NECESSITY OF THE THESIS
Board of Directors and Chief Financial Officers frequently encounter crucial financial decision-making challenges, including selecting optimal cash management strategies, managing inventory effectively, and overseeing accounts receivable These decisions are pivotal, as they can significantly influence a company's overall success or failure.
Based on observations of financial management practices in various companies, discussions with directors, and my experiences at Sonadezi Longthanh, I believe that incorporating mathematical models into financial decision-making can be highly beneficial These models provide managers with analytical tools grounded in scientific and quantitative methods, enhancing their ability to make informed decisions.
So I decide to choose the topic: ―Application of mathematics models in short - term investment decisions‖
OBJECTIVE OF THE RESEARCH
This thesis explores the application of mathematical models in decision-making for Directors and Chief Financial Officers It aims to investigate how financial models can effectively address challenges and identify optimal solutions for various decisions Additionally, the thesis serves as a guide for managers on implementing these models to enhance their decision-making processes.
KEY RESEARCH AREA
This article focuses on utilizing decision-making models for managing current assets,
METHODOLOGY
Thesis is used methodology of researching the secondary data, primary data, logic reason combination materialistic history, methods in raising the issues, interpretation, analysis and giving the conclusion
Thesis is also used statistic, formula illustration, interpreting the issues means and quantitative method.
CONTRIBUTIONS OF THE THESIS
This thesis holds significant value for both scientific inquiry and practical application It selects and enhances theoretical models that are tailored to the specific conditions and management capabilities of Vietnam.
About the reality, this thesis provide for managers the effective tools in analyzing and making decision base on quantitative method and apply mathematical model.
THESIS STRUCTURE
Topic: ―Application of mathematics models in short - term investment decisions‖ PREFACE
LITERATURE REVIEW
Overview of financial decision making
Financial decision-making is a crucial aspect of corporate financial management, as highlighted by Van Horne and Wachowicz (2001), who emphasize its focus on buying, selling, financing, and asset management to achieve overarching objectives McMahon's research supports this notion, illustrating that financial management aims to secure capital for asset acquisition and operational activities, while also analyzing limited capital for various purposes to ensure effective utilization in achieving company goals.
Financial management, as defined by researchers like Brealey and Myers (2003) and Ross et al (2003), focuses on investment, financing, and asset management to achieve specific objectives These definitions highlight three primary types of financial decision-making: investment, financing, and dividend decisions While numerous operational decisions impact a company's performance, this study emphasizes decisions amenable to quantitative analysis and modeling Ultimately, the article identifies key financial decisions that drive effective management.
Investment decisions involve evaluating total asset values, including both current and fixed assets, as well as maintaining a balance between these assets These decisions correspond to the left side of the balance sheet in accounting, highlighting the importance of understanding asset valuation and distribution for effective investment strategies.
- Investment decisions in current assets, include: o Cash management decisions o Inventory management decisions o Credit decisions
- Investment decisions in fix assets, include: o Financing new fixed assets decisions o Replacing old fixed assets decisions o Investing in project decisions o Long – term financial decisions
Investing in current and fixed assets is crucial in financial decision-making, as it significantly impacts a firm's value and shareholder wealth Key considerations in this process include operating leverage and break-even point decisions According to Hawawini & Vialiet (2002), making the right investment choices enhances firm value and increases shareholder wealth, while poor investment decisions can lead to a decline in both firm value and shareholder wealth.
Investment decisions focus on the left side of the balance sheet, while financing decisions pertain to the right side These decisions involve selecting the appropriate source of capital to acquire assets, whether through owner’s equity or debt, and determining the duration of the capital—short-term or long-term Additionally, financing decisions take into account the balance between retained earnings and dividend payouts Once a financing option is chosen, the next step for management is to strategize on how to effectively mobilize that source of capital.
- Short term financial decisions, include: o Short term debt or trade credit decisions o Short term borrowing or commercial paper decisions
- Long term financial decisions, include: o Long term borrowing: bank loans or bond decisions o Common Equity or long term debt decisions o Common equity or preferred equity decisions
- The ratio of total debt to total assets decisions (Financial Leverage)
- Borrowing to buy the assets or leasing decisions
Effective financing decisions are crucial for a company's operations Without a solid understanding of analytical tools, managers face significant challenges in making informed choices.
The third key decision in financial management is the disposition of profits, commonly referred to as dividend policy The Chief Financial Officer (CFO) faces the critical choice of either retaining earnings for reinvestment or distributing them as dividends to shareholders Additionally, the CFO must determine the appropriate dividend policy and assess its impact on the firm's overall value and the market value of its stock.
Besides 3 kinds of decisions in financial decision making, there is a lot of other decisions relate to the operations of the business But focus of this thesis will be on the decisions that the model can be applied to make decisions.
Overview about the model building
A model serves as a simplified representation of a complex empirical situation, capturing the essential behaviors of natural phenomena through a few interrelated variables For decision-makers, a simpler model is advantageous as long as it reliably reflects the real-world problem The key benefits of utilizing a straightforward model include enhanced clarity and ease of understanding, ultimately aiding in more effective decision-making.
- It is economical of time and thought
1 Bonini, Hausman, Bierman,(1997), Quantitative Analysis for Management (9 th Edition), McGraw
- It can be understood readily by the decision maker
- If necessary, the model can be modified quickly and effectively
The goal of a decision maker is not to create an overly complex model that mirrors reality in every detail, as this would be time-consuming and difficult to understand Instead, the focus is on developing a simple model that effectively predicts outcomes and supports actionable decisions.
