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JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE
MASTERS FINANCE AND CONTROL
THESIS
SITUATIONS OF THE EFFICIENCY OF
WORKING CAPITAL USE IN THE
VIETNAM ELECTRICITY CORPORATION - EVN
Prepared by: DO QUANG HUY
Supervised by: Mr. VU MANH CHIEN
Hanoi 2013
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ACKNOWLEDGEMENTS
I would like to sincerely thank all of teachers for their education and enthusiastic helps
that created favorable conditions for me in the process of study and research at Vietnam
Commercial University (VCU).
I owe sincere and earnest thankfulness to Mr. Vu Manh Chien, my supervisor in VCU for
his helpful suggestions, guidance and enthusiasm.
Also, I am obliged to many of the Director Board, staffs and particularly Ms. Nguyen Thi
Vinh Long - my supervisor at Vietnam Electricity Corporation - EVN, who supported me and
created opportunities for me to access data, research documents on the business and operations
of the Group.
I would like to show my gratitude to my cousin, Mr. Phan Anh Tu, audit staff, for his
patience and supports.
Finally, I would like to thank my family for their interminable encouragements and
supports.
Hanoi, 10 August ,2013
DO Quang Huy.
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Table of contents
ACKNOWLEDGEMENTS 1 -
List of tables 5 -
List of charts 5 -
INTRODUCTION 1
1. Research context 1
2. Research questions 1
3. Research objectives 1
4. Research methodology 2
5. The structure of the thesis 2
CHAPTER I: WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT IN
ENTERPRISE 3
1.1. Working capital in enterprise 3
1.1.1. Definition of working capital 3
1.1.2. Characteristics of working capital and the differences between working capital and fixed
capital 3
1.1.3. Classification of working capital 4
1.1.3.1. Based on the role of working capital in the production process 4
1.1.3.2. Based on the source of working capital 5
1.1.3.3. According to the expression patterns 5
1.1.4. Structure and determinants of working capital 5
1.2. Working Capital Management 6
1.2.1. Definition and components 6
1.2.2. Assessing the working capital performance 6
1.2.2.1. The rotating speed of working capital 7
1.2.2.2. The capital saving due to increasing the rotating speed of working capital 8
1.2.2.3. Coefficient of working capital 8
1.2.2.4. Coefficient of working capital profitability. 9
1.2.3. Objective and necessity of enhancing Working Capital efficiency 9
1.2.3.1. Business objective of the corporation 9
1.2.3.2. The important role of working capital in corporation 9
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1.2.3.3. The meaning of enhancing working capital efficiency 10
1.2.3.4. The fact of working capital efficiency in corporation 10
1.3. Assessment and management of working capital 10
1.3.1. Principles of Working Capital Management 10
1.3.2. Models of reserve and inventory management 11
1.3.3. Cash management models and highly liquid securities 12
1.3.4. Management models of receivables 14
1.3.5. Evaluating and overall managing via working capital metrics 15
1.3.6. Basic methods of enhancing working capital efficiency 15
CHAPTER 2: RESEARCH AND IMPLEMENTATION METHODOLOGY AT EVN 17
2.1. Introduction to EVN 17
2.1.1. Creation and development history 17
2.1.2. Organizational structure 18
2.1.3. Business operation features 19
2.1.3.1. Features of business sectors 19
2.1.3.2. Features of products 19
2.1.3.3. Features of market 20
2.1.4. Financial management mechanism of EVN 21
2.1.4.1. Capital and assets management 21
2.1.4.2. Revenue, profit, and business expense management 22
2.1.4.3. Financial Planning 23
2.2. Steps to collect and process the data 23
2.2.1. Secondary steps (literature review or document study) 23
2.2.2. Steps to collect and process primary data by interviews 24
CHAPTER 3: ANALYSIS OF WORKING CAPITAL EFFICIENCY IN EVN 26
3.1. EVN’s financial analysis 26
3.2.1. EVN’s business 26
3.2. Analysis of EVN’s working capital efficiency 29
3.2.1. Sources of working capital 29
3.2.2. Structure of working capital 29
3.2.3. Analysis of working capital efficiency 30
3.2.3.1. Rate of working capital turnover 30
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3.2.3.2. The capital savings thanks to the increasing in the rate of working capital 31
3.2.3.3. Undertaking coefficient of working capital 31
2.2.3.4. Profitability coefficient of working capital 32
