The urgency of the topic
Over a decade ago, the collapse of Lehman Brothers, a prominent American banking empire, marked a significant turning point in the global economic crisis, primarily due to a breakdown in cash flow management The following data from 2005 to 2007 provides insight into the financial performance of Lehman Brothers Holding Inc during this critical period.
Lehman Brothers Holding Inc (Mil USD)
Cashflow from business activities (45,595) (36,376) (12,205) Cashflow from investing activities (1,698) (792) (447) Cashflow from financial activities 48,592 38,255 12,112 [ ( ) = negative ]
The net profit report has shown a consistent increase over the years, yet cash flow from operating activities remains increasingly negative, accompanied by a rising amount of debt This situation culminated in 2008 when Lehman Brothers Holding Inc declared bankruptcy, triggering the largest continuous financial collapse in history and pushing the global financial system to the brink, leaving policymakers on both sides of the Atlantic in a state of confusion.
Cash flow and profit are distinct concepts crucial for business success While profit eventually contributes to cash inflow, the timing of these financial elements is vital For instance, a business that sells products with a 30-day payment term may experience delays in cash flow despite generating profit Understanding this difference is essential for effective financial management and planning.
2 term, the business is immediately recognized for revenue for this purchase
Accrual accounting recognizes revenue when it is earned, not when cash is received, leading to a disconnect between reported revenue and actual cash flow Similarly, expenses for goods purchased are recorded only when the goods are sold, not at the time of payment This discrepancy is common in rapidly growing businesses, where profits may significantly exceed cash on hand, increasing the risk of cash shortages.
Cash flow plays a very important role for a business Cash flow to businesses is like blood to your body
Effective cash flow management enables businesses to avoid liquidity issues, insolvency, and interest risks while reaping additional benefits These advantages include enhanced credibility with suppliers and contractors, priority access to goods, favorable pricing, and extended payment terms.
Effective cash flow management in PLC involves careful planning and control of cash flows Despite creating cash flow forecasts and identifying funding sources for anticipated expenses, the complex management structure poses significant challenges that hinder efficient cash flow management These forecasts often prove inaccurate and inflexible, leading to persistent issues in the overall management process.
Effective cash flow management is crucial for PLC to maximize owner value Key questions arise regarding the efficiency of their current cash flow practices and the factors influencing their management To enhance their cash flow strategies, PLC must identify and implement an optimal cash flow management model that addresses these urgent challenges.
3 helping the Company develop sustainably in the current volatile, competitive economic environment
To partly contribute to meet the demands of that practice, the topic:
"Cash flow management at Petrolimex Petrochemical Corporation ( PLC) has been selected by the author to study in this graduate thesis.
Overview of research situation
Effective cash flow management is a crucial aspect of financial management, supported by a well-established theoretical framework In domestic educational materials, cash flow management is typically integrated into the financial management curriculum, where it is introduced in a general and foundational manner Notable textbooks in this area provide essential insights into the principles of cash flow management.
Key resources on modern business finance include "Modern Business Finance" (2003) by TS Tran Ngoc Tho, particularly chapters 28 and 30, and "Corporate Financial Management" (2007) by Nguyen Hai San, especially chapter 15 Additionally, "Short-term Financial Management" (2007) edited by Nguyen Tan Binh offers valuable insights Notably, there are limited domestic publications focusing on cash management, with "Cash Flow Management Strategy to Gain Profits" (2008) by Nguyen Van Dung being a significant example.
There is a wealth of foreign textbooks available on cash management, cash flow, and related business issues Notable titles include "Corporate Finance – Theory and Practice" (second edition) by Aswath Damodaran, "Fundamentals of Corporate Finance" (sixth edition) by David Whitehurst, and "Short-Term Financial Management" (third edition).
(2005) by Terry S Maness and John T Zietlow
Numerous theoretical frameworks have been proposed in the literature to understand firms' financial requirements, including inventory theory (Baumol 1952; Miller and Orr 1966, 1968), production theory (Coates 1976), and property models (Meltzer 1963) These approaches provide valuable insights into the empirical evidence surrounding the financial needs of firms.
4 money was introduced in the 1960s by Miller and Orr (1968) and in the 1970s by Hunter (1978), in the 1980s by Marquis and Witte (1989) , and in the 1990s Mulligan (1997)
Morris (1983) incorporates cash flow operations within risk and return frameworks, assuming a Miller-Orr type money management policy Sartoris and Hill (1983) developed models for short cash inflows and outflows that directly impact firm value Additionally, the strategic reasons for holding cash have been explored by Mahrt-Smith and Servaes (2003) as well as Shin and Soene (1998, 2001), focusing on the relationship between liquidity and profitability (Kytonen, Erkki, 2004).