There are several types of decision models To understand and build the models, first we need to know how to classify the model base on different criteria
- The nature of models o Physical model o Notion model o Mathematical model
- The level of complication o Simple Problems
Decision analysis models o Complex Problems
Linear and integer programming models
PERT or Critical path models (CPM)
- The dynamic nature‘s models o Certain models o Uncertain models
Major variables in a decision problem are
Simple Case models Decision analysis
PERT or Critical path models
Simulation Inventory models Queuing models
( Sources: Bonini, Hausman, Bierman 1997 Quantitative analysis for management 9 th
Edition New York: McGraw – Hill/ Irwin)
A model serves as a simplified representation of a business decision problem, focusing on key elements while excluding nonessential factors, making it highly effective Key components of the model include decision variables, which are the choices controlled by the decision maker; exogenous variables, which are external influences like economic conditions and competitor actions; and policies and constraints that may limit decision-making due to company regulations or physical limitations Performance measures are crucial as they quantify the objectives managers aim to achieve, while intermediate variables, often accounting-related, connect decision and exogenous variables to these performance measures.
Figure 1.1 illustrates the relationships among different categories of variables, highlighting that decision variables, exogenous variables, and policies and constraints serve as inputs to the model, while performance measures are the outputs The model encapsulates the comprehensive set of relationships among these variables.
Figure 1.1: The various categories of variables are related
1.2.4 The method to set up a model and apply in the financial decision making
The choice of model—simple, complex, or very complex—depends on the nature of the problem and the objectives of the decision maker To establish an effective model, specific steps must be followed to ensure accurate outcomes.
Step 1: define the aim or the nature of decision
Step 2: define the variables affect decision
Step 3: define the relationship among the variables and the aim of decision (Set up the model)
Step 4: input the data of variables into the model, check the result
Step 5: change the data of variables and check again effect on the result.
ANALYZING BUSINESS ACTIVITIES OF SONADEZI
Sonadezi Longthanh Shareholding Company
2.1.1 The introduction of Sonadezi Longthanh Shareholding Company a General Information
Company: SONADEZI LONG THANH SHAREHOLDING CO
Address: LongThanh Industrial Zone, LongThanh district, DongNai province
E-mail: longthanhiz @ sonadezi.com.vn
Website: www.sonadezi com.vn
- Surveying, designing, investing, contributing, managing, and operating the infrastructure of industrial zone, house and house for rent
- Consulting about setting up and operating business plan
- Leasing ready – built workshop, office and warehouse
- Doing services assistant to residential area c Corporation For The Development Of Bien Hoa Industrial Zone (Sonadezi Corporation – Sonadezi Bienhoa) Structure
Established with a primary focus on industrial zone development in Dong Nai Province, Sonadezi Corporation has grown to comprise 20 subsidiary companies Since its inception, the corporation has played a pivotal role in shaping Vietnam's industrial landscape, particularly with the reconstruction of Bien Hoa 1 Industrial Zone's infrastructure Over time, Sonadezi has solidified its position as a leading and reliable name in Vietnam's industrial estates development sector.
- Ready-built workshop for lease
Sonadezi Longthanh, a subsidiary of Sonadezi Corporation, is primarily funded by Sonadezi Bienhoa, which holds a 51.19% stake As one of the largest companies in the construction and infrastructure development of industrial zones, Sonadezi Longthanh plays a crucial role in the core operations of Sonadezi Corporation.
College of Technical and Management of Sonadezi
Construction No.01 joint-stock co
Engineering consultants Joint- stock company
Dong Nai Vehicle Stand and Transport Service Joint Stock Company
Dong Nai Port Joint-stock company
Housing Dongnai joint – stock co
Dong Nai Land And Water Transport Company
Dong Nai Electric Appliances Joint- Stock Company
Dong nai Mechanical Joint- stock company
Dong Nai material and building Investment Joint- stock company
Dong Nai Transport Communication Machanical Company
Sonadezi Chau Duc shareholding company
Sonadezi Service Joint - Stock company d Capital Structure
Sonadezi Long Thanh is the shareholding company which is set up by Sonadezi Bien Hoa and the capital is contributed by all companies list below:
- Electricity of Vietnam – Dong Nai Branch;
- Sonadezi Shareholding Construction Company (Sonacons);
- Dong Nai Investment and Development Fund
Table 2.1: Capital structure of Sonadezi Long Thanh
No Name Value Unit Contribution ratio
4 Dong Nai Weter Plant 5.328.000.000 VND 5,33%
Sonadezi Bienhoa Electricity of Vietnam – Dong Nai Branch Dong Nai Investment and Development Fund Dong Nai Weter Plant
Dong Nai Posts & Telecommunications Sonadezi Shareholding Construction Company
Figure 2.2: Capital structure of Sonadezi Long Thanh e Company Organizing Structure
Figure 2.3: Company Organizing Structure of Sonadezi Long Thanh
2.1.2 The Operating results of Sonadezi Long Thanh Shareholding Company 2.1.2.1 The operating results in 2005, 2006 and 9 months 2007
The operating results of 2006 is the large progression of Sonadezi Longthanh: in
In 2006, the company's total assets surged by 58.43% compared to 2005, primarily driven by the significant increase in land subleasing Net sales rose by 48.41%, with land sublease expanding from 25 hectares at an average price of $22 per square meter in 2005 to 60.6 hectares at $25 per square meter in 2006 As a result, the profit after tax experienced a remarkable increase of 99.57% over the previous year.
The operating results for the first nine months of 2007 show significant improvement compared to the initial plan for the year, with a profit after tax of 57.7 billion VND, marking an increase from 2006.
Table 2.2: Operating results in 2005, 2006 and 9 months 2007
Total Assets Net sales Profit after tax
Figure 2.4: Operating results in 2005, 2006 and 9 months 2007
2.1.2.2 Some ratios assess the financial stability and business activities results
Sonadezi Longthanh demonstrates strong financial ratios overall, although its debt ratio remains high at 69.25% as of 2006, primarily due to the nature of its industry This elevated liability level reflects the prepayment costs associated with land subleasing for that year However, if accrued expenses are excluded, the debt ratio would significantly decrease to just 5%.
