Working capital and some solutions to increasing capital in utilization at Petrolimex Asphalt commercial limited company

limited company is a enterprise which is doing business in trading field have been making efforts in capital using and management, especially working capital occupied a large proportion in the total capital. Stem from appreciating of working capital in reality as well as to meet increasing demand effectively in every enterprise, for the past probrationary period, I`ve decided to chose this subject for my thesistation. “Working capital and some solutions to increasing capital in utilization at Petrolimex Asphalt commercial limited company” The graduation thesis`s content consists of 3 parts Chapter 1: Overview of producing activities in Petrolimex Asphalt limited company Chapter 2: The real state of working capital management and utilization in the company Chapter 3 : Some primary solutions to increasing effective capital in utilization and management CHAPTER 1 THEORY OF WORKING CAPITAL AND ITS EFFECTIVE UTILIZATION IN ENTERPRISE 1. Theory of working capital 1.1. The notion of working capital Any enterprise wants to carry out its produce and business process, it needs a combination of 3 factors : labour force, tools and materials Difference between tools for working and materials for working (materials, fuels, semi- unfinished products …). It only take part in one producing process and does not come back its initial form, all its value will change into in product`s value. Materials for working : as in kind form it is called working assets. As for value form, it is called Working capital of enterprise. Working Assets included : Working assets for manufactoring and working capital for circulating. Working Assets for manufactoring included such as : raw materials, fuels, materials, alternative accessories, half of products, unfinished products … are all being in process of reserve or manufactoring. Working Assets for circulating included : finished products are waiting for consumption, capitals in cash, capitals in payment, prepaid costs … In producing and businessing process, working Assets fo manufactoring and working assets for circulating are always mobilising, transforming to each other and at last aiming to ensure non-stop produce and business process. It is also an expressed form of working assets, so the characters of working capital exercises are always affected by working assets`s characters. Working capital will be transformed and repeated consecutively. So, they will create repeated cycle of working capital. One cycle starts since investing capital under the monetory form then finishing at the production cycle to come back its initial state. To the manufacture enterprises, the cycle of working capital process always mobilises under the following formula : TLSX T-H … SX … H’- T’ SLĐ For commercial enterprises, the repeated cycle of working capital process always mobilises under the following formula : T – H – T’ Therefore, Working capital is under the monetory, it is an expressed form of working capital or in other words, it is monetory on prepaid account to take shape of working assets for producing and working assets for circulating to ensure process of produce and business are going on smoothy. 1.2.Working capital and the classification 1.2.1. The classification under expressed form According to the classification, working capital is divided into 2 parts : - Capital in cash and accounts receivable : It consists of monetory in funds, bank`s deposit, capital in payment, short-term investment in securities … - Capital in materials, goods : They are working capitals which are under the expressed forms such as raw materials and materials, unfinished products, half of finished products, finished products … The classification will help enterprises to evaluate the level of inventory and ability of payment. 1.2.2. The classification under the working capital`s role in produce and business process Under the classification, working capital are divided into 3 parts : - Working capital in producing reserved : Including of prime materials, sub materials, fuels, alternative marterials, tools. - Working capital in producing process : Value of unfinished products, semi-finished products and other costs. - Working capital in circulating process : Value of finished products, capital in cash, short-term investment, mortgages, pay a security, pay earnest money in short-term and accounts capital in payment. 1.3. Working capital`s structure and driving factors behind There are many factors that have influences on capital`s structure, including many parts. There can be divided into 3 main groups below : - The factors related to supply materials such as : The distance between enterprise and supplier places, market and ability of supply materials, material prices, the scale of production. - The factors related to production : Character, technology, producing technology of the enterprise, the complexion of produced products, the lengh of produce cycle, the level ability of producing process organization, professional skills of Workers. - The factors related to payment method : payment methods and the execution of payment principles between enterprises. 1.4. Working capital resources 1.4.1. The classification with the relation of ownership According to the classification, it is divided into 2 parts : - Loan Accounts : It is the capital resource of borrowing from commercial banks or financial organizations, Customer ccounts receivable....enterprise is entitled to use them in a given temporary . - Owner`s equity : This is account capital which is under enteprise ownership, including * Mobilised capital inside : left benefit, funds. * Mobilised capital outside : From the members of enterpsie, joint-venture capital , State budget capital, Share capital is mobilised by issuing shares to the public. 