Despite numerous theoretical and experimental studies on explanatory models of money management, practical issues remain largely unexplored Limited survey data, such as that from Kytonen, highlight this gap in understanding.
A survey conducted in 2002 aimed to enhance awareness of cash flow management practices within companies Soenen and Aggarwal (1989) examined and compared money and foreign exchange management practices among large firms in the UK, the Netherlands, and Belgium Additionally, Soenen and Sun (1995) provided insights into money and foreign exchange management practices in China In their initial study, Tse, Buckley, and Westerman (1998) concentrated on the implications of these practices for the Dutch corporate sector.
Roychowdhury (2006) highlighted the significance of cash flow management for financial managers, demonstrating its benefits for business operations Additionally, a survey by Graham (2004) revealed that 21.4% of CFOs view cash flow as a critical element in executing plans This growing recognition of cash flow's importance has led to an increased focus on the study of cash flow management.
In the thesis "Cash flow management activities at Bien Cuong Tea Company Limited" by Nguyen Thi Hoa (2016), the author has proposed a
Effective cash flow management is crucial for businesses at every stage, from generating revenue to utilizing funds for meeting financial obligations Implementing five key solutions can enhance cash flow processes, ensuring that businesses maintain a healthy financial status However, the article lacks detailed calculations for quantifying these strategies.
Regarding the topic of cash flow management, there are also articles and forums on the internet
In her 2014 study, Do Thi Hong Nhung conducted surveys and in-depth interviews with 15 out of 53 food processing enterprises (FPE) listed on the Vietnam stock exchange, alongside consultations with financial experts and auditors The analysis revealed that cash flow management practices within these enterprises are inadequate Notably, cash flow planning is often regarded as a minor aspect of annual financial planning, and cash flow projections rely heavily on the experience of the chief financial officer and chief accountant Additionally, there is a lack of application of optimal fund models in these organizations.
Pham Hoang Dung (2005) and Duong Thi Thuy Linh (2006) highlighted the absence of cash model applications in businesses, while Hoang Le Cam Phuong and Pham Ngoc Thuy (2006) emphasized the importance of managing cash flow through effective working capital management.
While existing articles and theses emphasize the significance of cash management for businesses, they often overlook specific details regarding cash flow management In Vietnam, the practical application of cash flow management theory within enterprises remains limited Notably, there is a lack of research on the implementation of cash flow management at Petrolimex Petrochemical Corporation Consequently, it is crucial to conduct both theoretical and practical studies on cash flow management specifically tailored to Petrolimex Petrochemical Corporation.
Research objectives
Objective of the thesis is to suggest some solutions to improving cash flow management at Petrolimex Petrochemical Corporation To achieve this subject, the thesis fulfill the following task:
- Presenting the theoretical basis of cash flow and cash flow management in the business
- Analyzing the current situation of cash flow management and evaluate the efficiency of cash flow management activities at Petrolimex Petrochemical Corporation
- Evaluate the advantages and disadvantages of cash flow management, thereby suggest solutions to improve cash flow management activities at Petrolimex Petrochemical Corporation.
Research subjects
The subject of the study is cash flow management at Petrolimex Petrochemical Corporation.
Scope of research
About space: at Petrolimex Petrochemical Corporation
Data collection methods: From PLC internal information, Internet sources, University’s lectures – syllabuses, books, magazines
- Analytical methods: Inductive, deductive, statistical methods
- Figure Comparison, data evaluation, judgment and conclusion
- Synthesizing, analyzing and summarizing materials
- Interview directly with experts who have been working at PLC company through detailed questionnaire.
Thesis structure
Besides the Introduction, Conclusion and references, this Thesis includes 3 parts:
THEORETICAL BACKGROUND OF CASH FLOW AND
Cash flow
Cash serves as a vital means of payment, facilitating both domestic and international trade and operating activities Its emergence replaced gold and other metals, addressing the challenges associated with their transfer.
Cash is the most liquid asset, consisting of cash on hand and in bank accounts Businesses require adequate cash at all times to support their operating, financing, and investing activities, as well as to cover their expenses.
Simple calculation from a company’s balance sheet would indicate the following equation, describing an enterprise’s cash reserves
Cash = Liabilities (short and long term) + Equity – Fixed assets -Current assets other-than-cash
A successful business begins with an initial cash investment from the owner, supplemented by borrowed funds This cash is used to purchase goods or services, transforming it into inventory or delivered services Once customers receive these goods or services, they generate accounts receivable or cash collections The efficient collection of these receivables converts them back into cash When business processes function effectively, the cash inflow exceeds cash outflow, resulting in surplus funds that can be reinvested for growth To ensure sustainability, it is crucial to continuously repeat this cycle while maintaining adequate cash reserves.