3.2.4. Analysis of factors affecting the efficiency of working capital use of EVN 32
3.2.4.1. Management of working capital forms 32
3.2.4.2. Working capital planning 33
3.2.4.3. General financial management 34
3.3. Assess the working capital efficiency of EVN 35
3.3.1. Synthetic conclusions from the indicators assessing WCM efficiency 35
3.3.2. Indicators of WCM metrics 36
CONCLUSION 38
1. Academic and managerial contributions 38
2. Limits and research perspectives or orientation 38
BIBLIOGRAPHY 40
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List of tables
Table 1.1: Proportion of short-term assets and long-term assets in the sectors 4
Table 3.1: Profit indicators of EVN (2011- 2012) 26
Table 3.2: Assets Structure of EVN (2011- 2012) 27
Table 3.3: Capital Structure of EVN (2011-2012) 28
Table 3.4: Capital Structure of EVN (2011-2012) 30
Table 3.5: Indicator of working capital turnover (L) and duration of working capital turnover (K)
of EVN (2011-2012) 30
Table 3.6: Indicator of undertaking coefficient of working capital of EVN (2011-2012) 32
Table 3.7: Profitability coefficient of working capital of VNE (2011-2012) 32
Table 3.8: Criteria assessing the efficiency of working capital use of EVN from 2011-2012 35
Table 3.9: Working capital management metrics of EVN in 2012 36
List of charts
Chart 2.1: Organizational structure of EVN 18
Chart 3.2: Expense indicators of EVN (2011-2012) 27
Chart 3.2: Scale of sources can form the working capital 29
1
INTRODUCTION
1. Research context
Many financial analysts have considered the working capital of corporations as the blood
circulation in the human body. The reason for that comparison is the similarity of the circulation
and the necessity of working capital for the body of corporation. In the market economy, without
capital, corporations cannot run their business activities. In the corporations, capital in general
and working capital in particular are present in all the operation stages from reserving and
producing to circulating. Working capital helps corporations survive and operate smoothly.
However, due to the complex circulation and limited financial management skills in many
Vietnamese corporations, working capital has not managed and used effectively, which leads to
the low efficiency of business operations.
The Vietnam Electricity Corporation is a state-owned corporation, whose principal
business is producing, transmitting, distributing and trading electricity; commanding and
operating the system of production, transmission, distribution and distribution of electricity in the
national electricity system. In the Vietnam Electricity Corporation, the issues of working capital
management did not receive concern deserving its importance; and enhancing working capital
efficiency is a topic to which the Corporation pays a lot of attention. With such awareness, the
writer decides to choose the topic: “Situations of the efficiency of working capital use in the
Vietnam electricity Corporation - EVN”.
2. Research questions
The main research question of the thesis is: “What are the actual situation of working
capital management and its efficiency in the EVN?” Since then, the specific research questions
are outlined as follows:
- The theory of working capital & working capital management in the Corporation, the
benefits of good working capital management and the quality evaluation methods of this
operation;
- The situation of working capital management in the EVN: working capital forming
sources, working capital structuring, working capital management efficiency evaluation through
indicators and factors affecting working capital efficiency;
- The solutions to improve the quality of working capital management in the EVN.
3. Research objectives
The purpose of the author is to indicate the situation of working capital management in
the EVN with the orientation that it is the basis, the starting point for efforts to improve the
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quality of this operation which is being studied in this Corporation. The thesis will provide
answers to the research questions above.
4. Research methodology
The research subject of the thesis is the situation of working capital management in the
EVN between 2011 and 2012. From that, the thesis will evaluate the efficiency of this operation
through quantitative indicators.
The thesis uses two data sources, namely: primary data (through interviews) and
secondary data.