1.4.2. Classification of working capital follwoing to mobilising time and utilization methods According to the norm, enterprises`working capital included : regular capital and current capital. - Regular capital : Including the Owner`s equity and long-term debts. The capita is stable and can use for along time. Enterprises use it for investment, buying Fixed assets or using all or part of regular working capital which is necessary for business activities. - Current capital : Including of short-term loans from banks and other credit organizations, long-term debts fall due, Accounts receivable from suppliers, Accounts payable for workers, Accounts payable for the State budget … This is short term capital that enterprise can use it to meet the temporary working capital demand in produce and business activities. The classification will help managers to evaluate the mobilised capital which is suitable to quality and in the time to use necessary factors for business activities. 1.5.Working capital demand and the driving factors behind Working capital demand always changes and depend on many factors. In there, we need to care about following the fomula and the main factors : Working capital demand = Inventories + Customer accounts receivable - Suppliers accounts prepaid - The factors related to Business features such as : Business period, Business scale, it is temporary Business activities, The changes of producing technology … The factors have affected directly to the level of working capital that enterprise has to meet the prepaid capital with a required time demand. - The factors related to buy materials and product consumption : +The distance between enterprises and sppliers. + The fluctuations of goods and material costs which are being used in produce and business of the enterprises. + The gap between enterprises and selling market . + Conditions and means of transportation … - Enterprise`s policies in consumption activities and credit with payment organization impact on payment term and scale of Accounts receivable. Consumption activities organization and carry out the payment activities organization of selling goods have strongly affected to enterprise`s working capital demand. 2. Working capital and its importance in increasingly effective utilization. 2.1. Working capital and norms to reflect its cycle speed 2.1.1. Payment ratios * Short-term debts payment ratio It is the relation between short-term assets and short-term debts ( including: short-term debts in term and long-term debts fall due ). Value of current aassets The current ratio = ––––––––––––––––––––––––––– Short-term debts This ratio assesses changeable ability of short-term assets into cash in order to pay Short-term debts in term of Enterprises. Short term Assets = Inventories + Cash and equivalent + Accounts receivable. Among them, Inventories is a part of working capital which has the lowest ability to change into monetory. * Quick ratio Value of current assets – Value of Inventories The quick ratio = ––––––––––––––––––––––––––––––––– Short-term debts This ratio reflects accounts debts in the fastest time.This ratio provides information regarding the firm`s liquidity and ability to meet its obligations. It indicates a company financial strenghts (or weaknesses) but this ratio can be good or bad, this depends on character of every business field. * Current ratio Cash and cash equivalent The cash ratio = ––––––––––––––––––––––––––––––––– Short-term debts The current ratio measures whether or not a firm has enough resources to pay its debts over the nest 12 moths. It compares a firm`s current assets to its current liabilities. A comparison with the industry of the firm`s current ratio, and a comparison with average, can help determine if the current ratio is high or low at this period in the time`s comparison. These comparisons do not indicate why the current ratio is higher or lower than industry. For some possible reasons of the current ratio is out of line, which can be found from analysis of the individuals account that has been usually performed for Accounts receivable and Inventories. 2.1.2. The number of Inventory cycle The number of inventory cycle are the times of average inventory, which is mobilised in term. Costs of goods sold The number of Inventories cycle = –––––––––––––––––––––––– Average Inventories The number of inventory cycles are more and more higher, the business will be better because enterprises only need to invest a small level of Inventories but they still achieve a high turnover. 2.1.3.The number of accounts receivable cycle The norm reflects ability of capital recovery for payment in enterprises Accounts receivable cycle = Net Sales Remainder average Accounts receivable The cycle is more higher, the more better. It proves that the fast speed of recovery of Accounts receivable. Enterprises will needn`t to invest too much in Accounts receivable. 2.2.The primary factors have influences on the utilization effects of working capital * Objective factors + Fluctuations of economy : If economy with its inflation causes the rising of goods prices, including input material costs, produce costs will grow, product prices will be raised and of course to make the consumption will become ineffciently. + The non-stop development of Science and Technology also contribute to increasing effecient utilization of working capital. Science and technology are developing that it can be helpful factors or can be adverse factors to enterprise. if enterprise produces redundant products and they can not be consumed. Therefore this will be negative factors. + Business environment : The number of rising competitors, alternative products, changed market demand … They will impact on the ability of consumption, even though leading to the situation of capital losing. + The State with marcro policies : The state`s policies are very important to enterprises` operations. In each policy has 2 effects, may be positive and may be not positive to Business