Working capital management

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Table of Contents

Introduction

Methodology

Findings

Beton 6 Corporation and Manufacturing Sector

Mobile World Investment Corporation and Wholesale Trade and Retail Trade Sector

Duyen Hai Multi Modal Transport JSC and Transportation and Warehousing Sector.

Conclusion

References

Appendix

Introduction

The working capital management is a vital part of the business’s short-term planning process. It is important for management in deciding the quantity of each component should be held. Holding either too much or too little of each component will associate with costs. Management’s duty is aware of these costs, in order to control efficiently. Therefore, potential benefits must be considered against likely costs in order to achieve the optimum investment.

In order to complete the Managerial Accounting and Finance Course, I will write a business report about the working capital management. This report outlines the working capital performance of a sample of 28 listed businesses across the Transportation and Warehousing, Wholesale Trade and Retail Trade, Manufacturing sectors. The information is based on the most recent full-year results for 2014, compared to 2013 results.

Management working capital is a complex field, so, this report mainly focuses on the analysis and discuss “Operating Cash Cycle (OCC)” of these businesses.

Methodology

According to McLaney et al. (2010, p.637 - 683) about the working capital management, this report evaluates the working capital management performs by calculating the Operating Cash Cycle (OCC).

The working capital metrics referred to in this report have been calculated, as follows:

Average inventories turnover period:

This will provide a picture of the average period for which inventories are held, and can be useful as a basis for comparison.

Average settlement period for trade receivables:

The approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

Average settlement period for trade payables:

The approximate amount of time that it takes for a business to pay payments, in terms of payables, to its customers and suppliers

Operating cash cycle:

The OCC is the period between the payment made to the supplier for goods concerned and the cash received from the credit customer.

Findings

Beton 6 Corporation and Manufacturing Sector

Beton 6 is the leading company in manufacture of precast concrete products and construction of infrastructure projects in VietNam.

The operating cash cycle of BT6 was 287.5 days in 2014, increasing by 6.3 days from 2013. Moreover, the business’ OCC was much higher than the average industry period by 2 times. It takes 287.5 days for the purchase of inventories and the ultimate receipt of cash from the sale of the goods. It showed that the BT6 was one the worst companies in managing working capital in the Metal - Nonmetallic Mineral - Fabricated industry. It is necessary for business to reduce the OCC.

Figure 1: Operating cash cycle from 2013 to 2014 (days).

‘Companies often find themselves acting as the “middle man” in this sector, having to contract with great construction businesses or developers whilst also managing numerous subcontractors and suppliers. Both suppliers and customers are trying to tighten working capital cycles and minimize inventory holdings, which means tight debtor and inventory management is vital.’ (McGrathNicol 2014, p. 3).

Average inventories turnover period

Average settlement period for trade receivables

Average settlement period for trade payables

Operating cash cycle

BT6

175.5

280.7

168.8

287.5

Industry average

121.1

74.8

71.2

124.7

Figure 2: OCC of Metal - Nonmetallic Mineral - Fabricated industry

The inventories turnover period increased by 37.9 days from 175.5 in 2013 to 213.4 in 2014. The average inventories holding period seems at more than six months’ sales revenue. It means that the company had the difficult in sales. The inventories turnover period of BT6 is higher than the industry average, 175.5 days compares against 121.1 days. A high turnover period implies poor sales and, therefore, excess inventory when comparing against other competitors. However, it needs to be clear that there have been a difficult period for the industry. In this situation, company needs a plan to increasing sales to reduce the inventory level

Similarly, the average settlement period for trade receivables seems long at more than nine months’ sales revenue. The average receivable settlement period increased dramatically by 2 months from 213 days in 2013 to 280.7 days in 2014. It can be demonstrated by the declining of net revenue in 2014. The higher average settlement period for trade receivables means that there was a ‘more relaxed attitude to credit collection (thereby maintaining customer goodwill) and the high overheads are consistent with incurring the additional costs of satisfying customers’ requirements’ (McLaney et al. 2010, p. 769). The company’s average receivable settlement period is higher than the industry average.

