Working capital management in Vietnam national textile and garment group



The paper mentions the relationship between working capital management and profitability in Vietnam National Textile and Garment Group for a period of 2011–2016. I found statistically significant relationship between the cash conversion cycle and profitability, measured through gross operating profit. It follows that managers can create profits for their companies by handling correctly the cash conversion cycle and by keeping accounts receivables and inventory at an optimal level. The study contributes to the literature on the relationship between the working capital management and the firm's profitability.

Keywords: Working capital management, Vietnam National Textile and Garment Group, profitability

1. Introduction about working capital management

Management of working capital is an important component of corporate financial management because it directly affects the profitability of the firms. Management of working capital refers to management of current assets and of current liabilities.

Researchers have approached working capital in numerous ways. While some studied the impact of proper or optimal inventory management, others studied the management of accounts receivables trying to postulate an optimal way policy that leads toprofit maximization. According to Deloof (2003), the way that working capital is managed has a significant impact on profitability of firms. Such results indicate that there is a certain level of working capital requirement, which potentially maximizes returns.

For the viability of the enterprises, Banos et al (2010) observed that efficiency in the management of working capital is critical. This according to Banos et al will enhance performance of the joint stock companies as well their sustainability and competitiveness. They noted that their viability will depend to a greater extent, on the ability of the enterprises to effectively manage receivables, inventory and payables (Banoet al.,2010). The goal of working capital management is to ensure that affirm is able to continue its operations and that it has manage its short term obligations when they occur. According to Pieterson (2012), however, most joint stock companies fail to maintain necessary financial transactions which in the process affect their working capital and hence encounter cash flow problems.

There often exists a mismatch between cash inflows and cash outflows during operating activities in JSCs. To control these cash flows and thereby reduce the potential negative effects on profitability and risk, it is important that working capital management is applied. This is important because JSCs have more volatile cash flows, are less liquid, are more dependent on short term financing and are faced with higher portions of current assets compared to large companies (Ross, Westfield and Jaffe (2005).

In Peel and Wilson (1996) it was reiterated that small and medium enterprises should adopt formal working capital management routines in order to reduce the probability of business closure, as well as to enhance business performance. They contended that managers and entrepreneurs of these enterprises should understand the importance of working capital management for the liquidity, profitability and ultimately the survival of their company.

2. Working capital management in Vietnam National Textile and Garment Group
   1. Introduction about Vietnam National Textile and Garment Group

Textile sector has a moderate growth in recent years. After climbing up in the period from 2005 to 2014 (exports and imports textilesvolumn increased by 7 % and 8 % on average), the demand for textile declined in 2015. Textile exports reached 737 billion USD (decreased by 8 % yoy), textile imports reached 813 billion USD, (decreased by 6 % yoy). Most of major exporting countries have witnessed a decline in textile sector. Garments exports fell by 6 %yoy in China and 11 % yoy in the EU. However nnthis concept, Vietnam is the nation which witnesses the highest growth rate among textiles exporting countries, this sector increased by 10 % yoy in 2015 according to the statistics of WTO.

Textile market shifted from developed countries such as Hong Kong, Germany, Italy to developing countries such as Vietnam, Bangladesh thanks to their advantage of labor costs, the elimination of protectionist barriers and other textiles free trade agreements (FTAs). Textile export market share of Vietnam increased from 2 % in 2008 to 5 % in 2015, which helps Vietnam become the 4^th biggest textile export nation in the world.

In 1995, Vietnam National Textile and Garment Group, formerly known as Vietnam Textile and Garment Corporationwas established on the basis of the reorganization of enterprises subordinated to the Vietnam Textile Corporation and the Union of Garment Production –import and export. In 2010, the parent company — Vietnam National Textile and Garment Group (Vinatex) was transformed into wholly Stated-owned Company Limited.

Vinatex is the leader and the representative for the textile sector of Vietnam. Total revenue in 2015 reached 39,503 billion USD. This group stands at the first position about localization rate (52 %), pioneer to shift production model to FOB, ODM with higher added value. With large-scale and lots of experience in the field of textiles, Vinatex will be one of the first members who benefits from the growth and shifting trends in the industry.