activities in their fieds. * Subjective factors + We can recognize enterprises` weak points in quality of management. It causes the redundant or shortage of capital. + Ability of penertration and enlargement the market of enterprise : the speed of consumptionis better, the Working capital is higher, therefore its efficient in utilization will grow. 2.3. some solutions aiming to increase the utilization effects of working capital 2.3.1. Secification of the level necessary working capital demand for business operation Specification of necessary Working capital regularly, this will ensure the level enough capital to meet the demand of Business process amd avoid unliquided capital or short of capital, leading to interrupted production situation. Business activities have to ask for capital to come into operation. When starting to produce and do business, enterprise has to calculate the level of necessary capital demand and one of the most important is that enterprise has to calculate accurately in line with developing period in general and in produce process in particular. Because of this will help enterprise`s business operation go on smoothy and efficiently. 2.3.2. To push up the working capital` s rotate speed highly The effects of Working capital are evaluated by its rotate speed. If Working capital has a highly rotated speed, it shows that the effect of working capital utilization is very good. So, it is necessary to hasten speed of liquided Working capital in 3 processes : reserve , produce and circulation. 2.3.3. Carry out of checking, analysing, surpervising Business activities tightly and regulary. Executing of check activities regularly and consecutively will help enterprises to evaluate their strong points and weak points. Steming from there, enterprises can develop their advantages or prevent and modify shortcomings in time. Chapter 2 OVERVIEW OF PRODUCE ACTIVITIES IN PETROLIMEX ASPHALT LIMITED COMPANY 1. Introduction 1.1. Some information about the company Enterprise name : Petrolimex Asphalt commercial limited company Short name : Petrolimex Asphalt co.,LTD Headquarters : At 1 Kham Thien _Dong Da district _ Ha Noi Petrolimex asphalt commercial limited company, to be a subsidiary of Petrolimex Petrochemical - a member of Viet Nam Petrolimex, head of company. The company specialises in business with products related to asphalt in domestic market and regional South East Asia countries. In order to meet the increasing demand of petrolimex asphalt products in the domestic market. The ministry of Trading officially approved the company became as a member of Petrolimex Petrochemical joint stock company and under the name of Petrolimex Asphalt commercial limited company. The company deloyed “under the model of parents _subsidiary company ”. PLC is one of the most dynamic members of Petrolimex Petrochemical and approved by the ministry of Trading. Presently, the company is representative partner of BPETCO to supply high quality products of BP on market. It has been the first doing business with 60/70 hot solid asphalt products in Viet Nam since 1997 1.2. Business sectors and main products Do business sectors Do business with import and export petrolimex Asphalt products, in the short term, concluded 3 main sectors : lubricant , chemical, asphalt fields and some sectors related to them. - Doing business with import and export material products, Asphalt equipments. - Doing business with services related to : Shipping, stocks, mixtrure, alnalysis, consultancy and technical services. - In the coming time, the company will take part in doing business with buildings and real estate. Main products : Asphalt, chemical, lubricant. 1.3. Organization of management Management` structure : Including, chairman, director, duty director . - Chairman: cotrol Business activities as well as making regulations, priciples and the organization model and and have the authority to appoint director of Petrolimex Asphalt limited company. - Director : Director is a person who is resposible for Business operations to chairman and directly running Business activities and has to report them to chairman. - Duty director : Duty is a person who is intitled to help director and along with director to run Business operations and to take the regulations and priciples of mother company given into practice. Duty director is also responsiblity to director and chairman for given responsibility. 1.4. Accounting`s structure Accounting department : responsible to financial accounting activities to director. Always updating and giving accurated figures in time. The department has to give balance sheet, financial report … calculate expensives such as : profits, make loss, taxes, salary, bonus, other policies for staffs. At the being time, Accounting department has 9 people concluded : 1 chief accountant, 2 deputy chief accountants and 6 accountants (accountant take resposible for the whole company, accountant for departments, accountant for details). They are all up to the standard of graduated University. 2. The real state of working cappital`s utilization at Petrolimex Asphalt commercial limited company 2.1. Over view of assets and capital resources of the company Look at the table 1, capital and business capital resources of the company was higher than last year because of extending lager scale of produce and business . Within 2 years of 2006 and 2007 working capital of the company accouted for a high ratio in the number of assets. Namely, in 2006 it was 93.2% and 94.1% in 2007 among of all assets value which made the company` fixed capital had only small density in structure of assets. For example, in 2006 it occupied 6.8% and reduced 5.9% in 2007. This structure is entirely reasonable in line with enterprises doing business in trading. As for capital resourse, the company tended to use loans. In 2006 the Accounts payable of 43.8% density and decreased slightly 42.1% density in 