9 available to allow this sequence
The cash generation process is fundamental for various types of businesses, including manufacturing, retail, and nonprofit organizations While the specifics may differ—such as a retail store purchasing inventory instead of manufacturing products, or a service organization incurring costs to deliver services—each type of business follows a similar sequence of activities Crucially, all businesses must utilize cash before realizing profits from customers, making effective cash management vital for both short-term survival and long-term success.
There are three very basic reasons why a firm holds cash along with other assets:
To meet its day-to-day needs – transaction motive
1 The idea of the entire section 1.1.1 of this thesis was the result of reference from ―Managing cash flow: An operational focus‖ - [4, 12-20]
2 The exhibition 1.2 from ―Managing Cash flow: An operation focus‖ – page 15
3 Section 1.1.2 from ― Jonathan Berk, Peter DeMarzo, Jarrad Harford, ―Fundamentals of Corporate Finance‖
To be available for opportunities – speculative motive
To compensate for the uncertainty associated with its cash flows – pre-cautionary motive
To satisfy banks’ requirements – compensating motive
A business requires a sufficient amount of cash, known as the transaction balance, to meet its financial obligations This necessary cash amount is influenced by the average size of the transactions the business engages in and its cash cycle, which will be elaborated on later in this thesis.
The precautionary balance refers to the cash a company retains to manage uncertainties related to future cash requirements This balance varies based on the level of unpredictability in a company's cash flows; greater uncertainty necessitates a larger precautionary balance to effectively navigate potential fluctuations in transactions.
A compensating balance is a minimum amount that a company must maintain in its bank account as compensation for the bank's services, often resulting in funds that earn little to no interest This practice is akin to a personal banking arrangement where customers receive free checks as long as their account balance remains above a specified threshold, such as $1,000 Consequently, while the company technically holds these funds, they are effectively inaccessible for other purposes, as they are tied up to meet the compensating balance requirement.
1.1.3 Definition and characteristics of cash flow
A Company operating a business will have generating cash flows in
A business requires cash to cover essential expenses such as service costs, manufacturing costs, selling expenses, and administrative costs, as well as to meet scheduled liabilities like loans and taxes Additionally, any investments or capital repayments to investors necessitate cash outflows Conversely, cash inflows can be generated through various means, including the sale of equity, borrowing, selling goods and services, converting assets to cash by selling idle equipment, collecting accounts receivable, and financial investments.
According to text book ―Corporate Finance‖- Bui Van Van, Vu Van
Ninh – ― Cash flow refers to the movement of money in and out which arise in the certain period of time from the business activities of an enterprise.‖
Cash flow in an enterprise is separated into cash outflow and cash inflow
Cash outflow refers to the total cash disbursed by a company for its operating, investing, and financing activities over a specific time frame This includes expenses such as manufacturing costs, payroll, operational expenses, new investments, and payments for dividends or debt servicing.
Cash inflow is the total amount of cash going into the company, which could be the result of its operating, investing and financing activities in a given period of time
Net Cash Flow: is the difference between cash inflows and cash out flows of the business, incurred in a given period of time
Any business - manufacturing, service, financial, not-for-profit, government and so on - begins with an infusion of cash, discussing partly more specifically in Exhibit 1.2 below (page 7)
Exhibit 1.2 Flow of cash and funds in business 4
There are two ways to classify cash flow based on the nature of business activities and the nature of ownership a Classification of Cash flows by nature of activities
According this classification, business’s cash flows are divided into 3 types: Cash flow from operating, investing and financing activities
● Cash flow from operating activities
The cash generate from main-regular operating activities of the company, which effects of transaction creating revenue and expenses
● Cash flow from investing activities
The section on the cash flow statement that reports how much cash is generated from various investment-related activities in a specific period
● Cash flow from financing activities
Cash flows from financing activities include obtaining cash from issuing debt and repaying the amount borrowed and cash from stockholders and providing them with a return on their investment
4 The exhibition 1.2 from ―Managing Cash flow: An operation focus‖ – page 14
Exhibit 1.3 Classification of cash flow in a company b Classification of Cash flows by nature ownership
According to the nature of ownership, we classify cash flows into 2 types: Free cash flow to firm, Free cash flow to equity
● Free Cash Flow to Firm (FCFF)
Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution to investors, including both owners
Direct material / Semi- finished goods/
Payment for interest loan Taxes
Sale of marketable securities/ investments
14 and creditors, after eliminating essential investments (new investments in noncurrent assets and working capital) for future operating activities
FCFF = Net Income + Non-cash-charges + Interest expenses (1- t%) – New long-term investments – Change in Working capital
What does Free Cash Flow to the Firm tell us?