Table 2.3: Financial stability and business activities results of SZL
Long-term assets/Total assets % 58.15 43.08 31.60
Total assets/Total liabilities Time 1.56 1.44 1.49
(Current asset/Current liability) Time 0.69 0.84 1.03
2.1.3 Characteristic of cash in Sonadezi Long Thanh Shareholding Company and relating decisions
2.1.3.1 Characteristic of cash in Sonadezi Long Thanh Shareholding Company
Base on the balance sheet of Sonadezi Longthanh through 2005, 2006 and 9 months in 2007, we can see the cash account of company like this:
Table 2.4: Cash account of Sonadezi Long thanh
In the table 2.4 we can see Sonadezi Longthanh deposited all cash in the bank The cash in hand is very low
Sonadezi Long Thanh's land subleasing business model allows for one-time cash leasing, while construction costs are paid gradually through bank accounts after contract completion This structure minimizes the need for substantial cash reserves and reduces decision-making related to cash management The increasing liquidity ratios from 2005 to 2007 indicate that Sonadezi Long Thanh is well-equipped to meet its current liabilities promptly.
Table 2.5: Liquidity ratios of Sonadezi Long thanh
Total assets/Total liabilities Time 1.56 1.44 1.49
(Current asset/Current liability) Time 0.69 0.84 1.03
2.1.3.2 Decision making relate to cash in Sonadezi Long Thanh
Sonadezi Longthanh set up maximum cash on hand per day is 5,000,000 VND (C)
Based on Baumol's assumptions, including a constant disbursement rate, the absence of cash receipts during the projected periods, and no allowance for safety stock of cash, the cash flow is characterized as discontinuous Consequently, we can calculate the total cost by using the equation that accounts for both opportunity costs and trading costs.
Total cost = Opportunity costs + Trading costs
- T is the total amount of new cash needed for transactions purposes over the relevant planning period, say, one month
- F is cash withdrawal fee, transaction fee
- R interest rate of demand deposits (0.2 %/month) - Vietcombank
Tuong An Vegetable Oil Joint Stock Company (TAC)
2.2.1 The introduction of Tuong An Vegetable Oil Joint Stock Company a General information
Company name: Tuong An Vegetable Oil Joint Stock Company
Abbreviation name: Tuong An Oil
Company birthday: 20 November 1977, which has become joint stock company since 1 st October 2004
Address: 48/5 Phan Huy Ich Street, Ward 15, Tan Binh District, Hochiminh City, Vietnam
E-mail: tuongan@tuongan.com.vn
Website: http://www.tuongan.com.vn
Manufacturing, trading, importing and exporting products processed from vegetable and animal oils, fats, oilseeds and nata de coco
Trading, exporting and importing machinery, equipments, materials for vegetable oil processing and production
Manufacturing, trading spices used for food processing industry, sauces (production is not carried out at head office)
Manufacturing and trading instant food products (noodles, rice vermicelli, noodle soup, dry pancake and instant soup)
Agent in trading and on consignment
Entertainment centre services (not operate at head office)
Cultural activities (organizing meetings, cultural exchange relations)
Accommodation business (constructing buildings for trading or for leasing) c Production capacity
After nearly 30 consecutive years of building and development, till now with the advanced machinery system and processing technology, Tuong An has total capacity of 130,000 tons per year, including 02 factories:
Address: 48/5 Phan Huy Ich Street., Ward 15, Tan Binh District, Hochiminh City, Vietnam
Address: 153 Nguyen Viet Xuan Street, Hung Dung Ward, Vinh City, Vietnam
3 Tuong An are building the third oil factory in Phu My 1 industrial park, Vung Tau province This is the biggest and most modern oil factory with capacity of 600 tons per day in Vietnam This new factory is scheduled to operate in the end 2006, totaling overall capacity of Tuong An twice higher than current one d Main export markets: Japan, the Middle East, Eastern Europe, Hong Kong, Taiwan, etc, e Distribution network
Tuong An distribution network with over 200 distributors and agents, 100 industrial customers and 400 supermarkets, restaurants, kiosks, schools and nursery schools, etc., all over 64 cities and provinces nationwide
The branches and representative offices:
Address: 916 Bach Dang Street, Thanh Luong Ward, Hai Ba Trung District,
Address: 54-58 Le Trong Tan Street, Hoa Phat Commue, Hoa Vang District,
Address: 108/95/16 Nguyen Viet Hong Street, An Phu Ward, Ninh Kieu District, Can Tho City, Vietnam
The most important objective is to continuously enhance product quality, meet all demands of customers
In June 2000, Tuong An became one of the first Vietnamese companies to receive the ISO 9001:2000 quality certification from British BVQI Our dedication to implementing and upholding the ISO 9001:2000 quality management system reflects our commitment to meeting the growing demands of our customers and ensuring their utmost satisfaction.
Table 2.6: Capital structure of Tuong An Vegetable Oil Joint Stock Company
No Name Value Unit Contribution ratio
Oils, Aromas and Cosmetics of
Vocarimex In Company Out of Company
Figure 2.5: Tuong An Vegetable Oil Joint Stock Company Ownership h Company Organizing Structure
2.2.2 The Operating result of Tuong An Vegetable Oil Joint Stock Company 2.2.2.1 The operating result in 2005, 2006 and 9 months 2007
In table 2.7, the operating result of 2006 is development against 2005, concretely in
In 2006, the company's total assets and net sales both saw a significant increase of 28% compared to 2005, with the primary product being oils However, the profit after tax rose by only 14% during the same period, highlighting a disparity between high net sales and lower profit margins This discrepancy can be attributed to the substantial costs associated with goods sold, selling expenses, and general and administrative expenses prevalent in the oils industry, as illustrated in Table 2.8, which outlines the structure of sales and expenses for 2006.