2.2. Working capital management in Vietnam National Textile and Garment Group

The scale of sales. The average growth of revenue of consolidated companies occupied 23 % of this of Vietnam textile sector from 2012–2015 mainly due to rapid and sustainable growth and sustainable growth of this sector, Vietnam. Total sales revenue of Vinatex reached 13,294 billion VND, which was contributed mainly from subsidiaries. Some subsidiaries have large-scale of revenue are Phong Phu Corporation (3,487 billion VND), Hoa Tho Textile Corporation (3,002 billion VND), Hanosimex (1,745 billion VND) and Hue Textile Corporation (1,480 billion VND).

Cost structure. The major proportion of the production structure of Vinatex is variable cost such as materials expense (58 % of total cost for production and business) and labor costs (19 %). This feature is the common characteristic of the global textile industry. This is also a factor which bring the comparative advantages for Vietnam's garment sector compared to the world thanks to lower labor costs relatively. If the investment projects which aim to expand supply chains of Vinatex andsubsidiaries go intobusiness effectively, production and business costs of the Group can decline.

Asset structure. The proportion of long-term assets over total assets was maintained in the range of 48–51 % in the period from 2011 to 2015 and increased to 55 % at the end of third quarter in 2016 due to the recognition of the value of the new investments projects. The most valuable assets of Vinatex is the investments project in subsidiaries, associated companies. The group consists of the majority of companies which operate efficiently and contribute 99 % of revenues and 99 % of profit after tax for the Group.

Capital structure. Equity of Vinatex is large, reached 7399 billion VND at the end of third quarter in 2016. Financial leverage ratio is 2.61x at the same time, equivalent to the median of listed companies in Vietnam market (2.56x). Most of the company's loan comes from its subsidiaries (accounting for about 77 % of total liabilities). Many loans of Vinatex and its subsidiaries are listed in USD (more than 100 million USD), so Vinatex has to face with exchange rate risks. The working capital management at Vinatex is evaluatedvia the following criterias:

Table 1

Some indicators to assess the effectiveness of Management of working capital in the period 2011–2016 in Vinatex

Basic indicators	2011	2012	2013	2014	2015	2016
Capital structure
Loans/Equity	0.73	0.49	0.48	1.09	1.11	1.13
Total asset/Equity	2.96	2.30	2.38	2.72	2.57	2.61
Asset structure
Long-term assets/ Total assets	48 %	49 %	51 %	46 %	51 %	55 %
Short-term assets/ Total assets	52 %	51 %	49 %	54 %	49 %	45 %
Solvency
Quick Ratio	0.79	0.87	0.84	0.89	0.89	0.93
Current Ratio	1.22	1.30	1.29	1.33	1.36	1.38
Operability
No of Days Accounts receivables	32	44	41	45	53	55
No of Days Inventory	56	65	64	71	78	73
No of Days Accounts payables	27	38	38	33	34	32
Profitability (%)
Gross Profit margin	12 %	12 %	12 %	11 %	12 %	11 %
ROS	2 %	4 %	2 %	2 %	3 %	2 %
ROE	11 %	10 %	4 %	5 %	6 %	9 %
ROA	3 %	4 %	2 %	2 %	2 %	3 %

As can be seen in the table, in recent years Vinatex use the higher financial leverage than previous years, this ratio before the year 2013 was only 40–90 % of total equity however this in 2016 was 1.13 times total equity. The main purpose of these loans is to invest in capital construction, such as the construction of Nam Dinh Fiber Factory, Phu Cuong spinning mills, Tuyen Quang garment factory and Bac Lieu garment factory. Asset structure shifted from short-term assets into long term assets, this is a reasonable shift because Vinatex is a production enterprise so the investment in plant, machinery and equipment, production chain is one of the most importantissues.

