9815_Effective working capital management in small and medium enterprises in Vietnam

D U B L I N B U S I N E S S S C H O O L

Effective Working Capital Management in Small and
Medium Enterprises in Vietnam

NGOC LONG PHAM

MBA FINANCE
2013

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CONTENTS

List of Tables, Figures and Charts

P6
Glossary of terms and abbreviations

P7
Acknowledgements

P8
Abstract

P9
CHAPTER 1: INTRODUCTION
1.1.
Research problem

P11
1.2.
Research questions

P12
1.3.
Research objectives

P12
1.4.
Recipients of research

P12
1.5.
Suitability of Researcher for the Research

P12

CHAPTER TWO: THE ECONOMIC STRUCTURE AND SMEs IN VIETNAM
2.1. The Vietnam economy

P14
2.2. Vietnam business structure

P16
2.2.1. Types of businesss in Vietnam

P17
2.2.2. Overview of enterprises in Vietnam

P18
2.2.3. Overview of small and medium enterprises inVietnam

P20
2.3. Small and medium enterprise finance in Vietnam

P21
2.3.1. Overview of financial management for SMEs

P21
2.3.2. Problems in working capital management

P23

CHAPTER THREE: WORKING CAPITAL MANAGEMENT THEORIES
3.1. Concept of small and medium business

P24
3.1.1. Concept of small and medium business in Europe

P24
3.1.2. Concept of small and medium business in Vietnam

P25
3.2. Financial concept for small and medium business

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3.3 Working capital

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3.3.1. Definition

P26
3.3.2. Managing working capital

P26
3.3.3. Industry influence

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3.3.4. The level of working capital

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3.3.5. Financing working capital

P29
3.3.6. Barriers for optimizing working capital

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3.4. Financial cost of working capital

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3.5. Working capital and overtrading

P31
3.5.1. Smalll and medium enterprise with overtrading

P31
3.5.2. Reducing impact of overtrading

P32
3.6. The influence of efficient working capital management on profitability

P33
3.7. Inventory management

P33
3.7.1. Potential consequences of stock-out

P33
3.7.2. Financial cost

P34
3.7.3. System and procedures in place

P34
3.7.4. The economic order quantity

P35
3.7.5. Just-in-time inventory policies

P35
3.8. Cash Management

P36
3.8.1. Trade-off

P36
3.8.2. Influence

P37
3.9. Trade receivables / payables management

P39
3.9.1. Credit management

P39
3.9.2. Influence

P40
3.9.3. Credit management system

P41
3.9.4. Protection against bad debt

P42
3.10. Effective working capital management for SMEs

P43

CHAPTER FOUR: RESEARCH METHODOLOGIES
4.1. Research philosophy

P47
4.2. Research approach

P49
4.3. Research strategy

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4.4. Research choice

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4.5. Time horizon

P51
4.6. Data editing and coding

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4.7. Ethical issues

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4.8. Population and sample

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4.9. Personal biases, difficulties and pratcial efforts

P57
4.10. Time, Cost and Project Management

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4.11. New and relevent research

P59

CHAPTER FIVE: DATA ANALYSIS AND FINDING
5.1. Introduction

P61
5.2. Links between data analysis and research objectives and the research questions

P62
5.3. Analysis of business and financial documents

P63
5.3.1. Company A: Construction and Commerce HUONG SON co. Ltd.

P63
5.3.2. Company B: Construction HA BINH PHUONG co. Ltd.

P74
5.4. Consequences of poor working capital management on Small and Medium Company
P83
5.5. Effective working capital management is value to the survival and solvency of the SMEs
P84

CHAPTER SIX: CONCLUSION AND RECOMMENDATION
6.1. Introduction

P86
6.2. Conclusions related to research questions

P86
6.2.1 Conclusions related to working capital management practices

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6.2.2. Conclusions related to consequences of poor working capital management

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6.3. Implications of the research study

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6.4. Limitations of the research study

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6.5. Implications for further research

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CHAPTER SEVEN: SELF REFLECTION
7.1. The researcher‟s profile

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7.1.1. Family and culture background

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7.1.2. Educational background

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7.1.3. Professional background