Table 2.7: Operating result in 2005, 2006 and 9 months 2007 of TAC
Table 2.8: Structure of sales and expenses in 2006
Item Net sales and services
Cost of sales Selling expenses
The operating results for the first nine months of 2007 show significant improvement compared to 2006, with a profit after tax of 91.02 billion VND, marking an increase of 45.69 billion VND from the previous year.
Total Assets Net sales Profit after tax
Figure 2.7: Operating result in 2005, 2006 and 9 months 2007 of TAC
2.2.2.2 Some ratios show the financial situation and business activities results
Tuong An demonstrates strong overall ratios; however, its debt ratio remains notably high at 51.75% in 2006 This elevated figure is primarily due to a significant portion of current liabilities, which largely consists of amounts owed to Vocarimex for materials.
Table 2.9: Financial stability and business activities results of TAC
Item Unit 2005 2006 9 months (2007) Asset turnover
Long-term assets/Total assets % 24,09 51,94 35.80
Total assets/Total liabilities Time 2,30 1,93 2.00
(Current asset/Current liability) Time 1,89 1,05 1.57 Acid test ratio
Table 2.10: Liabilities structure of TAC
Current liabilities 251,401,316,787 Long-term liabilities 31,901,851,834
2.2.3 Characteristic of current assets in Tuong An Vegetable Oil Joint Stock Company and relating decisions
2.2.3.1 Characteristic of Inventory in Tuong An Vegetable Oil Joint Stock Company
In table 2.11, the ratio inventory over cost of goods sold is quite low through 2005,
2006 and 9 months 2007 it means the ratio between inventory and cost of goods sold is reasonable
Table 2.11: Inventory structure of TAC
Raw material 48,411,557,114 58,574,611,556 68,877,961,077 Instrucments and tools 80,365,745 128,445,660 154,233,708
Goods in process 15,085,934,890 12,988,271,761 17,026,337,471 Finished goods 13,030,628,621 43,141,614,711 42,527,866,059
Tuong An Vegetable Oil Joint Stock Company demonstrates strong financial ratios in inventory management, with an impressive inventory turnover exceeding 12, indicating effective inventory control This efficiency is further evidenced by the notable increase in sales and profit after tax during 2005, 2006, and the first nine months of 2007 Additionally, the average inventory period of less than 30 days highlights the popularity of Tuong An oils in the market.
+ Average inventory period = turnover Inventory
Table 2.12: Inventory turnover of TAC
+ Average inventory 65,158,772,392.25 95,869,496,901.50 121,922,725,695.00 + Average inventory period 22.28 24.98 28.30
A comparison of inventory turnover between Tuong An oils and Marvella oils reveals that Tuong An oils demonstrates more effective inventory management Specifically, the inventory-to-cost of goods sold ratio for Tuong An oils is lower than that of Marvella oils, indicating a more efficient use of inventory resources.
Table 2.13: Comparison inventory turnover of Tuong An oils and Marvella oils
2.2.3.2 Decision making relate to inventory in Tuong An Vegetable Oil Joint Stock Company
Tuong An Vegetable Oil Joint Stock Company does not utilize the economic order quantity (EOQ) model for inventory management Consequently, by analyzing the inventory levels at the beginning of each year, we can determine the costs incurred for inventory due to the absence of EOQ implementation.
The inventory in the beginning of each year of Tuong An Vegetable Oil Joint Stock Company like this:
Total units selling per year (T)
With the restocking costs and carrying cost like this:
Year Restocking costs/order (F) Carrying costs/unit (CC)
We can calculate the total costs with the units order equal to the inventory in the beginning of the year
Year Total CC Total F Total cost
2.2.4 Characteristic of Account Receivables in Tuong An Vegetable Oil Joint Stock Company and relating decisions
2.2.4.1 Characteristic of Account Receivables in Tuong An Vegetable Oil Joint Stock Company
Table 2.14 reveals that the ratios of accounts receivable to total assets and accounts receivable to net sales remain consistently low from 2005 through the first nine months of 2007 These findings indicate that Tuong An Vegetable Oil Joint Stock Company is implementing a restrictive credit policy.
Table 2.14: Characteristic of Account Receivables in Tuong An Vegetable Oil
Total assets 427,827,566,009 547,408,667,444 653,132,842,015 Net Sales 1,182,278,272,303 1,516,516,302,466 1,708,240,973,237.00 Accout receivable 21,865,403,106 28,061,725,178 32,565,527,737
Tuong An Vegetable Oil Joint Stock Company has a high accounts receivable turnover, indicating an efficient collection process from customers Table 2.15 reveals a decline in the average collection period from 2005 to 2006 However, this efficiency may pose a risk for future net sales, as customers might shift to competitors with longer average collection periods.
+ Account receivable turnover receivable Account
+ Average collection period = turnover receivable
Table 2.15: Account receivable turnover of TAC
Table 2.16: Comparison account receivable turnover between Tuong Anoils and
Table 2.16 reveals that Marvella's accounts receivable turnover is lower than that of Tuong An, indicating that Marvella offers its customers a longer credit period This extended credit term serves as a competitive advantage for Marvella in the marketplace compared to Tuong An.
2.2.4.2 Decision making relate to Account Receivables in Tuong An Vegetable Oil Joint Stock Company
The analysis of the accounts receivable turnover at Tuong An Vegetable Oil Joint Stock Company reveals that the company employs a restrictive credit policy for all customers, lacking tailored management models for credit decisions This approach may hinder Tuong An's competitive edge within the industry and potentially lead to a decline in future net sales To enhance market competitiveness, this thesis recommends the implementation of accounts receivable management models By utilizing these models to assess sales and expenses, the Board of Directors can make informed and effective credit policy decisions.