Short-term solvency ratios are stable and greater than 1, respectively at 1.36 and 1.38 in 2015 and 2016, which demonstrates that the company's loans are guaranteed by the property, financial ability of the group is good. Quick ratiois the indicator that evaluates the possibility of short-term debt repayment bycash (cash on hand, cash in transit and bank deposits) and financial investments in the short term. This ratio was 0.93 in 2016, increasedby 0.04 times compared to this in 2015, whichshow that Vinatex have a better inventory management. In cash and cash equivalents, the item cash equivalents accounted for a large proportion, which was 91.3 % of cash and cash equivalents and 14.7 % of total assets in 2016. This item consists of short-term investments which have maturity less than 3 months, easily convert into a specific amount of cash and have no risk.

The number of days to collect receivables increased from 40 days in 2010 to 55 days in 2016, this increase of 37.5 % shows that payment debt recovery is slow, the company's capital was tied up. In addition, accounts receivable occupied 25.5 % of total assets. This is slightly higher than the average ratio of textile industry. Besides, the number of days to paypaybles reduced from 38 days in 2012 to 32 days in 2016, which shows Vinatex have to face with the pressure from the vendors, especially loans and debt long-term with the Asian development Bank — ADB, accounting for 50 % of liabilities. This is a notable problem for Vinatex.

Inventories are the reserve capital of the company. Normally inventories occupied 15 % to 30 % of the total assets of a enterprise. If a enterprise has a reasonable amount of inventory, it will help them to maintain production activities continuously, without lack of goods in the consumption phase, and the short-term capital are used reasonable. Inventory amount in Vinatex is not too large, about 5 % of total assets, which show that consumption of goods has increased. Besides, after a long period of maintaining inventory, the number of days to keep inventories decrease to 73 days in 2016, this is a good signal in the context of the national economy remains tough.

Vinatex has stable performance which is proved in the gross profit margin about 11 % -12 % in the period from 2011 to 2015 and reached 11 % in 2016. Net profit margin in business activities was from 1 % -3 % in the years 2011 to 2015 and reached 2.4 % in 2016. ROE, ROA was respectively 9 % and 3 % in 2016.

3. Suggestions to increase the efficiency of working capital management in Vietnam National Textile and Garment Group

3.1. Plan the demand of working capital

To build a good plan for working capital, the first step is to define Vinatex demand for working capital for production and business activities. Identifying accurately needs for working capital for production and business activities, will be a assurance for the production and consumption of products Vinatex continuously, and avoid the stagnation of supplies, inefficient use of capital, and avoid creating unreal tensions on the needs of capital.

3.2. Plan to use working capital

In fact, the needs of working capital for production and business activities, the use of capital between periods are different over years. Because in the short time such as months, quarters, beside the specific needs of working capital, a temporary demand may arise due to many reasons. Therefore, tomake sure to meet the needs of working capital for production and business activities over the time is a very important issue.

Vinatex have to determine the exact needs for working capital in each quarter, month with the reconciliation of the existing working capital and additional capital in this quarter of month, then have effective solutions to create the continuity, seamless of the use of working capital in a whole year. In addition, an important part of the plan to use working capital over time is to ensure the solvency of Vinatex with the requirements of investments in cash in a short time.Besides, Vinatex need to know to combine the plan and management of working capital.

3.3. Analyze credit worthiness of customers

The increase in average time to collect receivables is a remarkable issue to Vinatex. Therefore, Vinatex need to analysis and decide whether to give credit to customers or not. This is the main content of the management of receivables.

To give credit to customers, Vinatex have to analysis the credit worthiness of the customers. This work includes: First, build a reasonable credit standards; Second, verify the credit quality of potential customers. If the credit worthiness of customers meet the the minimum standards, commercial credit can be issued.

The establishment of the credit standards of financial executives must be proper. If credit standards are too high, it will eliminate many potential customers and will reduce profits, or if the standards are too low, it can increase revenue, but will have more credits risky and collection costs are also high.

References:

1. Banos M. B. (2010). Impact of Working Capital Management on the Profitability of Public Listed Firms in the Nertherlands During the Financial. Journal of Finance.
2. Financial Statement of Vietnam Textile Corporation for a period of 2011–2016.
3. Mathuva D (2009). The influence of Working capital management components on corporate profitability: a survey on Kenyan listed firms. Research Journal of Business Management, 3:1–11.
4. Pieterson A. (2012). Working Capital management practices of SME in Ghana, Kwame Nkrumah University.