Free Cash Flow to the Firm (FCFF) is the cash available to investors after a company covers all its operating expenses and invests in both current and long-term assets This metric accounts for both bondholders and stockholders in determining the residual cash available for investors through discounted cash flow analysis To calculate the owners' free cash flow, the value of any outstanding loans is deducted Additionally, the cash flow is discounted using the average cost of capital to provide a more accurate valuation.
Free cash flow is a crucial financial metric that significantly impacts a company's stock value, as it reflects the sum of expected future cash flows Despite this, stock prices do not always align with their true value, leading to potential discrepancies in market pricing.
Calculating Free Cash Flow to the Firm (FCFF) requires adjustments to a company's financial policies A negative FCFF signifies that the cash flows from operations fall short of meeting the needs for new investments This shortfall necessitates financing through new capital, such as loans or equity, or may lead the company to modify its investment strategies to lower investment demands.
A positive Free Cash Flow to Firm (FCFF) signifies that the company's cash flows not only meet investment needs but also exceed them, allowing for potential adjustments in financial strategies This surplus enables the business to consider reducing its debt levels or increasing dividend payments to shareholders, enhancing overall financial health and shareholder value.
● Free Cash Flow to Equity (FCFE)
Free cash flow to equity (FCFE) indicates the amount of cash available to a company's equity shareholders after accounting for all expenses, reinvestments, and debt obligations This metric serves as a key indicator of how effectively equity capital is utilized within the business.
FCFE = Net Income + Non-cash-charges – New long-term investment – Change in Working capital + Net debt issued
FCFE = FCFF –
Where: FCF to creditors = Principals repaid + Interest expenses (1-t%)
What does FCFE tell us?
The Free Cash Flow to Equity (FCFE) metric is widely utilized by analysts to assess a company's value through the discounted cash flow method, incorporating the average cost of equity This valuation approach has gained traction as a viable alternative to the dividend discount model (DDM), particularly for companies that do not distribute dividends While FCFE indicates the cash available for shareholders, it does not directly reflect the actual payouts made to them.
Cash flow management in enterprises
1.2.1 Definition and roles of cash flow management 6
1.2.1.1 Definition of cash flow management
Effectively managing cash flow is an ongoing process that requires careful planning and organization to balance the inflow and outflow of funds This approach is essential for meeting the operational needs of a business and ultimately maximizing its market value.
1.2.1.2 Roles of Cash flow management
Cash flow management is a fundamental responsibility of the treasury function, overseeing cash inflows, outflows, and intra-group fund transfers With advancements in information systems, this process has become largely automated, enhancing efficiency in managing financial resources.
The treasurer primarily focuses on designing or selecting a financial model while overseeing daily operations However, it is essential to examine the fundamental mechanics of the treasury function to grasp the significance and influence of various options available.
Effective cash flow management is crucial for business survival, often outweighing the importance of production or sales While businesses can endure lost sales or customers, miscalculating cash availability for essential expenses like wages, taxes, or supplier payments can lead to sudden operational halts By implementing fundamental cash flow management principles, companies can prevent crises and ensure smooth operations.
6 Section 1.2.1 from Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi (2009) ―Corporate Finance – Theory and Practice‖(2 nd ), page 945
Effective cash management enables businesses to secure timely capital for their operations, optimize capital utilization, and maintain strict oversight of company activities.
1.2.2 Contents of cash flow management
To manage the cash flow, the business performs the following activities
●Analyze the Turnover Ratio of Inventory, Payables and Receivables
● Review the criteria to assess the ability to generate money, the criteria solvency assessment
● Planning cash flow, assessing and comparing the outflows, at each specific time
To effectively manage cash flow, it is essential to implement strategies that ensure a balance between incoming and outgoing funds This balance should align with the business activities and the specific life cycle stage of the company, promoting financial stability and sustainability.
Cash flow planning aims to ensure that projected cash inflows surpass outflows, thereby maintaining a positive cash flow By comparing actual financial results to the cash plan, businesses can analyze performance and make informed decisions Essential tools for effective cash flow planning include budgeting, forecasting, and monitoring cash reserves.
7 Section 1.2.2 from Rob Reider, Peter B.Heyler (2002), ―Managing Cash Flow: An Operational Focus‖, Wiley, page 263
In order to establish an effective (i.e., usable and reasonably accurate) process for projecting cash flow, it is helpful to examine the company’s actual cash flow history
To effectively manage its cash balances and transactions, a company must establish robust internal systems and anticipate its cash flow patterns Cash forecasting provides valuable insights into potential cash shortfalls and surpluses, enabling strategic planning for borrowing and investment Prioritizing planning over mere forecasting is essential for optimal cash management.
Plans are prepared for short- or long-term periods of time Keep in mind that plans are always subject to adjustment based on changes in circumstances or actual results
Conventional wisdom suggests that cash plans be done in considerable detail for a relatively short period of time Avoiding surprises should be a major goal in cash planning
Effective cash planning is essential, yet it becomes futile if the outcomes are not utilized appropriately The primary goals of any cash flow plan should focus on maximizing financial efficiency and ensuring sustainable growth.
