A study on improving working capital management efficiency of steel companies in Vietnam

.1.1.1. Working capital concepts and characteristics Working capital (WC) of a business is the amount of advance capital to form working assets, ensuring the process of production and operation in the company on a regular and continuous basis. The main characteristics of WC are as follows: (1) WC participates in a business cycle, and always change the manifestation form through the stages in the business and production process, from the initial monetary capital form to materials, inventory reserve, to become unfinished products, semi-finished products, finished products and finally returns to monetary capital form; (2) At the end of each business cycle, the value of WC is transferred wholly and once to the value of produced goods and services and compensated when the enterprise receives money from selling goods and services. (3) The WC rotation is associated with the end of a business cycle. The above process takes place regularly, continuously, and is repeated after each business cycle, forming a WC cycle. 1.1.1.2. Roles of working capital in the business Firstly, WC is the prerequisite material condition of the production and business process. 6 Second, analyzing and evaluating the movement of WC through stages helps business administrators to control the entire business activities of companies. 1.1.2. Working capital classification According to the manifestation form, WC can be divided into: cash, receivables, and inventory. According to the role of WC in the production and business process, WC is divided into the following main categories: WC in production reserve, WC in production, WC in circulation. 1.1.3. Working capital structure and factors affecting working capital structure of enterprises 1.1.3.1. Working capital structure Working capital structure is the proportion of each component of the WC in the total amount of WC in the enterprise. Working capital structure varies from companies to companies. Working capital structure also varies among companies in the same sector. Even one company could have different working capital structure in different periods of development. 1.1.3.2. Factors affecting working capital structure of the business - Factors in terms of material supply: - Factors in terms of production: - Factors in terms of circulation: 1.1.4. Working capital requirement of the business In order that production and business activities to operate regularly and continuously, companies always need a certain amount of WC. This amount of WC is called the working capital requirement (WCR) of the firm. Based on the 7 nature (or time of arising), it is possible to divide the WCR of the business into 2 categories: regular WCR and irregular WCR (short demand term, temporary needs). In the scope of the thesis, the author focuses on the necessary regular WCR of enterprises, so the term WCR is understood as the necessary regular WCR of enterprises. 1.1.5. Sources of working capital WC of a business is the amount of advance capital to form working assets, ensuring the process of production and operation in the company on a regular and continuous basis. Companies need to exploit WC from different sources in order to have enough WC for production and business activities. Each types of business at different times would have different sources of WC. It is possible to classify sources of WC according to many methods, but mainly according to the time of mobilizing and using capital. Specifically: WC is taken from two sources: the permanent WC source and the temporary WC. 1.2. WORKING CAPITAL MANAGEMENT EFFICIENCY 1.2.1. Concept of working capital management efficiency Efficiency of WCM is an economic category reflecting the ability to optimize the amount of WC used in production and business activities to create the maximum amount of profits. Efficiency of WCM has a great influence on the entire efficiency of business capital management of an enterprise, and especially, it has a decisive effect on the ability to pay off due debts of the enterprise. 1.2.2. Working capital management and working capital management efficiency 1.2.2.1. Inventory and efficiency of inventory management * Inventory and inventory management In manufacturing enterprises, inventory (also known as capital in terms of materials - goods, or capital in terms of inventory) is the value of raw materials, 8 fuels, tools (collectively referred to as manufacturing reserve), value of work in progress and semi-finished products (collectively referred to as work in progress) and value of goods and finished products in stock. In manufacturing enterprises, inventory often accounts for the largest proportion in the amount of WC. Therefore, the management and use of inventory in general, the efficiency of inventory