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7.2. Relationship with the researcher‟s career goal

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7.2.1. Skills required for realization of career goal

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7.2.2. Rationale for undertaking MBA

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7.3. Self Reflection on Learning outcomes and Skill Development

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7.3.1. Time management

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7.3.2. Data Analysis

P97
7.3.3. Communication skill

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7.3.4. Organizational skill

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7.3.5. Research and investigative skills

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7.4. Link of learning outcomes to theory

P98
7.5. Plans to apply the learning outcomes

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Bibliography

P101
Appendix1: Interview A

P104
Appendix2: Interview B

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Appendix3: Financial report A

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Appendix4: Financial report B

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Appendix5: Vietnam Background

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Words count : 21 300 words ( Excluding Bibliography and Appendix)

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LISTE OF TABLES, FIGURES AND CHARTS

Table 2.1

Main Indicators of Vietnam Economy
Table 3.1

Enterprise Categories
Table 5.1

Liquidity ratios calculation A
Table 5.2

Operating Cycle Calculation A
Table 5.3

Working Capital Investment A
Table 5.4
Growth Rate A
Table 5.5

Profitability Ratio Calculation A
Table 5.6

Liquidity ratios calculation B
Table 5.7

Operating Cycle Calculation B
Table 5.8

Working Capital Investment B
Table 5.9

Growth Rate B
Figure 3.1

Shareholder Value and Working Capital Management
Figure 3.2

Working Capital Compenents
Figure 4.1

Research Phylosophies
Figure 4.2

Research Choices
Figure 5.1

Balancing Working Capital
Figure 5.2

Efficient WCM
Figure 7.1

Professional Background
Figure 7.2

Career Tree
Figure 7.3

Kolb Learning Cycle
Figure 7.4

Investigate Problem Process
Chart 5.1

Liquidity Ratio A
Chart 5.2

Operating Cycle A
Chart 5.3

Growth Rates A
Chart 5.4

Profitability Ratios A
Chart 5.5

Liquidity Ratio B
Chart 5.6

Operating Cycle B
Chart 5.7

Growth Rates B

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GLOSSARY OF TERMS AND ABBREVIATIONS

SMEs
Small and Medium Enterprises
CF

Cash Flows
CUR
Current Ratio
EOQ
Economic Order Quantity
FDI
Foreign Direct Investment
GDP
Gross Domestic Products
VCCI
Vietnam Chamber of Commerce and Industry
VN

Vietnam
VND
Vietnam dong
WTO
Word Trade Organization
WCM
Working Capital Management

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ACKNOWLEDGMENT

Firstly, I would like to thank Dublin Business School for the opportunity to fullfill my dream of
completing a MBA Degree. Special thanks to my parents for giving me the chance to study MBA and
the strength to finish it. I would like to thank my family and friends who provided me with
encouragement and the belief that I could do this.

I owe a debt of gratitude to many people who helped me complete this research. I would like to
acknowledge the help of all. First of all I would like to express my deepest acknowledgement to my
supervisor, Professor Enda Murphy from the Dublin Business School (DBS), for his valuable advice and
recommendations.

I acknowledge Dr. Nicole Gross, the Dissertation Coordinator from the Dublin Business School (DBS),
for her support with the research methodology for dissertation.

In the process of data collection for this research, many people contributed to the task and I am
particularly grateful for their contributions. I am greatly indebted to Mr. SON and Mr. HA, the manager
of two companies who help me to collect maximum information.

Finally, to my parents and my girlfriend, I wish to extend my loving thanks for their encouragement. My
greatest debt of gratitude is to my parents, who patiently supported me during my study in Ireland. This
research could not have been written without their daily encouragement.

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ABSTRACT

After few decade of reforming policy, building and developing the multi-sector market economy, Small
and Medium Enterprises (SMEs) in Vietnam have developed strongly and contributed to create jobs,
high growth GDP, and increase the nation‟s volume of international trade. However, SMEs have faced
difficulties on the way to development because of lack of business and financial management experience
and financial resources, and due to uncertainty of government policies and business environment. As a
result, SMEs often faced obstacles during their operations. This research examines the working capital
management practices of SMEs and its consequences to determine effective working capital
management for SMEs in Vietnam.