APPLICATION OF MATHEMATICS MODELS IN SHORT-
Apply the cash management model in decision making in Sonadezi LongThanh
AN VEGETABLE OIL JOINT STOCK COMPANY
Chapter 2 analyzes the importance of applying mathematical models in decision-making, as evidenced by the survey results in Appendix B This chapter specifically focuses on utilizing these models for short-term investment decisions at Sonadezi Longthanh and Tuong An Vegetable Oil Joint Stock Company The application of these models reveals significant differences in the total costs incurred by the two companies.
3.1 Apply the cash management model in decision making in Sonadezi LongThanh Shareholding Company
3.1.1.1 The guideline to apply the BAT (Baumol) model
The Baumol model aims to calculate the optimal cash balance by considering opportunity costs and trading costs It operates under specific assumptions to effectively guide financial decision-making.
- No Cash Receipts during the Projected Periods
- No Safety Stock of Cash is allowed for
- The cash flow is discontinuous
The assumptions of the Baumol model often impose restrictions that make it challenging to apply in real-world situations, as these scenarios rarely align perfectly with the model's premises Nevertheless, the Baumol model remains valuable and relevant for practical applications.
F The fixed cost of making a securities trade to replenish cash
T The total amount of new cash needed for transactions purposes over the relevant planning period, say, one year
R The opportunity cost of holding cash This is the interest rate on marketable securities
C* Optimal size of the cash balance
General guideline for collecting data of these variances as follows:
In the Baumol model, F represents the fixed costs associated with executing securities trades to replenish cash, encompassing brokerage fees and other related expenses In Vietnam, most companies do not utilize surplus capital for short-term securities investments The components of F vary based on the investment choices of the company, which typically involve depositing surplus capital in banks for interest or purchasing derivatives like treasury notes and bank deposit certificates Consequently, F includes costs such as cash withdrawal fees, transaction fees, brokerage costs, discount fees, and potential losses from selling derivatives in challenging market conditions.
- T: In the Baumol model, T is the total amount of new cash needed for transactions purposes over the relevant planning period, say, one year However, if
T is one year then it is not real and breaks the assumption of Baumol model So we can choose T is a quarter, a month or a week
In the Baumol model, R represents the opportunity cost of holding cash, indicating the interest that is forgone, calculated as a percentage per year When estimating R, it is crucial to adjust it according to the planning period used for estimating T, as well as to consider the opportunity cost involved in the estimation process.
R, must be equal interest rate of demand deposits Next, depend on how ability the company use the money we adjust R increase to suitable rate
3.1.1.2 Apply the BAT model in determining the target cash balance
Apply the Baumol model to calculate the optimal size of target cash balance of Sonadezi Longthanh per week
- T is the total amount of new cash needed for transactions purposes over
- F is cash withdrawal fee, transaction fee
- R interest rate of demand deposits (0.2 %/month) - Vietcombank
Table 3.1: The optimal cash balance of Sonadezi Longthanh from January to
January 13,123,546,178.00 1,500,000.00 0.20% 4,436,814,089.75 February 13,537,083,535.00 2,000,000.00 0.20% 5,203,284,258.04 March 13,209,468,435.00 2,000,000.00 0.20% 5,139,935,492.79 April 25,964,583,120.00 2,100,000.00 0.20% 7,384,146,839.82 May 24,670,897,462.00 1,900,000.00 0.20% 6,846,510,438.01 June 26,472,198,465.00 2,200,000.00 0.20% 7,631,437,389.05
In conclusion, C* represents the optimal cash balance, determined by analyzing the associated costs at this level, as well as slightly above and below it For instance, examining the optimal cash balance in January provides valuable insights into effective cash management strategies.
Table 3.2: Total cost of the optimal cash balance from January to June in 2007
January 4,436,814,089.75 4,436,814.09 4,436,814.09 8,873,628.18 February 5,203,284,258.04 5,203,284.26 5,203,284.26 10,406,568.52 March 5,139,935,492.79 5,139,935.49 5,139,935.49 10,279,870.99 April 7,384,146,839.82 7,384,146.84 7,384,146.84 14,768,293.68 May 6,846,510,438.01 6,846,510.44 6,846,510.44 13,693,020.88 June 7,631,437,389.05 7,631,437.39 7,631,437.39 15,262,874.78
Table 3.3: The total cost in optimal cash balance compare with others cash balance in January Cash Balance Opportunity
The total cost at the optimum cash level is 8,873,828.18 VND (minimum) and it does appear to increase as we move in either direction
The assumptions of the Baumol model, including a constant disbursement rate, absence of cash receipts during the projected periods, no allowance for safety stock of cash, and discontinuous cash flow, align well with the real situation at Sonadezi Longthanh We will analyze and compare the total costs of two distinct cases to evaluate their financial implications.
Case 1: Setting up the optimal cash balance on hand per month base on Baumol model
Case 2: Setting up the maximum cash on hand (cash balance) per month base on the experiences and opinion of general director
Table 3.4: Comparison of the total cost of holding cash in the case of using
Baumol model and in the case of basing on experiences
Month Case 1 (Baumol model) Case 2
Cash balance per week Total cost Cash balance per week Total costs
January 4,436,814,089.75 8,873,628.18 5,000,000 3,937,068,853 February 5,203,284,258.04 10,406,568.52 5,000,000 5,414,838,414 March 5,139,935,492.79 10,279,870.99 5,000,000 5,283,792,374 April 7,384,146,839.82 14,768,293.68 5,000,000 10,905,129,910 May 6,846,510,438.01 13,693,020.88 5,000,000 9,374,946,036 June 7,631,437,389.05 15,262,874.78 5,000,000 11,647,772,325
Table 3.4 demonstrates that establishing the optimal weekly cash balance using the Baumol model can reduce costs for Sonadezi Longthanh, provided that the company's cash flow aligns with the assumptions of the model.