management in particular has a great impact on the efficiency WCM of enterprises. * Efficiency of inventory management Efficiency of inventory management could be assessed by two ratios: Inventory Turnover and Days Inventory Outstanding. (1) Inventory Turnover = Cost of goods sold Average Inventory (2) Days Inventory Outstanding = 360Inventory Turnover 1.2.2.2. Receivables and receivables management efficiency * Receivables and receivables management Receivables, also known as accounts receivable, are the corporate capital that is used by organizations and individuals inside or outside the enterprise in the form of appropriation or being provided with commercial credit that the company is responsible for collecting. Receivables include: Value of goods and services provided by the enterprise but the customer has not yet paid; Prepayments to sellers for supply of goods or services; deductible taxes; advances for officers, employees and employees in enterprises; other receivables such as damages of individuals or collectives that the company has not yet collected, etc. In which, receivables from customers often account for the largest proportion. At the same time, in most businesses, receivables accounts for a relatively large proportion of the total WC. * Receivables management efficiency 9 Receivables management efficiency is one of the WCM efficiency indicators of enterprises. This is evaluated through two ratios: (1) Receivables Turnover = SalesAverage receivables (2) Days Sales Outstading = 360Receivables Turnover 1.2.2.3. Cash and cash management efficiency * Cash and cash management Cash is the most important and most liquid part of the working assets in a business, directly impacting the solvency of the business and contributing to the regular and continuous business operations. Cash exists directly in the form of cash in hand, deposits at the bank and cash-in-transit. * Cash management efficiency To evaluate the efficiency of cash management, it is necessary to consider the ratio of Cash Conversion Cycle (CCC): Cash Conversion Cycle= Days Inventory Outstanding + Days Sales Outstading− Days Payables Outstanding In which, Days Inventory Outstanding and Days Sales Outstanding have been presented in sections 1.2.2.1 and 1.2.2.2, Days Payables Outstanding ratio is calculated as follows: Days Payables Outstanding = 360Payables Turnover Payables Turnover = Total supply purchasesAverage payables 10 1.2.2.4. Combined efficiency of WCM According the concept of WCM efficiency presented in section 1.2.1, ratio Return on Working capital (ROW) is proxy for WCM efficiency. Return on Working capital = Profit after taxAverage working capital The ratio of ROW reflects how much profit after tax earned compared with the average working capital paid in the period. The higher this ratio is, the higher efficiency of WCM the company has and vice versa. The goal of each enterprise in the long term is to maximize profits, so the ROW could comprehensively evaluate the WCM efficiency of the enterprise, also known as Combined efficiency of WCM. Moreover, efficiency of WCM could be assessed through a number of effectiveness ratios which show the rate of WC rotation. The faster WC rotates, the higher the effectiveness is and vice versa. The rate of WC rotation could be reflected through the ratios of Working Capital Turnover and Days Working Capital. Working Capital Turnover = Net Sales Average Working capital Days Working Capital = 360Working Capital Turnover 1.2.3. Determinants of WCM efficiency 1.2.3.1. Objective determinants Objective determinants are external factors that directly or indirectly affect business operations in general and WCM efficiency in particular, including: economic growth, inflation, industry characteristics. There are also some other objective determinants such as exchange rate, macro policies, credit policies of competitors, credit of suppliers, and assessment of investors, etc. 11 1.2.3.2. Subjective determinants In addition to the above objective determinants, there are many subjective determinants created by the enterprises themselves that affect the efficiency of capital use, including: firm size, proportion of tangible fixed assets, financial leverage, profitability, sales growth, age of the business, corporate governance and leadership characteristics. Moreover, many other subjective determinants are also considered factors affecting the efficiency of WCM such as: Financial management regulations of the company, vision and strategy of the company, relationship between the company and its customers and suppliers, qualifications of officials and employees in enterprises, expenditure capital, etc. 1.3. INTERNATIONAL EXPERIENCE IN WCM EFFICIENCY AND LESSONS FOR COMPANIES IN VIETNAM With experience from many different perspectives, from state management to specific enterprises of countries in the world, businesses in Vietnam can learn many lessons, as follows: First, CFO takes the main responsibility for the management of WCM. Second, improving the efficiency of WCM should be in the long-term strategy of businesses. Third, businesses need to focus on minimizing the cash conversion cycle. Fourth, technology should be modernized to improve the efficiency of WCM. Fifth, the government's state capital management committee should develop a manual on WCM for state-owned enterprises. 