2007. Although reduced, it was still high in the total of the company`s capital. Owner`s equity accounts for a small density in capital resource structure of the company such as 12.4% and 15.7% in 2007. Business capital is an value expression of assets. It included : Working capital, it is a form of its value and short term investment accounts; Fixed capital is an expression of its value and long term investment. Looking at business capital structure, showed that the business capital increased with high speed, the company was expanding for a larger scale to control the market, namely : In 2006, business capital 954.698.725 thousand dongs. Its value growed 199.592.549 thousand dongs and present at 1.154.291.274 thousand dongs. It increased relatively of high speed, equivalent of 20.1%. To get the good results of growing business capital above, the company used flexibly its financial resources included Owner`s equity and Accounts payable. In 2006, Accounts payable were 743.176.105 thousand dongs, holding 43.8% in the total capital. Owner`s equity was 211.522.620 thousand dongs, equivalent of 12.4 % in the total capital. In 2007, the scale of capital was increased both of Accounts payable and working capital : Accounts payable raised 96.970.509 thousand dongs, equivalent of 13.04% ratio. Meawhile, Its owner`s equity speed of 48.51%, equal to 102.622.041 thousand dongs. This showed that, the rising rate of Owner`s equity was higher than Accounts payable in 2007, leading to ratio of capital resource changed, Owner`s equity increased by 48.51 % and Accounts payable reduced to 42.1%. Although, the density of loans reduced but accounted for a large propotion of total capital. The structrure of the capital required to execute activities of management and use it efficiently. Because of business character, short term debt hold nearly entire in 2006 and 2007. Long term obligation grew 192.432 thousand dongs, equal to 38.35%. Short term debt occupied over high rate, under which the company has to set plans to accomplish its accounts debt within required time, it would help the company to guarantee its prestige in payment. 2.2. The real situation of working capital`s utilization at the company 2.2.1.Working capital`s structure Working capital is impossible not to have for the company since taken shape, especially to enterprises which have activities in business trading, working capital always account for high ration in all business capital. Therefore, structure of working capital in every company which is doing business in trading such as Petrolimex Asphalt limited company, it would impacted on its results of processing line and business activitives. Look at the table 2, capital`s structure of PLC, we find out its Working capital scale in 2007 increased 223.080.993 thousand dongs higher than 2006, equal to 25%. It included 3 component parts : Cash capital, Inventories, Accounts receivable, almost all was increasing in value. The density of capital in cash moved up in 2007 compared to 2006, which pushed ability of payment for the company. Working capital has been driven, caused by cash and bank deposits were all increased. In contrast, the density of them were all reduced from 15.1% to 13.5%, which showed that the company had a tendency to decrease the density of availabe cash funds in order to increase the effective utilization of capital. So, the company should consider exactly the level of a reasonable cash reserve. Avoiding situations of being over lack or redundant cash funds. Accounts receivable were over high, following that it would reduce ability of making profits, then capital could not liquidized continuously, even unnecessary costs could be raised related to the management activities of recovering capital costs … Customer accounts receivable played a majority in accounts receivable. Thus, the company really needs good measures to manage and recover it in dated time in order to avoid bad accounts debts which could be leading to lose its capital. Inventory capital was more and more higher because of enlarging its scale. Requiring the company should have big goods reserve levels to meet the huge contracts demand in time under which would help it make a good image. We realised that almost all of goods were imported, so every time in import is a process leading to increasing the cost of time and money. Therefore, the company always has enough goods in stock to meet the selling demand and avoid situations goods out of stock which could impact on the company`s prestige. Howerver, over redundant Inventories would raise costs of storage, keeping in good condition and capital unliquidized … So the company shoud canculate the level inventory reserves accurately and namely. 2.2.2. The situation of management in ability of payment Capital in cash of management Ability of payment increased by the growth of cash and bank deposits but the major factor is caused of influence on the rise of bank deposits. - Cash funds was up 2.320.484 thousand dongs, equivalent of 17.9% rate but decreased 1.6% density. - The company is an enterprise, doing business in the field of trading by import and export operation. So the payment activities were finished at the bank. It is easy to understand that the bank deposits occupied a high density in the total of working capital in cash. In 2006, it was 84.9% and grew 86.5% in 2007. The increasing of bank deposits of 25.015.968 thousand dongs, showed that its rate relatively high , equal to 34.4% ratio. Current ratio at the end of 2006 was 1.19 and at the same time in 2007 was up to 1.32. The ratio is higher than one, so its abitity of payment`s very good. - Similar to current ratio is Quick ratio also grew up, this is caused of increasing of Working capial ratio faster than short term debt ratio. Therefore, the ability of payment of short term debt at the end of 2006 was 1.19 up to 1.32 at the same time in 2007. The ratio reflected its growth