3.1.2.1 The guideline to apply the Miller – Orr model
The Miller-Orr model is designed to establish a target cash balance, differing from the Baumol model by incorporating the concept of random fluctuations in daily cash inflows and outflows Unlike Baumol's assumptions, the Miller-Orr model introduces the premise that net cash flows follow a standard distribution, allowing for more accurate cash management strategies.
The Miller-Orr model establishes a target cash balance by defining an upper limit (U*), a lower limit (L), and a target cash balance (C*) This model enables a firm to maintain its cash balance within these limits, allowing it to fluctuate between U* and L without triggering any actions.
When a firm's cash balance hits the upper limit (U*), as seen at Point X, it transfers U* - C* dollars from its account into marketable securities, reducing the cash balance to C* Conversely, if the cash balance drops to the lower limit (L) at Point Y, the firm sells C* - L worth of securities to replenish the cash account, bringing the balance back up to C*.
Determining the target cash balance by an amount instead of a certain number is extends the ability to apply this model in every cases of company
F The fixed cost of making a securities trade to replenish cash
R The opportunity cost of holding cash This is the interest rate on marketable securities σ 2 the variance of the net cash flow per period
U* is the upper control limit of cash balance
L is the lower control limit of cash balance
C* is the target cash balance
General guideline for collecting data of these variances as follows:
- L : depend on using money in what profitable purpose is, company can imply the cash balance is the cash on hand or cash on hand plus cash in bank
- F and R: similar to the guideline in Baumol model
- σ 2 : to calculate this variable, collecting the data of cash inflows and cash outflows per period, then take the difference of two cash flow we have the net cash flow
3.1.2.2 Apply the Miller – Orr model in determining the target cash balance
Apply the Miller – Orr model to calculate the optimal size of target cash balance of Sonadezi Longthanh per week
- L is the lower control limit of cash balance
- F is cash withdrawal fee, transaction fee, in one month
- R interest rate of demand deposits (0.2 %/month) – Vietcombank
- σ 2 : the variance of the net cash flow per period, a month
Table 3.5: The optimal cash balance of Sonadezi Longthanh from January to
January 5,000 1,500 0.2 18,662,767,708,691,3 2,194,607.09 6,573,821.3 February 5,000 2,000 0.2 32,466,203,503,485,2 2,903,439.6 8,700,318.8 March 5,000 2,000 0.2 10,356,788,665,412,0 1,985,441.9 5,946,325.9 April 5,000 2,100 0.2 23,867,782,300,539,5 2,663,811.5 7,981,434.4 May 5,000 1,900 0.2 24,800,290,383,681,1 2,609,637.04 7,818,911.1 June 5,000 2,200 0.2 11,361,590,353,660,9 2,113,455.1 6,330,365.3
Table 3.6: The average cash balance of Sonadezi Longthanh from January to
Month The average cash balance
Conclusion: C* is the optimal cash balance by calculating the various costs at this balance
Apply the Inventory Management Model and Credit and Receivable
3.2.1 The Economic Order Quantity Model
3.2.1.1 The guideline to apply the Economic Order Quantity model
The Economic Order Quantity (EOQ) model is a widely recognized method for determining the optimal inventory level that minimizes total inventory costs This model helps businesses identify the ideal order size for restocking inventory based on specific data inputs.
- T: Total unit sales per year
- F: Fixed cost per order, every time we place an order, there are fixed costs associated with that order such as: procedure cost, checking cost
- CC: Carrying costs per unit, such as storage cost, insurance cost, the opportunity cost of capital on the invested amount
3.2.1.2 Apply the Economic Order Quantity model in determining the optimal size of inventory orders
Apply the economic order quantity (EOQ) model in determining the optimal size of inventory orders of Tuong An Vegetable Oil Joint Stock Company
- T: Total unit sales per year;
- CC: Carrying costs per unit;
Table 3.7: The economic order quantity (EOQ) of Tuong An Vegetable Oil Joint
Stock Company per year form 2005 - 2007
Year T (liter) F(VND)/order CC(VND)/liter Q* (liter)
Which the total units sales per year from 2005 – 2007, apply the equation
We can calculate the optimal order size to establish an optimal inventory level
Total carrying costs = Average inventory x Carrying costs per unit
Total restocking cost = Fixed cost per order x Number of orders
Total costs = Carrying costs + Restocking costs
Table 3.8: The total cost of Tuong An Vegetable Oil Joint Stock Company per year form 2005 - 2007
Year Total carrying cost Total restocking cost Total cost
The total cost it means the optimal total cost per year
When comparing the total costs associated with using the Economic Order Quantity (EOQ) model versus not applying this model, it becomes evident that the total cost incurred by utilizing the EOQ model is significantly lower This highlights the efficiency and cost-effectiveness of the EOQ approach in determining optimal order quantities.
Case 1: Determine the economic order quantity base on EOQ model
Case 2: Determine the order quantity base on experiences and the inventory in the beginning of that year
Table 3.9: Comparison of the total cost of holding inventory in the case of using
EOQ model and in the case of basing on experiences
Year Order quantity Total cost Order quantity Total cost
3.2.2 Credit and receivables management models
3.2.2.1 The guideline to apply the Credit and Receivables Management Models
All Credit and Receivables Management Models were written in chapter 2 which are used to help Chief Financial Management (CFO) to determine credit policies of company
The credit policies of company include: i Credit standard policy ii Credit term policy iii Cash discount policy
To effectively manage credit and receivables, CFOs must gather and input data into a model for processing However, the complexity of data processing and decision-making in credit management requires sophisticated mathematical models, as highlighted by Van Horn and Machowicz.