5. The structure of the thesis
The structure of the thesis consists of three chapters:
Chapter 1: Working Capital and working capital efficiency in the Corporation in the
market economy
Chapter 2: Research methodology implemented in EVN
Chapter 3: Analysis of working capital efficiency in EVN
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CHAPTER I: WORKING CAPITAL AND WORKING CAPITAL MANAGEMENT IN
ENTERPRISE
1.1. Working capital in enterprise
1.1.1. Definition of working capital
Normally, capital is the total material value invested by one enterprise to conduct
business activities. According to Jani, Virenda C. (2007), all the enterprises need capital for two
purposes: (1) establish and expand business extent and (2) pay for daily operation costs. Capital
exists in all the business stages, from reserves, production to circulation; businesses need capital
to invest in basic construction; need capital to maintain production and to invest in production
capacity enhancement, etc.
Working capital is as an important part of the total capital of enterprises. Eugene F.
Brigham & Joel F. Houston (2009) referred to many related concepts such “gross working
capital”; “net working capital”; “net operating working capital”. In particular, “working capital”
are short-term assets or current assets, including cash, tradable securities, inventories and
accounts receivable. Current liabilities subtracted from current assets is called “net working
capital” (Net Working Capital (NWC) is defined as current assets minus current liabilities). “Net
operating working capital” is calculated by subtracting all noninterest-bearing current liabilities
from current assets (accounts payable for supplies and other accounts payable). The definition
assumes that cash and tradable securities in the balance sheet are used for the long-term goals
and the company is not holding excess cash. Cash surplus and trade securities surplus are not
considered as net working capital. The definition of “working capital” (or “net working capital”)
interpreted in this thesis as the concept defined by The Accounting Principles Board of the
American Institute of Certified Public Accountants is as under, “working capital” represented by
the excess of current assets over current liabilities and identifies the relatively liquid portion of
the total enterprise. Capital which constitutes a margin or buffer for maturing obligations within
the ordinary operating cycle of the business”.
1.1.2. Characteristics of working capital and the differences between working capital
and fixed capital
In his book, Modern Corporate Finance (2003), Tran Ngoc Tho analyses three main
characteristics of working capital namely: (1) rotating with the rapid rate, (2) changing
expression patterns, and (3) operating in a circulating cycle. Working capital rotates with the
rapid rate and complete a cycle after finishing a business cycle. Working capital in the business
is always changing its expression patterns during the cyclic rotation, and it only participate in to
a production cycle but does not keep the original physical forms. Its whole value is once shifted
into the value of product. Working capital operates according to a cycle from one form to
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another form and then return to the original form with a greater value than the initial value. The
cycle of working capital is an important basis used to assess the working capital efficiency of the
business.
The most difference between working capital and fixed capital is that the fixed capital
only shifts its value into the value of product with a certain level of depreciation gradually while
the whole value of working capital is shifted into the value of product once. Therefore, the
movement and rotation of working capital is much larger than those of fixed capital. Another
feature between working capital and fixed capital is worth considering and studying, namely the
scale of current assets and fixed assets. There is no a certain model in the proportion of two
groups of assets. In practice, the most decisive factor to the scale of two groups of assets is the
enterprise’s sectors. Satish B.Mathur (2007) surveyed and counted the proportion of current
assets and fixed assets according to the sectors as follows:
Table 1.1: Proportion of short-term assets and long-term assets in the sectors
Current assets (%) Fixed assets (%) Sectors
10-20 80-90 Hotels & Restaurants
20-30 70-80 Electricity Generation & Distribution
30-40 60-70 Aluminum, Shipping
40-50 50-60 Iron & Steel, Basic Industrial Chemicals
50-60 40-50 Tea plantation
60-70 30-40 Cotton Textiles, Sugar
70-80 20-30 Edible Oils, Tobacco
80-90 10-20 Trading, Construction
1.1.3. Classification of working capital
Working capital may be classified on different ways only with the aim at managing and
use working capital effectively. Three main classification criteria are: (1) the role in the
production process, (2) the source of working capital, (3) expression patterns.