12 CHAPTER 2: CURRENT SITUATION OF WORKING CAPITAL MANAGEMENT EFFICIENCY OF STEEL COMPANIES IN VIETNAM 2.1. OVERVIEW OF STEEL COMPANIES IN VIETNAM 2.1.1. Development process and industry characteristics of steel companies in Vietnam Vietnam's steel industry started in the early 1960s with the appearance of Thai Nguyen Iron and Steel Complex, considered as the first industrial park in Vietnam to have a closed integrated production line from iron ore mining. Despite a history of nearly 60 years, Vietnam’s steel companies have really thrived in the past 20 years. Although there were times of negative impacts from the financial crisis and economic recession, enterprises in the steel industry still maintained an average growth rate in the 2010-2015 period at 7-8% / year. Even the compound growth rate of the industry in the period 2015 - 2018 reached 20% - relatively impressive. Characteristics of production and business activities of steel companies in Vietnam are as follows: First, the production scale of steel enterprises in Vietnam is quite small, with low technology level. Second, businesses mainly participate in outsourcing and processing, so the added value created is not much. Third, there is an imbalance between product groups of steel companies and domestic consumption demand. Fourth, Vietnam's steel companies depend heavily on external factors. Fifth, the manufacturing cost of steel products in Vietnam is relatively high. 13 2.1.2. Business results and financial situation of steel companies in Vietnam In order to evaluate the current situation of the efficiency of WCM of companies in the steel industry, I choose a sample of 26 companies and classify into groups of enterprises according to two criteria: Business field - Key product, and firm size. In general, the business performance and financial situation of most enterprises in the steel industry are quite low and unstable in the period 2009 - 2018. 2.2. CURRENT SITUATION OF WMC EFFICIENCY OF STEEL COMPANIES IN VIETNAM Evaluating the current situation of the WCM efficiency of steel companies in Vietnam, I carry out in-depth analysis of the efficiency of inventory, receivables, cash management and the combined efficiency of WCM. Steel companies in Vietnam achieve some important achievements but still have shortcomings, especially with the groups of companies of Galvanized steel - Steel Pipes, Steel Trading, Stainless Steel, Small-Scale companies. 2.3. EMPIRICAL RESEARCH ON DETERMINANTS OF WCM EFFICIENCY OF STEEL COMPANIES IN VIETNAM The research was conducted on 26 Vietnamese steel enterprises in the period from 2009 to 2018. Based on the analysis of panel data regression results, it is pointed out that: - Determinants that have a positive impact on the efficiency WCM of Vietnam's steel enterprises are: Economic growth, firm size, and profitability. - Determinants that have a negative impact on the efficiency of WCM of Vietnamese steel enterprises are: The proportion of tangible fixed assets over total assets of enterprises. - Industry characteristic has an impact on the efficiency WCM of Vietnamese steel enterprises. 14 - Factors that do not have a statistically significant relationship with the WCM efficiency of Vietnamese steel enterprises are: inflation, financial leverage, sales growth, and enterprise age. These results are consistent with some previous studies, but there are also conflicting results. The reason is the difference in the number of samples, enterprises, time and space to conduct the research. However, these results also give the author important suggestions in proposing solutions to improve the WCM efficiency of steel companies in Vietnam. 2.4. GENERAL ASSESSMENT OF WCM EFFICIENCY OF STEEL COMPANIES IN VIETNAM 2.4.1. Achievements First, in the period 2012 - 2018, the recovery of the economy and the real estate market helped improve the output market of enterprises in the industry, thereby contributing to increasing profits and ROW. The ROE rate has improved from 7.27% (in 2012) to 15.72% (in 2018). In terms of the combined efficiency of WCM, the ROW rate increased from 4.3% (in 2012) to 11.75% (in 2018), which is quite high. In particular, the group of Construction Steel and Large- Scale companies always have relatively stable labor turnover and highest ROW in the research sample, showing that the WCM efficiency of this group is quite good. Second, in terms of the inventory management efficiency, in general, the rate of inventory rotation is stable, inventory growth meets revenue growth. In the period of 2014 - 2018, Inventory Turnover tended to improve, from 4.03 times in 2014 to 4.4 times in 2018, reflecting a better trend of inventory rotation. In which, the group of construction steel enterprises, steel trading enterprises, when classified by business areas and key products, and the group of medium-sized enterprises effectively use inventory and tend to improve. 