(2001) set up the model to analyze and make decision base on effective of policy on two aspects:
- If the purpose of the policy is increasing profits then considers in increase profits equal or more increase costs
- If the purpose of the policy is decreasing costs then considers in save costs compensate the decreasing in profits i Credit standard policy
Credit standards refer to the criteria companies utilize to evaluate credit applicants, helping them decide which customers qualify for credit and the amount to offer These standards encompass both liberal and illiberal credit policies To determine the appropriate policy, a CFO can conduct an analysis using one of two established models.
Figure 3.1: Liberal credit policy model
Increase profit equal or more increase Costs
Figure 3.2: Illiberal credit policy model
This model can apply in manufacture and distribution companies To apply this model, we can do steps follow:
First, set up a credit standard
Second, forecast the changing in sales when using either liberal or illiberal credit policy
Third, forecast the changing in costs when using either liberal or illiberal credit policy
Fourth, compare between profits and costs to make decision
Fifth, keep track of effect of liberal or illiberal credit policy on sales and costs to change the policy on time ii Credit term policy
The credit term refers to the maximum duration a company permits customers to purchase products without immediate payment If customers exceed this period, their unpaid debt is classified as bad debt Adjusting the credit term can involve either extending or reducing the credit period.
Safe Costs equal or more Decrease profit
Figure 3.3: Lengthen the credit period model
Figure 3.4.: Shorten the credit period model
To apply this model, CFO need to cooperate with Business Manager, Sales Manager to estimate data input:
- Estimate the changing in sales ratio when the credit period changing
- Estimate the changing in average collection period when the credit period changing
- Estimate the changing in account receivables affect by changing in sales and average collection period
Safe Costs equal or more Decrease profit
Increase profit equal or more increase Costs
- Estimate opportunity of account receivables
Based on estimated data, the CFO can assess changes in profits and costs to inform strategic decision-making By comparing profits and costs, the CFO can determine which policies to implement within the company, including the cash discount policy.
A cash discount is a percentage reduction on the net cost of goods purchased, provided the customer repays the extended credit within a specified timeframe This discount, typically excluding freight and taxes, is designed to accelerate the collection of accounts receivable, thereby lowering a company's investment in receivables and associated costs There are two models of cash discount policies available to businesses.
Figure 3.5: Increase Cash discount policy model
Safe Costs equal or more Decrease profit
Figure 3.6: Decrease Cash discount policy model
To apply this model, CFO need to cooperate with Business Manager, Sales Manager to estimate data input:
- Estimate the changing in average collection period when the cash discount ratio changing
- Estimate opportunity of account receivables
Base on the estimated data, CFO can calculate changing in profits and costs Compare between profits and costs to make decision which policy can apply in company
3.2.2.2 Apply the Credit and receivables management model
Apply the Credit and receivables management model to determine credit policies of Tuong An Vegetable Oil Joint Stock Company per year i Credit standard policy
- Additional investment in inventory: 1,246,264,620VND
- Variable production, administrative, and marketing cost: 70% of total sales
Increase profit equal or more increase Costs
- Profit contribution ratio per dollar of sales is: 30%
- The company‘s required pretax rate of return: 25%
Table 3.10: Tuong An Vegetable Oil Joint Stock Company’s Analysis of the Decision to relax Credit Standard by Extending Full Credit to customers
Marginal profitability of additional sales 102,494,458,394.2
= Profit contribution ratio x Additional sales
Step B: Additional investment in receivables 56,161,347,065.33
= Additional average daily sales x average collection period ditional annual sales/365*60
Cost of the additional investment in receivables 14,040,336,766.3
Required pretax rate of return
Step C: Additional bad-debt loss 23,915,373,625.3
= Bad-debt loss ratio x Additional sales
Step D: Additional investment in inventory 1,246,264,620
Cost of the additional investment in inventory ditional investment in inventory x
Required pretax rate of return 311,566,154.9
Step E: Net change in pretax profits 64,227,181,847.64
In conclusion, Tuong An Vegetable Oil Joint Stock Company can effectively implement a liberal credit policy based on the provided hypothesis By relaxing credit standards, the company anticipates a significant increase in pretax profits, amounting to 64,227,181,847.64 VND Additionally, the credit term policy will further enhance financial outcomes.
- Expect average collection period to increase: from 35 day to 65 days
- The bad debt loss ratio: 7%
- Additional investment in inventory: 1,246,264,620 VND
- Variable production, administrative, and marketing cost: 70% of total sales
- Profit contribution ratio per dollar of sales is: 30%
- The company‘s required pretax rate of return: 25%
Table 3.11: Tuong An Vegetable Oil Joint Stock Company’s Analysis of the
Decision to change its credit term from “net 30” to ” net 60”
Marginal profitability of additional sales 102,494,458,394.22
Step B: Additional investment in receivables 201,244,826,984.09
= New average balance - Present average balance
Cost of the additional investment in receivables 50,311,206,746.02
= Additional investment in receivables x Required pretax rate of return
Step C: Additional bad-debt loss 23,915,373,625.32
= Bad-debt loss ratio X Additional sales
Step D: Additional investment in inventory 1,246,264,620
Cost of the additional investment in inventory 311,566,154.93
= Additional investment in inventory x Required pretax rate of return
Step E: Net change in pretax profits 27,956,311,867.95
In conclusion, Tuong An Vegetable Oil Joint Stock Company can extend its credit period, transitioning from a "net 30" to a "net 60" term, resulting in a significant pretax profit increase of 27,956,311,867.95 VND Additionally, the implementation of a cash discount policy may further enhance financial performance.