McLaney et al (2010, p. 667) point out that:

‘Imposing tighter credit control, offering discounts, charging interest on overdue accounts and so on, may reduce this, any policy decisions concerning inventories and trade receivables must take account of current trading conditions, and the reduction may have been due to chasing customers too vigorously or as a result of incurring higher expenses, such as discounts allowed to customers who pay quickly. Because the customers are the large construction businesses so any non-suitable collection policy will leading to lose the customers to other rivals.’

The average payable settlement period was 168.8 days and it was higher than the average of industry. High payable period seems to be good to business, though, it need concern about the relationship with the suppliers. If it “squeezes’’ the supplier in a reasonable way, it can also lose the suppliers.

Mobile World Investment Corporation and Wholesale Trade and Retail Trade Sector

Mobile World Investment Corporation operates under two distribution formats: the “thegioididong” which means Mobile World, and “dienmay” which means Consumer Electronics.

The operating cash cycle of MWG was 23.5 days in 2014, growing by 2.9 days from 2013. The MWG’s OCC was the lowest in the industry. It presented that MWG achieved working capital well comparing against the other competitors in retail trade industry.

Figure 3: Operating cash cycle

Figure 4: Operating cash cycle

Generally, retailers are impacted by high competition and margin erosion. Inventory is usually the most significant capital item on a retailer’s balance sheet so its management is a key success factor in the industry.

Figure 5: Average Inventories Turnover Period

The inventories turnover period decreased slightly by 2.9 days from 50.5 in 2013 to 47.6 in 2014. The inventories turnover period of MWG is lower nearly 2 times than the industry average, 47.6 days compares against 95.7 days. The inventory level is very important in retail industry because it is the seasonal business. Therefore, the retailers want to minimize the inventory level as low as possible. It showed that MWG had a good sale in the industry. The inventory level of MWG is relatively good for the mobile retail. The business provided some marketing strategy plans or sale-off events to encourage customers purchasing to lower the inventory level.

Average settlement period for trade receivables

Average settlement period for trade payables

2013

1.8

30.0

2014

1.0

25.1

Industry average

75.4

58.8

Figure 6: Average settlement period for trade receivables and payables

The average receivable settlement period decreased by 0.8 from 1.8 days in 2013 to 1.0 day in 2014. The receivable period of MWG is very low but it is normal to the business when customers pays immediately for buying goods or services. The company’s average receivable settlement period is lower than the industry average nearly 75 times, 1 day compares against 75.4 days. It mean that the business really have had an efficient collection policies and does not have to be worry about the risk of non-payment.

The average payable settlement period decreased slightly by 5 days, from 30 days to 25.1 days. There is not much difference between the two years in the time taken to pay trade payables. It seems that the business applied the same payment policy when dealing with the suppliers. When comparing against the average industry period, the Mobile World Investment Corporation had a shorter period. The period seems quite short, nearly a month to pay credit to suppliers. The business may need to negotiate and build a good relationship with their suppliers to increase payable settlement period. However, the receivable period is very low, so, the business does not need to concern about the short payable period.

Duyen Hai Multi Modal Transport JSC and Transportation and Warehousing Sector.

Duyen Hai Multimodal Transport Joint Stock Company (TCO) specializes in road transport and warehousing business mainly in Haiphong.

The operating cash cycle of Duyen Hai Multimodal Transport Joint Stock Company was 79.7 days in 2014, increasing by 6.3 days from 2013. Moreover, the business’ OCC was higher than the average industry period by 18.8 days. It showed that the CTO did not managed working capital well comparing against the Water Transportation industry average.

Figure 7: Operating cash cycle

The business can reduce the operating cash cycle in a number of ways. The average inventories holding period seems acceptable. This period can be shortened by reducing the level of inventories held. Similarly, the average settlement period for trade receivables seems long at more than two months’ sales revenue. Offering discounts, imposing tighter credit control, charging interest on overdue accounts may decrease this. Increasing the time of credit taken to pay suppliers could also reduce the OCC.

Figure 8: The inventories turnover period

The inventories turnover period decreased by 7.1 days from 41.7 in 2013 to 34.6 in 2014. It means that the company had strong sales or ineffective buying. The inventories turnover period of CTO is higher than the industry average, 34.6 days compares against 18.5 days. A high turnover period suggests poor sales and, therefore, surplus inventory.