• Attempt to smooth out cash flow Knowing about prospective cash excesses will allow the company to use them effectively either for investment or as a reserve for future requirements
• Make investments as early as possible The look into the future provided by a solid cash planning system may alert the company to opportunities to make investments earlier
• Delay borrowing as long as possible this means savings in interest
• Get early information The advantage of having early information so as to preclude the chaos of dealing with unexpected cash excesses or shortfalls should be obvious to any businessman
Cash flow budgeting is crucial for assessing a company's cash position and effectively managing its cash flow A robust cash budgeting process is essential for business success, as traditional profit and loss budgeting methods may not adequately address cash flow needs.
• Its benefits do not outweigh the costs involved
• It is too time consuming
• It requires too much education of operating managers to enable them to participate in the process
• It does not add anything of value to either planning or control because other systems in place handle these processes effectively
• No one in the company knows how to do it
• Operating managers are too busy with their principal responsibilities to get involved in a budgeting process This budgeting process can be divided into the following components:
Managing cash shortfalls and excesses
There are three optimal funding models widely used around the world: The
Baumol, The Miller- Orr and The Stones Model
The Miller-Orr model of cash management is designed for businesses facing unpredictable cash inflows and outflows This model establishes both lower and upper cash balance limits, enabling companies to identify a target cash balance or return point for optimal financial management.
Assumptions: The Miller-Orr model of cash management can be used if the following assumptions are met:
The cash inflows and cash outflows are stochastic In other words, each day a business may have both different cash payments and different cash receipts
The daily cash balance is normally distributed, i.e., it occurs randomly There is a possibility to invest idle cash in marketable securities
There is a transaction fee when marketable securities are bought or sold
A business maintains the minimum acceptable cash balance, which is called the lower limit
Formula: The return point for the cash balance under the Miller-Orr model can be calculated as follows:
Return Point = Lower Limit + 1/3 × Spread
The lower limit for cash flow management is determined by factors such as acceptable risk levels, the business's creditworthiness, and anticipated cash needs In cases where a company has strong investments in marketable securities or outstanding creditworthiness, this lower limit may be set to zero, allowing for the flexibility to secure additional short-term debt as needed.
The equation to compute the spread is as follows:
24 where F is the transaction cost, K is the opportunity cost of holding cash, and σ2 is a variance of a daily cash balance
To find the upper limit of the cash balance, the following formula should be used:
Upper Limit = Lower Limit + Spread Limitations: When the Miller-Orr model of cash management is applied, we should take into account the following limitations:
An increase in transaction cost results in an increase of spread and a higher return point
A higher standard deviation (σ) of daily cash balance indicates a wider spread and potential for higher returns Increased volatility in daily cash balances also signifies a greater likelihood of hitting either the upper or lower limits.
An increase in the return on investment in marketable securities results in a narrower spread and a lower return point, as the opportunity cost of holding cash rises Consequently, businesses are motivated to reduce their cash holdings.
William J Baumol introduced a model known as "The Transactions Demand for Cash: An Inventory Theoretic Approach," which is primarily utilized in inventory management but also serves to determine the optimal cash balance Baumol identified parallels between inventory management and cash management, highlighting the importance of effectively managing cash reserves.
the basic information
- Vietnamese name: Petrolimex Petrochemical Corporation - JSC
- Headquarter: 18th -19th Floor, No.229 Tay Son Street, Dong Da Dist., Ha Noi City, Vietnam
- Yearly accounting period: January 1 st to December 31 st , Fiscal year
Email: plc@petrolimex.com.vn
Website: www.plc.petrolimex.com.vn
Petrolimex Petrochemical Corporation – JSC (PLC), previously known as Petrolimex Lubricants Company, was founded on June 9, 1994, following Decision No 745/TM/TCCB issued by the Ministry of Commerce, which is now referred to as the Ministry of Industry and Trade.