Objectives of the research are to analyze the system of working capital management in SMEs, to
establish the causes of any poor working capital management and to find out an effective working
capital management for SMEs in Viet Nam.

In terms of structure, the dissertation has seven chapters. The research begins by defining the research
problem and questions, and providing a justification for the research study. Chapter one also reviews the
research background, and presents definitions of terms, significance and scope of the study. Chapter two
presents the economic background, business structure and the development of SMEs in Vietnam. This
chapter also reviews previous research related to financial management for SMEs in Vietnam to identify
the practices of financial management and working capital management for SMEs in Vietnam.

Chapter three talks about the different studies of working capital management practices of SMEs in
Vietnam and all over the world. This review emphasizes the theory of managing of working capital and
the impact of poor working capital management on the financial situation of SMEs. Objectives of this
chapter are to review previous research related to the areas of financial management practices, working
capital management.

Chapter four discusses aspects of the research methodology including research design, data collection
and data analysis methods. Objectives of this chapter are: (1) to justify the research methodology of this
study, (2) to explain research methodology used in the study, and (3) to demonstrate how research

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design, and data collection and analysis can be utilized in this study to answer the research questions
outlined in the chapter one.

Data analysis and findings are presented in chapter five. This chapter presents descriptive analysis of
financial management, working capital management characteristics of two companies selected.
Objectives of this chapter are to systematically present the descriptive findings of the research study, to
interpret significance of these findings based on data analysis and to find out the effective working
capital management for these SMEs. The research will continue with chapter six where
recommendations will be suggested and applications of the research findings for the financial
management practitioners. Chapter seven will be the self-reflection on learning and skill development
during MBA and dissertation process.

The research provides descriptive findings of financial management characteristics and working capital
management practices and demonstrates the simultaneous impact of poor working capital management
on SME financial position. Financial ratios will be calculated including debt ratios, all other variables
including current ratio, working capital management ratios and short-term planning practices, fixed asset
management and long-term planning practices, and financial and accounting information systems related
to working capital management practices

With the findings as presented above, this research study provides many implications for working
capital management practices and contributes to knowledge of working capital management of SMEs.
The recommendations of working capital management practices can be used as guidance for actions to
improve the financial management of SMEs in Vietnam.

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CHAPTER 1. INTRODUCTION

1.1. Research problem
Effective working capital management in small and medium enterprises (SME) in Viet Nam

In Vietnam, the difficult economy is forcing the company to manage for having enough cash. And it’s
time to take the time look at how alert and prudent working capital management. Many banks are
limiting of credit for the small and medium companies because they are considered risky. The current
number of small and medium enterprises that are going bankrupt is increasing significantly.

The needs to main effective working capital management within small and medium enterprises remain
pivotal to solvency and liquidity of SMEs. These companies often do not understand about their working
capital position. Many of them do not have standard credit policy or have only little regard for the
company working capital management. Small and medium companies have generally a simple
management. They may focus only on running business, on cash receipt and what their bank account
position is. Many of them do not really understand about the company‟s financial position. (Sunday,
2011)

The small and medium business remains the most dynamic force and agent of economic growth and
development in Viet Nam. The fact that only small capital is required to start a SME makes it the most
popular term of business. However, several SMEs in Viet Nam fail in a little time after they are started.
Many of them fail du to poor financial management especially the working capital. Many SMEs cannot
survive in the third year. Most SMEs don‟t engage their working capital in such a way as to genera
maximum profit. SME don‟t have enough resource and experience in cash management, debtors‟
management, and account payable and stock management (Nguyen, 2001)

This research will evaluate various working capital management strategies and their effective
application by SMEs. Many of SMEs don‟t manage their short-term fund effectively. The net working
capital are often, hence they run into insolvency (Sunday, 2011). The need to evolve a proper working
capital management is necessary for good solvency and liquidity of the company.

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1.1.1. Research questions

This research is to answer the following research question:
1) How the SMEs in Viet Nam establish their working capital management policy system? 