- Present Average collection period: 50 days
- New Average collection period: 28 days
- 40% of the company‘s customers will take the advantage of the new cash discount
- The company‘s required pretax rate of return: 25%
Table 3.12: Tuong An Vegetable Oil Joint Stock Company’s Analysis of the
Decision to offer a 1 percent cash discount
Step A: Decrease in average receivables balance 102,962,469,619.76
= Present average balance - New average balance
Earnings on the funds released by the decrease in receivables 25,740,617,404.94 rease in receivables x Required pretax rate of return
Step B: Cost of cash discount 6,832,963,892.95
= annual sales x Percentage taking discount x Percentage discount
Step C: Net change in pretax profits 18,907,653,511.99
In conclusion, Tuong An Vegetable Oil Joint Stock Company is able to provide a 1 percent cash discount based on the outlined assumptions This discount results in a net change in pretax profits for the company, highlighting the financial implications of such an offer.
1 Brigham, E F., (1992), Fundamentals of Financial Management, 6 th
2 Van Horne, J.C., and Wachowicz, J.M., (2001), Fundamentals of Financial Management, 11th Edition, Prentice Hall
3 Higgins R C, ( 2001), A n a l y s i s f o r Financial Management, 6 th Edition , McGraw-Hill/Irwin
4 Bonini, Hausman, Bierman, (1997), Quantitative Analysis for Management
(9 th Edition), McGraw-Hill/ Irwin
5 Brealey, R.A., and Myers, S.C., (2003), Principles of Corporate Finance, 6 th Edition, McGraw-Hill/Irwin
6 David Whitehurst, (2003), Fundamentals of Corporate Finance, 6 th Edition, McGraw-Hill/Irwin
7 Beverley Jackling and et al, (2003), Accounting – A framework for decision making, McGraw-Hill/Irwin
8 Leopold A Bernstein, (1993), Financial Statement Analysis, 3 rd Edition, McGraw-Hill/Irwin
9 Citi bank, (1994), Basic of corporate Finance, Latin America Training and
10 Financial Statement of Sonadezi Long Thanh and Tuong An Vegetable Oil Joint Stock Company
11 Sonadezi Long Thanh and Tuong An Vegetable Oil Joint Stock Company annual report
APPENDIX A: THE DEVELOPMENT OF VIETNAMESE BUSINESSES
Recent statistical data from the General Statistics Office of Vietnam indicates a significant growth in the country's business sector, evidenced by an increase in the number of active enterprises, employee count, average annual capital, and net turnover This expansion has positively impacted the economy, contributing to the growth rate of GDP.
In the second quarter of 2007, the GDP experienced a notable increase of 7.87% compared to the same period in 2005 and 2006 This growth was driven by three key economic sectors: agriculture, forestry, and fishery, which rose by 2.67%; industry and construction, which saw a significant increase of 9.88%; and the service sector, which grew by 8.41% Specifically, the contributions to the 7.87% GDP growth included 0.53 percentage points from agriculture, forestry, and fishery; 3.94 percentage points from industry and construction; and 3.4 percentage points from the service sector.
1 Acting enterprises a Number of total acting enterprises increase very quickly, annual average was increasing by 22% against previous year, concretely:
15 Source: Press release: socio-economic statistical data, 2 Quarter in 2007 General Statistics Office of Vietnam
Figure 1: Number of acting enterprises in Vietnam from 2001 - 2005
(Source: General Statistics Office of Vietnam) b Number of acting enterprises classifying by type of enterprise
State owned enterprise Non-state enterprise Foreign investment enterprise
Figure 2: Number of acting enterprises classifying by type of enterprise in
(Source: General Statistics Office of Vietnam)
2 Employees in enterprises a Number of employees in total enterprises increase very quickly, annual average was increasing by 12% against previous year, concretely:
Figure 3: Number of employees in enterprises in Vietnam from 2000-2005
(Source: General Statistics Office of Vietnam) b Number of employees in enterprises classifying by type of enterprise: from
2000 to 2005 the employees move from state owned enterprise to Non – state enterprise and foreign investment enterprise Figure 2.4 can prove that information
State owned enterprise Non-state enterprise Foreign investment enterprise
Figure 4: Number of employees in enterprises classifying by type of enterprise in
Vietnam from 2001 - 2005 (Source: General Statistics Office of Vietnam)
3 Annual average capital of enterprises a Annual average capital of total enterprise increase year by year, annual average capital was increasing by 20% against previous year, concretely:
Figure 5: Annual average capital of enterprise from 2000 -2005
According to the General Statistics Office of Vietnam, the annual average capital of enterprises varies by type, with state-owned enterprises holding the largest capital among them.
2000 – 2005 but the ratio is decrease compare with non state enterprise and foreign investment enterprise
State owned enterprise Non-state enterprise Foreign investment enterprise
Figure 6: Annual average capital of enterprises classifying by type of enterprise
(Source: General Statistics Office of Vietnam)
4 Net turnover from business of enterprises a Net turnover from business of total enterprises increase year by year, annual average capital was increasing by 21.8% against previous year, concretely:
According to data from the General Statistics Office of Vietnam, net turnover from businesses reveals a significant trend: non-state and foreign investment enterprises are experiencing consistent annual growth, while state-owned enterprises are witnessing a decline in their net turnover This shift indicates that non-state and foreign enterprises are becoming more robust, aligning with the government's economic policies that favor private and foreign investment.
State owned enterprise Non-state enterprise Foreign investment enterprise
Figure 8: Net turnover from business of enterprises classifying by type of enterprise
(Source: General Statistics Office of Vietnam)
APPENDIX B: THE FACT OF USING MATHEMATICS MODELS IN
Managers frequently rely on intuition for financial decision-making While this approach can be effective for senior managers, it may lead to failures in more complex situations As businesses grow in size and complexity, relying solely on intuition becomes increasingly challenging, making it essential to adopt more structured decision-making strategies to successfully expand operations.