* 1998: Lubricant Company was named as Petrochemical Company
* 2005: Established 02 subsidiaries: Petrolimex Asphalt Limited Company and Petrolimex Chemical Limited Company, 100% owned by Petrolimex Petrochemical Joint Stock Company
* 2006: PLC’s stock was official listed in Hanoi Stock Center
* Since 03rd April 2013: Petrolimex Petrochemical Joint Stock Company was named as Petrolimex Petrochemical Corporation- JSC
In over 26 years of establishment and development, PLC has positioned the company among the leading production brands in the fields of lubricants and petrochemical in Vietnam
2.1.3 The business characteristics of PLC
* Size as whole: o No of staff: more than 650 o Turnover: 300 million USD
* Business in general: Lubricants, Bitumen and Petro-Chemicals Products
* Parent Company (PLC Corporation): Lubricants Business
* 2 Subsidiary Companies: Chemical Co., Ltd & Asphalts Co., Ltd
* Lubricants Business: o Volume: 50.000 MT per year o Turnover: More than 260m USD (2019) o Benefit before tax: More than 6m USD (2019)
Petrolimex Petrochemical Corporation is member of Petrolimex
Before 2012: National Petroleum Corporation, 100% state owned
Main Activities: Petroleum Distribution, Lubricants; Chemicals & Bitumen; LPG
Insurance, Banking, Transportation; Design and construction…
More than 2.400 Petroleum Service stations 100% owned by Petrolimex Distribution system: More than 4.000 Petroleum Service Stations
Sales Volume: 10 milion MT in term of petroleum business
Market share: 50% in term of petroleum business c Head office, branches and factories:
1 Head Office: 18&19/F, No 229 Tay Son Str., Dongda Dist., Hanoi City, Vietnam
Add: 7/F, No 122 2-9 Str., Hai Chau Dist., Da Nang, Vietnam
Add: 2/F, No 4 Mai Thi Luu Str., 1 Dist., Ho Chi Minh, Vietnam
Add: Tra Noc Industrial Zone, Binh Thuy Dist.,Can Tho, Vietnam
Add: Duc Giang Str., Long Bien Dist., Ha Noi, Vietnam
6 Thuong Ly Blending Plant Add: 01 Hung Vuong Str., Hong Bang Dist.,Hai Phong, Vietnam
7 Nha Be Blending Plant Add: Lot 6, Store B, Nha Be Town, Ho Chi Minh, Vietnam
Trading, importing and exporting lubricants, asphalt, chemicals and other products in the filed of petroleum and combustible gas;
⁎ Trading in imported and exported services: Materials, specialized equipments used in petrochemical industry;
⁎ Trading in services of transportation, depot for rent, making up, testing and analysis, consultancy and petrochemical technique services;
⁎ Trading in supply vessels services
⁎ Depends on fluctuations in world oil prices (because of using base oil and additives from petrochemical refining)
⁎ The input material is base oil Currently, there are few NCCs with base oil products in the world => the degree of dependence on suppliers is relatively high
The distribution of this consumer product, derived from petrochemical industry materials, is unique, as it does not follow the typical channels for either standard consumer goods or industrial products Additionally, many users lack a comprehensive understanding of the product's features.
⁎ PLC's market share and brand is only 2nd and 3rd, so it is dominated by the top companies and strong brands (BP Castrol)
⁎ Strong competition from companies with lower product quality but cheaper price
⁎ No or very limited participation in specific products with high profit margin (such as special oils for vehicles at coal mines, car models often have
39 recommendations for oil changes from companies with high profit margins) international brands, especially luxury cars)
⁎ Specific products dependent on macro policies and public investment (asphalt)
2.1.5 The overview of financial position and performance
Table 2.1.ASSETS SITUATION OF PLC IN THE PERIOD OF 31/12/2017 TO 31/12/2019
● Current assets: Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, used, or exhausted through standard business operations with one year
Over the past three years, the proportion of current assets has remained relatively stable, with values of 76.9%, 78.2%, and 74.1% in 2017, 2018, and 2019, respectively However, cash and cash equivalents saw a slight decline, dropping from 18.9% in 2017 to 15.4% in 2018, and further to 12.7% in 2019 Similarly, short-term receivables decreased from 52.5% in 2017 to 49.6% in 2019.
From 2017 to 2019, inventories and other current assets experienced a slight increase, while short-term financial investments saw a significant rise, jumping from 2.9% in 2018 to 7.9% in 2019 This dramatic growth can be attributed to an increase in short-term cash held in banks.
Long-term assets, also referred to as non-current assets, are valuable resources that provide benefits to a company for over a year These assets encompass a range of items, including fixed assets like property, plant, and equipment, as well as intangible assets such as patents, copyrights, franchises, goodwill, trademarks, trade names, and software.
From 2017 to 2019, long-term assets experienced significant growth, rising from 897,559 million VND in 2017 to 1,154,660 million VND in 2019 Notably, net fixed assets increased from 56.7% in 2017 to 66.5% in 2019, reflecting a substantial upward trend In contrast, other asset categories either saw slight declines or remained stable during this period.
In summary, PLC primarily focuses on lubricants, bitumen, and chemicals, benefiting from a favorable asset structure due to higher investment in current assets compared to non-current assets A significant portion of the account receivables stems from the company's credit policy, allowing clients to defer payments for three to six months, which enhances cash flow management.