15 Third, in terms of receivables management efficiency, most of receivables come from short-term receivables from customers, stable turnover speed, tends to increase gradually, especially the group of Galvanized steel - Steel Pipes enterprises and Large-scale enterprises. The average collection period of the Galvanized steel - Steel Pipes group decreased from 39 days (2010) to 34 days (2018), lower than the sample average. Similarly, the group of Large-scale enterprises saw a decrease in average collection period from 45 days (2010) to 35 days (in 2018). Fourth, in terms of cash management efficiency, cash reserves and solvency of Construction steel enterprises and Large-scale enterprises are always higher than the whole sample and remain stable. Cash conversion cycle (CCC), despite a tendency to increase slightly, still remain stable during the research period and lower than the sample average, showing that the conversion rate to money of these two groups is quite good. By maintaining a stable level of rotation cycles in the context of a decade witnessing great fluctuations in the world economy, it shows that steel companies have tried very hard to maintain efficiency of WCM. 2.4.2. Shortcomings Besides the achievements, steel companies in Vietnam over the period 2009 - 2018 still have potential shortcoming as follow: First, the efficiency of WCM in some groups of steel enterprises shows signals of deterioration. Except for the groups of Construction steel enterprises and Large-scale enterprises, the other groups of enterprises all have greatly fluctuating and low ROW with declining trend. Typically, the group of Galvanized steel - steel pipes enterprises, with ROW in 2018 was only 1.12%; The group of Stainless steel enterprises even have negative ROW in 2015, and by 2018 it is only 4.47%, lower 16 than the sample average of 11.75% (2018). The speed of WC rotation of the Stainless steel enterprises group also decreases negatively during the study period. Small and Medium-sized businesses also had a very low ROW and fluctuate continuously. This trend is expected to continue in the coming years when the difficult economic cycle returns, strong impact from the US - China trade war and the COVID-19 pandemic. This raises the need to propose solutions to improve ROW for Vietnamese steel enterprises. Second, the efficiency of inventory management of Stainless Steel and Galvanized Steel - Steel pipes enterprises has not been improved. Although the Inventory Turnover is stable on an overall scale, going into each specific group of enterprises, we see that the efficiency of inventory management of the Stainless steel enterprises needs improving. The Inventory Turnover of this group decreases from 4.46 times (2010) to 3.64 times (in 2018). In addition, the group of Galvanized Steel - Steel pipes continuously has high inventories of finished goods, showing difficulties in consuming products in the group. In addition, the proportion of inventory over the total WC is always the largest, so it is necessary to pay special attention to improving the efficiency of inventory management to help maintain the efficiency of WCM. Third, the efficiency of receivables management shows notable concerns. Although the receivables turnover is relatively stable and tends to increase, some of groups of enterprises appear to have remarkable problems. The Stainless Steel group has the lowest receivables turnover rate in the group of enterprises classified by business field - key product, with a tendency to slow down. The group’s receivables turnover decreases from 6.57 times (2014) down to 4.02 times (in 2018). Steel Trading enterprises also suffer declining receivables turnover, from 10.16 times (2010) to 9.53 times (in 2018). In addition, Small- Scale enterprises also have lower efficiency of receivables management when receivables turnover decreases sharply from 14.82 times (2010) to 9.92 times 17 (2018), corresponding to the increase in days sales outstanding, from 24 days (2010) to 36.29 days (in 2018). Fourth, the efficiency of cash management has been negative in most groups of steel enterprises. The reserve of cash and cash equivalents is low compared to the size of short-term debt, taking place in the groups of Galvanized Steel - Steel pipes, Steel Trading, Stainless Steel companies, groups of Medium and Small-Scale companies, leading to low ability to pay instant debts, and potential risks related to short-term debt payment. Cash conversion cycle (CCC) in the above groups has shown signs of increase in recent years, making the cash flow slow down. Particularly, the CCC of the Stainless Steel enterprises is currently very high compared to other groups in the industry, up to 145 days (in 2018), twofold the average of the sample, requiring attention to improve cash efficiency management. 