ability of debts payment in terms. Quick ratio increased by 0.04, compared to 2006 and 2007. In greneral, the ratio smaller than one. On the basic, it was able to accept because the company would still self control in finance. Cash and cash equivalent were also grew. Namely. It was 0.11 ratio as the end of 2006 and in 2007 it was 0.13 ratio. This showed the ability of payment about it better than last year. That was very convenient because the company can use it to payment cash loans when is necessary to avoid the situation of borrowing money “ over- night” 2.2.3. The Situation of accounts receivable management The component of Accounts receivable in the total of working capital at the end of 2007 increased more than at the end of 2006 was 80.176.627 thousand dongs, equal to 17.1%. All in all, among total Accounts receivable, Customer accounts receivable played a majority. Management financial activities of Accounts receivable are very important and complex problems. Customers Accounts receivable went up 77.728.067 thousand dongs, equal to 16.6%. At the end of 2006 was 467.598.807 thousand dongs up to 545.326.874 thousand dongs at the end of 2007. The company was in expanding process its marketshare so it applied selling on credit policy to customers. That was the main cause of Accounts receivable increased. However, it is necessary to tie closely management activities, have selling on credit policy to customers and identify the term of payment and increase incentive quick payment policy in order to reduce Accounts receivable. Suppliers Prepaid accounts also increased because of the store bought quality of goods pushed up to supply for selling activities. It increased by 743.353 thousand dongs in value, was 10.789.501 thousand dongs up to 11.532.854 thousand dongs, but the density moved down 2.1% density at the end of 2007. Accounts receivable increased both of density and ratio. At the end of 2006, as for other Accounts receivable accounted for 3.8% density, equal to 17.861.692 thousand dongs but at the end of 2007 was up to 3.9% density, following that its value also was plus of 2.203.187 thousand dongs and up to 20.064.879 thousand dongs. Accounts receivable tended to move down. It would help the company reduce pressure in capital cycle demand. In 2007, the growth of spare bad Accounts receivable showed that the company had a preparation for bad situations to avoid falling to lose the state of balance if these bad situations would have happened. It also helped the company classify every customer to give capital recovering policy effectively. Management of Accounts receivable with the aiming to help the company recover Accounts receivable within required time and to avoid losing capital at once. Accounts receivable cycle reflected ability of recovering capital in payment so we should take cycle indexes of Accounts receivable and average collect term of Accounts receivable for considering. In Genaral, the cycle indexs of Accounts receivable and average money collection term was better than last year. Net sales was higher than average Account receivable so its cycle increased from 4.16 as the end of 2006 to 4.81 at the end of 2007, equivalent of 0.65. Accounts receivable cycle grew so average money collection term reduced by 12.79%. It created good conditions for the company to have faster cycle of floating capital and reduce the level of working capital demand. It showed that PLC had positive measures to deal with Accounts receivable in due time. Yet, average Accounts receivable moved up because it has a selling on credit policy under which to push for the better goods consumption up as its purpose and to make relationships to many other different customers. 2.2.4. The situation of inventories management activities Look at the table 2. Inventories occupied a high density out of the total capial. As the end of 2006, accounted 38% density and moved up 41.8% in 2007 in the number of working capital resoure. It not only increased in density but also grew in scale. The value of Inventories at the end of 2007 was 453.229.739. Meanwhile, at the end of 2006 was only 337.661.825 thousand dongs, increased of 115.567.914 thousand dongs, equal to 34.2%. Inventories increased, the main cause was that its scale of consumption market was being expanded and leading to the growth of its marketshare and so, materials and finished products in stock also arose in order to meet the dated delivery as contracts. In addition to the increase is that a part from goods and materials are imported to meet the demand activities of produce and business process. Moreover, imported materials prices were impacted by exchange rate in tandem with the cost of delivery import for each time was relatively high, procedures would arise more time and more money. Therefore, the company had enough materials and finished products available in stock to supply for market when requested which helped it avoid any change situation of these The Inventories cycle was 5.34 in 2006 and it increased 5.81 cycle. This made the number of days per cycle decreased factors to keep its reputation to customer. It explained why the level of materials, finished products and goods in stock grew. Materials increased 38.4% ratio, finished products also grew 35.2% and goods increased of 31.4%. It showed that the company had a good schedule for working out of plan Inventories reserved which helped to gain the initative in all business operations and reduce influence on changeable innermaterials prices. Look at the table 4, Inventories cycle in 2007 was 5.81, its cycle was decreased every cycle 5days. Costs of goods sold`s speed increased faster than average Inventories, leading to the growth of Inventories cycle. Costs of goods sold`s value moved up to 530.652.050 thousand dongs, equal to 30.27% ratio of speed. Meanwhile average Inventories only increase by 19.62%, equal to 64.415.790 thousand dongs. This showed that ._.