Table 2.2 THE CAPITAL SOURCES AT PLC – PERIOD FROM 31/12/2017 TO 31/12/2019
Table 2.2 indicates a slight decline in total resources in 2019, following an increase from 2017 to 2018 The data reveals that PLC operates on a large scale of capital, aligning with its core business activities in manufacturing and distributing lubricants, bitumen, and chemicals This decrease in total capital is attributed to a reduction in current liabilities.
● Liabilities: Liabilities are the legal debts a company owes to third- party creditors They can include accounts payable, notes payable and bank debt
The proportion of long-term liabilities increased dramatically from
2017 to 2019 From 74,754 million VND to 135,110 million VND Because in the period time, PLC invested in many warehouses and factories in many provinces in overall of Vietnam
Owner's equity represents the owner's claim to the assets of a business, calculated by subtracting total liabilities from total assets It reflects the residual interest that remains for the owner after all debts have been settled.
During the whole period, the proportion of owner’s equity was quite stable Owner’s Equity in 2017 was 1,343,695 million VND, in 2018 and
2019 it was 1,326,038 million VND and 1,326,582 million VND That means PLC’s production and business activities were relatively stable
In conclusion, after three years of research and investment in warehouses and factories, PLC has seen a significant rise in long-term liabilities; however, the company's business and production have continued to thrive This growth signals positive prospects for the upcoming year, as the completion of these facilities is anticipated to further enhance operations.
Table 2.3 INCOME STATEMENT OF PLC IN THE PERIOD 2017 - 2019
Through 3 year – period, the table 2.3 shows net revenue increased and corresponds to an increased in cost of goods sold So, gross profit slightly increased Goods sold are the main sources of revenue of PLC in this period Specifically:
Between 2017 and 2018, net sales experienced a significant increase of 27.5%; however, in 2019, they fell by 4.3% Despite a slight rise in gross profit from 782,831 million VND in 2017 to 871,410 million VND in 2018, gross profit decreased to 839,205 million VND in 2019 Consequently, net operating profit declined from 216,705 million VND in 2017 to 205,992 million VND in 2018, and further down to 181,291 million VND in 2019, primarily due to rising financial expenses.
2018 against 2017 was 84.5% and 2019 against 2018 was 22.8%
In 2018 and 2019, PLC increased loans from banks in order to invest in warehouse and factories
Despite a significant increase in accounting profit, net operating profit declined due to rising financial expenses The sale of land in Da Nang in 2019 contributed to this situation, resulting in minimal differences in net profit after tax over the past three years.
Table 2.4 SOME OF MAIN FINANCIAL INDICATORS OF PLC FROM 2017 - 2019
According to the table 2.4, it could be seen generally that financial situation through several main indicator was positive in the period of 2017 -
Liquidity ratios are crucial financial metrics that assess a company's ability to meet its short-term debt obligations without seeking external funding These ratios evaluate the firm's capacity to pay off debts and provide insight into its financial stability through key indicators such as the current ratio, quick ratio, and operating cash flow ratio.
During the research period, the liquidity ratio emerged as a positive aspect, despite a decline from 1.59 in 2018 to 1.38 in 2019 This ratio remains above 1, indicating that the company's assets can cover its liabilities However, while total assets are sufficient to support debt obligations, the current assets struggle to adequately meet short-term liabilities during this timeframe.
• Assets and capital sources Ratios
CURRENT SITUATION OF CASH FLOW MANAGEMENT AT PLC 51 1 Regulations - Current Cash flow management contents applied at
2.2.1 Regulations - Current Cash flow management contents applied at PLC
Section 2.2 outlines the current state of cash flow management at PLC, drawing on secondary data from financial statements and insights gathered through interviews with controllers, the chief accountant, and specialists involved in the company's cash flow operations.
There are two methods for making a cash flow statement, the direct method and the indirect method, in which the indirect method is the choice of PLC
Net cash flows are calculated by adjusting net income before tax for non-cash charges and changes in working capital, ultimately reflecting the cash flows from investing and financing activities.
The Company’s management activities do have concerns with cash flow management; we are mentioning the basic contents below:
Effective cash flow planning involves preparation, forecasting, planning, and budgeting Small and medium enterprises often struggle to translate academic theories into practical applications While many businesses rely on their economic knowledge and experience for cash flow management, PLC has successfully integrated these concepts into their monthly cash flow planning for each business unit.
PLC has integrated academic principles of cash flow planning into its operations by preparing monthly budget estimates for each business unit This approach enables treasurers to effectively manage and ensure sufficient funds are available for production and business activities The implementation of a structured cash flow plan is essential for maintaining financial stability within the organization.
The Controller, with assistance from accountants, prepares financial reports using historical data and information For instance, the provision for bad debts is determined through the monthly accounts receivable aging report, which helps monitor whether receivables are overdue.