18 CHAPTER 3: SOLUTIONS TO IMPROVE WORKING CAPITAL MANAGEMENT EFFICIENCY OF STEEL COMPANIES IN VIETNAM 3.1. SOCIO-ECONOMIC CONTEXT AND DEVELOPMENT ORIENTATION OF STEEL INDUSTRY IN THE PERIOD 2020 - 2025, VISION 2035 3.1.1. Socio-economic context Global socio-economic activities have been seriously affected by the COVID-19 pandemic. In the first 6 months of 2020, international organizations continuously lowered their forecasts for global and nations’ economic growth in 2020. In the latest report (June 2020), the International Monetary Fund (IMF) predicted the world economy fell into a deep recession in 2020, at the growth rate of -4.9%, and the World Bank (WB) even forecasted a -5.2% growth rate this year. This is a much deeper recession than the global financial crisis in 2008 - 2009 (-1.67%, WB). Facing this situation, the world steel industry in general and Vietnam in particular are also affected greatly by the pandemic because countries are closed to fight the pandemic, and supply chain disruptions occur. 3.1.2. Development orientation of Vietnam's steel industry First, increase production scale, increase the competitiveness of the industry. Second, make use of available raw materials, reduce costs, and apply appropriate technology. Third, be proactive in international economic integration. 3.2. SOME MAJOR SOLUTIONS TO IMPROVE THE EFFICIENCY OF WCM OF STEEL INDUSTRY COMPANIES IN VIETNAM 19 3.2.1. Group of solutions to improve the combined efficiency of WCM 3.2.1.1. Develop a strategy to improve the efficiency of WCM First, transform the current popular thinking to classify WCM into operational management activities, short-term to long-term strategic thinking. Second, the efficiency of WCM relates to many parts of the enterprise and relates to each employee in the enterprise. Third, improve the efficiency of WCM should be a daily job of all employees in the enterprise through the collection and application of continuous efficiency improvement initiatives. Fourth, properly handle the effects of the change in WCM methods in the enterprise system. Fifth, set out a roadmap for implementation of specific tasks in each stage, and clearly assign responsibilities in the implementation process. 3.2.1.2. Use a prudent model of WC financing Steel industry is a high risk industry, the demand depends heavily on the real estate industry and the growth of the economy. Vietnam's economy has great fluctuations over time and years, its stability is low and unpredictable. In case the real estate market goes down and the economy slows down, steel companies have difficulty in selling and cash flow, if they use a large proportion of short-term debt, it will lead to great pressure to pay back in short term, and threaten the solvency of enterprises. Therefore, in order to ensure safety and sustainable development in long term, businesses should apply the prudent model of WC financing. 20 3.2.2. Group of solutions to improve the efficiency of WC in each stage 3.2.2.1. Improve efficiency of inventory management As analyzed, inventory accounts for the largest proportion in the total WC of the steel enterprises in Vietnam, inventory clearance is always an important task for each enterprise. In particular, companies in the Galvanized Steel - Steel pipes group have many difficulties in consuming inventory of finished goods, and companies in the Stainless steel group also suffer decreasing efficiency in inventory management. Therefore, it is necessary to implement comprehensive solutions to improve the efficiency of inventory management of steel companies in general, Galvanized Steel - Steel pipes, and Stainless Steel in particular. a. Flexible application of approaches to manage inventory in accordance with the development stages of the industry First, postpone the growth rate of inventory, especially raw materials in stock. Second, businesses may have to negotiate with suppliers to suspend orders as soon as sales start to decline. Third, adjust the rewarding regime of the inventory manager to avoid storing too much stock. Fourth, to reduce excess inventories, companies will analyze the current inventory levels compared with the new market demand forecast. Fifth, make