT OF RED STAR VIETNAM
Objectives and targeted performance of Red Star Vietnam
In 2019, Vietnam's economy demonstrated remarkable success, achieving over 7% growth for the second consecutive year since 2011 Although this year's growth rate slightly decreased from the previous year's 7.08%, it still reflects the country's strong economic performance.
2018 but higher than the increase of 2011 - 2017 The government has set several socio-economic target focusing on macroeconomic stability, growth, inflation control, productivity, trade, investment, and increasing the economy's competitive.
The government and national assembly has already reached or exceeded its socio-economic goals for 2018 and 2019, and aims to do so in 2020.
The Vietnamese economy, particularly the service trade, is significantly impacted by the global spread of Coronavirus disease 2019 (Covid-19), which was first identified in December 2019 This infectious disease has adversely affected nearly all industries, with tourism, agriculture, real estate, and the trade of goods and services being the most affected sectors.
If Vietnam successfully manages to control the epidemic by April 2020, the decline in various services is expected to be limited to under 35% However, if the epidemic persists until the end of June 2020, most services could experience a decline ranging from 20% to 40%.
Red Star Vietnam specializes in research products across various sectors, including industry, science and technology, and health Despite its efforts to sustain business operations, the company encounters challenges due to Vietnam's restrictive trade policies.
3.1.2 The targeted performance of Red Star Company
In recent years, Red Star Vietnam has significantly enhanced its performance, achieving growth in net sales and profit after tax while improving employee income and welfare The company's reputation in the market has strengthened, reflecting its commitment to quality and a diverse range of products.
Red Star Vietnam aims to connect with top global manufacturers of scientific and technical equipment, medical devices, and industrial machinery Our mission is to supply Vietnam with cutting-edge technology and high-quality equipment, ensuring exceptional warranty services and comprehensive maintenance support for the advancement of science and medicine.
Red Star Vietnam also makes commitments to achieve the main objective as follows:
To suppliers: always seeks and establishes relationships with manufactures and suppliers to become prestigious, long-term business partners.
To customers: to provide warranty service, best quality and best services serving for the best of clients.
The company is dedicated to producing accurate research products that benefit both the community and society at large With a strong commitment to service and contribution, it aims to play a vital role in fostering growth and development for the nation.
Red Star Vietnam has established new goals for the upcoming year, focusing on daily improvement to enhance both community determination and the company's performance through key initiatives.
Research and market research, to bring new products, meet for diverse industries.
Upgrading marketing forms and promoting products in various forms to maintain existing customers and find new customers.
Reorganize Red Star Vietnam to be able to compete with competitors in domestic and foreign projects.
Planning to expand, distribution branches in locations other than branches in Hanoi and Ho Chi Minh City to ensure convenience for customers.
Maintaining the existing labor force, strengthening employees' social security to make employees work at their best.
Maintain and continue to strive to achieve profit and net sales that ensure minimize costs and lower product prices.
Orientation of business plan in 2020:
+ Total net sales: VND 131,017 million
Solutions to improve working capital management of Red Star Vietnam
In a competitive market economy, companies may experience revenue and profit growth; however, they often struggle with the efficient management of working capital, failing to meet expected performance outcomes This highlights the need to address the shortcomings and underlying causes that hinder effective working capital management.
Some solutions that Red Star Vietnam should pay attention to are:
The return on working capital index declined due to a disproportionate increase in current assets compared to profit after tax Despite both metrics rising, the growth rate of profit after tax was insufficient to match the increase in current assets To address this issue, the company should implement strategic measures.
Promote product marketing Especially in this epidemic prevention period, some products such as microscopes, medical equipment cleaning machines, etc are being used a lot
There are reasonable discount and preferential policies, especially for large customers and regular customers.
Find out your competitors to gain market share.
Find out the needs of the market and customers at the present time to have more reasonable products.
Secondly, the company should be cautious because financial leverage is
“a double-edged sword” Some solutions for Red Star LLC consider the short- term capital are:
The company considered adjusting its capital mobilization policy to reduce borrowing.
Consider to choose an investment that is suitable for a company with high profitability.
Negotiate with suppliers to extend repayment period.
To improve operational efficiency, the company must focus on enhancing its inventory management Given that the business relies on imported goods, it is vulnerable to fluctuations in exchange rates Furthermore, with a significant portion of its inventory consisting of goods, effective management of these resources is crucial for maintaining optimal stock levels.
Improving the quality of warehouse room to limit damaged goods, ensure the quality of goods, and also help save costs.
Making a reasonable provision for devaluation of inventories, avoid excessive provisioning, and reduce the profit of the company.
To enhance financial efficiency, Red Star must refine its working capital forecasts In 2019, the company overestimated its working capital needs, leading to a surplus of current assets that, while sufficient to cover short-term obligations, may have encouraged unnecessary spending and mismanagement of cash resources.
To enhance capital efficiency, companies must accurately assess their working capital requirements using a scientific approach rather than relying on subjective estimates Proper identification of working capital needs significantly influences the overall effectiveness of capital utilization within the enterprise.
Determining the appropriate working capital demand is crucial for business efficiency; overestimating it can lead to capital stagnation and increased costs, while underestimating can disrupt production due to insufficient funds Therefore, companies must accurately assess their working capital needs to maintain smooth operations and optimize capital utilization.
Determine properly the minimum and reasonable cash reserve to meet the cash spending needs of the enterprise in the period.
Balance revenue and expenditure, perform monthly cash flow planning.