Figure 9: The average receivable settlement period

The average receivable settlement period increased dramatically by 18.2 from 43.7 days in 2013 to 61.9 days in 2014. It can be demonstrated by the increasing of trade accounts receivable in 2014. The higher average settlement period for trade receivables is ‘consistent with a more relaxed attitude to credit collection (thereby maintaining customer goodwill) and the high overheads are consistent with incurring the additional costs of satisfying customers’ requirements’ (McLaney et al. 2010, p. 769) . The company’s average receivable settlement period is lower than the industry average, 61.9 days compares against 81.4 days. It mean that the business is not in danger.

Figure 10: The average payable settlement period

The average payable settlement period increased slightly by 4.8 days. There is not much difference between the two years in the time taken to pay trade payables. It is interesting to compare the difference in the trade receivables and payables collection periods. Duyen Hai Multimodal Transport Joint Stock Company allows an average of 61.9 days’ credit to its customers, yet pays suppliers within 16.8 days, it will require greater investment in working capital. However, it will have good relationship with the suppliers. This is reflective of the critical nature of some key inputs and inflexibility in related payment arrangements – fuel, contract labor and warehousing – and the bargaining power of the major retail, primary production and mining customers.

Conclusion

Beton 6 Corporation was one the worst companies in managing working capital in the Metal - Nonmetallic Mineral - Fabricated industry. It had a high Operating cash cycle with high average inventories turnover period and average settlement period for trade receivables. The business need to reduce the inventories level held and apply the new collection policy to reduce collection period.

Mobile World Investment Corporation achieved working capital well comparing against the other competitors in retail trade industry. The MWG’s OCC was the lowest in the industry. By good sales and appropriate policy, the business had a good inventories level and receivable/payable period.

Duyen Hai Multimodal Transport Joint Stock Company showed that it did not manage the working capital well. Only the receivable period is lower than the industry average, the inventory turnover was very high and the payable was low. It demonstrates the poor sales and non-payment risk

References

McLaney, E. & Atrill, P., 2010. Accounting: An Introduction. Essex: Pearson Education Limited.

McGrathNicol, 2014. Working capital report 2014, Melbourne: Cash and Working Capital Centre of Excellence.

Appendix

Company

Average inventories turnover period

Average settlement period for trade receivables

Average settlement period for trade payables

The operating cash cycle

PVT

8.3

40.2

37.2

11.3

GMD

15.6

45.1

55.4

5.4

TCO

34.6

61.9

16.8

79.7

GSP

7.5

20.4

22.6

5.4

HTV

0.9

279.7

29.8

250.8

MHC

0.0

309.0

64.3

244.7

PJT

16.6

27.9

16.3

28.2

VNA

23.8

47.5

51.2

20.1

VOS

34.2

21.1

71.4

-16.1

VST

24.6

13.6

43.1

-4.8

VTO

37.0

28.9

20.3

45.6

Figure 11: Water Transportation Industry

Company

Average settlement period for trade receivables

Average settlement period for trade receivables

Average settlement period for trade payables

The operating cash cycle

BTT

60.9

3.6

37.2

27.3

CCI

12.4

342.5

0.9

354.0

MWC

47.6

1.0

25.1

23.5

PNC

302.0

28.0

224.9

105.1

PNJ

55.4

1.7

5.9

51.3

Figure 12: Retail Trade Industry

Company

Average settlement period for trade receivables

Average settlement period for trade receivables

Average settlement period for trade payables

The operating cash cycle

BT6

175.5

280.7

168.8

287.5

CTI

208.3

54.8

190.4

72.7

DCT

72.2

56.7

24.8

104.2

DTL

204.0

27.2

28.8

202.3

FCM

164.4

237.3

93.3

308.5

HPG

138.3

17.8

33.5

122.6

HSG

107.1

15.6

46.0

76.6

HT1

65.4

23.0

69.0

19.4

HVX

31.1

26.5

36.9

20.8

NKG

59.4

31.4

86.2

4.7

POM

100.1

67.9

14.1

153.9

SHI

127.7

58.7

63.2

123.2

Figure 13: Metal - Nonmetallic Mineral - Fabricated Industry

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