1.1.3.1. Based on the role of working capital in the production process
The classification of working capital based on this criterion helps to evaluate the
allocation of working capita in each stage of the rotating process of working capital. Thanks to
that, managers will take appropriate measures in order to create a structure of working capital, to
increase the rotating speed of working capital and to improve the efficient use of working capital.
According to Dang Thuy Phuong (2000), based on this classification, working capital consists of
three types as follows:
• Working capital in the reserve stage includes the types of capital such as main material
capital, additive material capital, fuel capital, spare parts capital, packing material capital and
tool & instrument capital.
• Working capital in the production process includes types of capital such as: goods-in-
process capital, home-made end-product capital and prepaid item capital.
[...]... less capital as well as can save an amount of working capital for other utilization The amount of less capital is the absolute saving level of working capital • Vas: The absolute saving level of working capital • AWC0, AWC1: Average working capital in the reporting year and the planning year • M1: Total circulation of working capital of the plan year • K1: Time of working capital circulation of the... working capital turnover • M1: the total rotation of working capital (net sales) of the planning year • K0, K1: The time of working capital rotation of the reporting year and the planning year 1.2.2.3 Coefficient of working capital Coefficient of working capital reflects the amount of needed working capital to get a unit of net sales The lower this coefficient is, the higher working capital efficiency. .. 1.983.393 Source: The Financial Statements in 2011, 2012 of EVN 3.2.3 Analysis of working capital efficiency 3.2.3.1 Rate of working capital turnover Indicator of working capital turnover (L) and duration of working capital turnover (K) of EVN as below: Table 3.5: Indicator of working capital turnover (L) and duration of working capital turnover (K) of EVN (2011-2012) Unit: million VND Calculation Year... demand of the customers Short time for circulating working capital and big cycle of circulation make management and usage of working capital take place daily and regularly Having such an important role, increasing speed of working capital circulation and enhancing working capital efficiency is a certain request 9 1.2.3.3 The meaning of enhancing working capital efficiency Enhancing the efficiency of working. .. efficiency is 8 1.2.2.4 Coefficient of working capital profitability This indicator reflects how much profit a unit of working capital can create (before or after corporate income tax) The higher coefficient of working capital profitability is, the higher working capital efficiency is: 1.2.3 Objective and necessity of enhancing Working Capital efficiency 1.2.3.1 Business objective of the corporation In the market... cycle 1.3.6 Basic methods of enhancing working capital efficiency Planning working capital is one of the very first important and necessary duties for corporations The content of planning working capital in corporations normally consists of some parts namely the working capital need plan, the working capital source plan and working capital usage plan over time + Planning working capital: In order to build... of working capital, the structure of working capital is analyzed according to the role of working capital in manufacturing process Recognizing the role and the allocation of working capital in each stage, manager will have method to allocate and adjust reasonably the value of working capital in each stage to ensure business, and enhance the working capital turnover Overall, increasing of average working. .. level of working capital (Vrs) The nature of the relative working capital saving level: thanks to increasing working capital circulation speed, enterprises can raise the total rotation of working capital ( to create a great net sales) but need no further increase or have an insignificant increase in the scale of working capital • Vrs: The relative saving level of working capital due to increasing working. .. the efficiency of working capital can increase working capital circulation’s speed and shorten working capital s time at stages of reserving, manufacturing, and circulating, then decrease the number of used working capital and save working capital in circulation Thanks to the increase of working capital circulation’s speed, corporation can reduce the number of used working capital but still remain the... reflect the working capital which could be saved by increasing the rotating speed of working capital during this period in comparison with the previous The working capital saving due to increasing the rotating speed of working capital is represented by two criteria: (1) The absolute saving level of working capital (Vas) With the unchanged working capital circulation, thanks to increasing working capital . USE IN THE
VIETNAM ELECTRICITY CORPORATION - EVN
Prepared by: DO QUANG HUY
Supervised by: Mr. VU MANH CHIEN
Hanoi 2013
. encouragements and
supports.
Hanoi, 10 August ,2013
DO Quang Huy.
- 2 -
Table of contents
ACKNOWLEDGEMENTS 1 -
List of tables
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