The monthly cash flow plan is prepared and submitted to the production manager of each business unit for confirmation and necessary amendments Once finalized, the plans are summarized and reviewed by the chief financial officer before being processed by accountants, specifically the treasurer The treasurer assesses the cash demands of each business unit to determine if sufficient funds are available If not, they may collaborate with banks to secure payment guarantees for collecting overdue receivables This ensures the company maintains adequate cash flow to meet debt obligations and expenses, with the treasurer's performance monitored by the chief accountant.
To effectively manage monthly cash flow planning, controllers must prepare a comprehensive monthly income statement, balance sheet, and key performance indicators for each unit from the prior period Additionally, they need to include relevant data on leasing and associated factors, such as provisions for bad debts and anticipated tax obligations, including corporate income tax, personal tax, and value-added tax.
Table 2.5 Sample of monthly cash flow planning of business
1 Cash inflows from operating activities a Sales revenue b Collect debts
2 Cash inflows from investing activities
3 Cash inflows from financing activities
1 Cash outflows from operating activities
2 Cash outflows from investing activities
3 Cash outflows from financing activities
III Net cashflow for the period
2.2.1.2 Current status of cash flow management in the last 6 months of 2019 at PLC a) Cash flow plan for the last 6 months of 2019 at PLC
The following is a summary of the cash flow plan for the last 6 months of
2019 compiled based on PLC's monthly cash flow plan There are some points to be noted for this time:
-30% payment in the 2nd month from the delivery month
-60% payment in the 3rd month from the delivery month
-30% payment at the time of purchase
-70% payment in the 3rd month from the date of purchase
• Payment policy for short-term loans: loan principal is usually paid every 2 months or monthly depending on the actual business conditions of the company
• Salary costs, service costs purchased from outside, other expenses in cash are paid in the month in which they arise
• In order to meet the monthly cash needs, the average amount of money needed each month is approximately 100 million VND
Table 2.6 Sample of cash flow planning for the last 6 months 2019
The cash flow analysis for the last six months of the year reveals that in July and August, cash reserves surpass the minimum required threshold.
So in July & August PLC may consider to make short-term investments to increase the profit of the currency
In the months of September through December, PLC faced a significant cash capital shortage, prompting a reevaluation of its debt collection strategy To address this issue, the company may consider reducing selling prices for immediate cash flow or renegotiating payment terms with its primary supplier, proposing a structure of 30% payment in the second month and 70% in the sixth month.
Based on interviews with experts in the company, it was show that:
+ PLC does not rely on any specific models to determine the optimal cash balance, they only based on practical experience over many years of business operation
To optimize cash flow, PLC opts for one-month deposits when faced with temporarily idle cash, as excess funds are minimal compared to actual needs and the company has existing bank loans.
+ In order to make up for the shortfall in cash as expected, the accounting department must closely coordinate with other departments to implement the following solutions:
- Urging the sales department to collect debts according to the set plan and faster (if possible)
- Minimize inventory to the lowest level
- Additional short-term loans (if possible)
- Negotiate with suppliers to temporarily extend payment terms
- For shipments that will be sold in the last 4 months of the year, discounts can be accepted to attract customers who can pay immediately
57 b) Implemented cash flow management for the last 6 months of 2019 at PLC
Based on the monthly cash flow plan, PLC tried to control revenue and expenditure to ensure optimal cash flow:
In July, the company finds itself with a modest surplus of cash, but anticipates increased expenses and challenges in debt collection in the upcoming months Consequently, it has decided to retain the surplus for future financial stability.
From August to November, the company made significant efforts to collect outstanding debts In August, only 50% of receivables from three months prior were collected However, in September, collections improved, with 5% of July's and 10% of August's receivables being recovered By October, an additional 10% of June's debts were collected, but despite these efforts, the cash balance remained low.
At the end of the year, the actual demand was slightly lower than anticipated, primarily due to high raw material costs, which necessitated a reduction in selling prices to maintain customer liquidity Additionally, dividend payments to shareholders are scheduled for October 10, a month earlier than initially planned, following a request from the dominant shareholders.
In December, the cash shortage significantly improved, with an excess amount of only 6,980 thousand dong This achievement reflects PLC's dedicated efforts in adhering to its cash flow plan and proactively implementing measures to optimize cash management.
For many years, PLC has prioritized cash flow planning, diligent monitoring, and strict adherence to strategies aimed at maintaining an optimal monthly cash balance Despite occasional challenges in achieving this balance, the collaborative efforts of all departments, from sales to accounting, consistently lead to effective resolutions.
One of the most important factors affecting cash flow of the company is account receivables Receivables is strictly controlled by the due date of output invoices
In order to ensure that customers are willing to pay their debt, the finance department has had the assessment process of customer’s financial potential