2) What are the consequences of any poor working capital management?
3) How the effective working capital management is value to the survival and solvency of the SMEs?
1.1.2. Research objectives

In order to find out answers to the research question, the following research objectives were derived:
–
To analyze the system of working capital management in SMEs
–
To analyze the consequence of any poor working capital management
–
To find out an effective working capital management for SMEs in Viet Nam

1.1.3. Recipients of research:

The main recipients for this research will be the companies that provide the information used in this
research. Other recipients are the SMEs that have troubles in working capital management or in similar
financial difficulties. Academic institutions can also use this dissertation for consulting or further
research. The dissertation supervisor will be also the recipient of this research.

1 . 1 . 4 . Suitability of Researcher for the Research

As a graduate in MBA Finance, working capital management has always been a great zeal of interest.
Moreover, having worked with some companies in construction sector, the researcher has a clear vision
to the research area. His personal experience within the same also helped me to understand the research
problem in a better manner. The researcher tries to find out the reason behind the poor managing of
working capital in many Small and Medium Enterprises (SMEs) in Viet Nam.

The researcher wants to make his career in finance area because he has a better knowledge and
understanding of this area. This research will help him to develop the skills. The skills and knowledge

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learnt during the coursework of MBA international has also proved to be of great in developing this
research.

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CHAPTER TWO: THE ECONOMIC STRUCTURE AND SMEs IN VIETNAM

2.1. The Vietnam economy

Vietnam is a country suffering from many years of war and economic mismanagement, stands on the
threshold of a new era – an era of international relations and economic development. After few decade
of strong efforts, the economy and finance have been substantially reformed, and intergrated into the
world economy. Vietnam has made substantial progress in rearranging its foreign devbt and benefit from
financial assistance and foreign direct investment (FDI) since the end of 1980s. Although challenges
remain, Vietnam‟s achievements over the past years was a important success. The researcher provides in
this chapter an overview of Vietnam‟s economy and performance of small and medium enterprises
(SMEs) in Vietnam. Objectives of the chapter are firstly to provide a review of the national economy,
business structure and the development of SMEs in Vietnam, and secondly to identify gaps in financial
management for SMEs in Vietnam compared with financial management for SMEs worldwide.
(Nguyen, 2001)

Vietnam is a densely populated developing country that has been transitioning from the rigidities of a
centrally planned economy since 1986. Vietnamese government has reaffirmed their commitment to
economic modernization in recent years. This country joined the World Trade Organization in January
2007, which has promoted more competitive, export-driven industries. Vietnam became an official
negotiating partner in the Trans-Pacific Partnership trade agreement in 2010. Agriculture’s share of
economic output has continued to shrink from about 25% in 2000 to less than 22% in 2012, while
industry’s share increased from 36% to nearly 41% in the same period. State-owned enterprises account
for roughly 40% of GDP. Poverty has declined significantly, and Vietnam is working to create jobs to
meet the challenge of a labor force that is growing by more than one million people every year.
The global recession hurt Vietnam’s export-oriented economy, with GDP in 2009-12 growing less than
the 7% per annum average achieved during the previous decade. In 2012, volume of exports increased
by more than 12%, year-on-year; several administrative actions brought the trade deficit back into
balance. Between 2008 and 2011, Vietnam’s managed currency, Vietnam Dong, was devalued in excess
of 20%, but its value remained stable in 2012. Foreign direct investment inflows have fallen 4.5% to
$10.5 billion in 2012. Foreign donors have pledged $6.5 billion in new development assistance for 2013.

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Hanoi has oscillated between promoting growth and emphasizing macroeconomic stability in recent
years. In February 2011, the Government shifted policy away from policies aimed at achieving a high
rate of economic growth, which had stoked inflation, to those aimed at stabilizing the economy, through
tighter monetary and fiscal control. In early 2012 Vietnam unveiled a broad, “three pillar” economic
reform program, proposing the restructuring of public investment, state-owned enterprises, and the
banking sector. Vietnam’s economy continues to face challenges from an undercapitalized banking
sector. Non-performing loans weigh heavily on banks and businesses. In September 2012, the official
bad debt ratio climbed to 8.8%, though some financial analysts believe it could be as high as 15%.
(Index mundi, 2013)

Tables 2.1: Main indicators of Vietnam Economy (Index mundi, 2013)
GDP (purchasing power parity)
$320.5 billion (2012 est.)
$304.9 billion (2011 est.)
$287.9 billion (2010 est.)
note: data are in 2012 US dollars
GDP (official exchange rate)
$137.7 billion (2012 est.)
GDP – real growth rate
5.1% (2012 est.)
5.9% (2011 est.)
6.8% (2010 est.)
GDP – per capita (PPP)
$3,500 (2012 est.)
$3,400 (2011 est.)
$3,300 (2010 est.)
note: data are in 2012 US dollars
GDP – composition by sector
agriculture: 21.5%
industry: 40.7%
services: 37.7% (2012 est.)
Population below poverty line
14.5% (2010 est.)
Labor force
49.18 million (2012 est.)
Labor force – by occupation
agriculture: 48%

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industry: 22.4%
services: 29.6% (2011)
Unemployment rate
4.3% (2012 est.)
3.6% (2011 est.)
Investment (gross fixed)
28.2% of GDP (2012 est.)
Budget
revenues: $42.14 billion
expenditures: $47.57 billion (2012 est.)
Taxes and other revenues
30.6% of GDP (2012 est.)
Public debt
48.2% of GDP (2012 est.)
48.3% of GDP (2011 est.)
Inflation rate (consumer prices)
9.2% (2012 est.)
18.7% (2011 est.)
Central bank discount rate
13% (31 December 2011)
7% (31 December 2010)
Industrial production growth rate
6% (2011 est.)
Exports
$109.4 billion (2012 est.) 
 $96.91 billion
(2011 est.)

Imports

$109.6 billion (2012 est.)
$97.36 billion (2011 est.)
Exchange rates
dong (VND) per US dollar
20,858.3 (2012 est.)
20,649 (2011 est.)
18,612.92 (2010 est.)
17,799.6 (2009)
16,548.3 (2008)

2.2. Vietnam business structure

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The previous sections provided an overview of the Vietnam economy with a special focus on economic
changing. This section will explain business structure in Vietnam with types of business, development of
SMEs and the government policy to support for SMEs.

2.2.1. Types of businesss in Vietnam

With the policy of developing a multi-sector economy and attracting foreign investment, the Vietnam
business structure has currently diversified consisting of many different economic sectors. The business
structure in Vietnam can be classified into many different types depending upon the breakdown basis.

Based on form of ownership, the business structure in Vietnam includes two main sectors: domestic and
foreign-invested. The domestic sector can be further divided into the state and non-state sectors. There
are five types of business in non- state sector: private enterprises, limited liability companies, joint stock
companies, collectives or co-operatives and individual households. (Nguyen, 2001)

A second way to breakdown the business structure in Vietnam is based on size of the businesses. Based
on size of the businesses, the business structure in Vietnam can be classified into three types: small,
medium and large enterprises. This study only focuses on examining small and medium enterprises
whereas the large enterprises are beyond the scope of this study. Small enterprise was defined as
business having less than 50 employees and/or a total capital of less than VND 1 billion.Medium
enterprise was defined as business having from 51 to 200 employees and/or a total capital ranging from
1 to VND 5 billion. Large enterprise was defined as enterprise with more than 200 employees and/or a
total capital of more than VND 5 billion in capital. (Nguyen, 2001)

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Breakdown of business by size:

A third way to break-down the business structure in Vietnam is based on industry. Based on the
characteristics of industry, the business structure in Vietnam can be classified into businesses operated
in the following major industries: agriculture and forestry, fishery, mining, manufacturing, electricity,
construction, trade and services, hotels, and finance and banking.

2.2.2. Overview of enterprises in Vietnam

Non-state business is the fastest growing in the number of businesses and create new jobs for
workers.

As of 01/01/2009, the non-state business activity is actually 196 779 enterprises, accounting for 95.7%
of the total number of enterprises, 5.6 times in 2000, the number of sales growth annual average is now
24.1%. This area has 4.72 million workers with regular jobs, accounting for 57.1% of total employment
of the business sector, the average annual increase of 8.7% of the workforce. (Vietnam Enterprises
General Statistics 2009)

S m a l l
e n t e r p r i s e
–
L a b o u r :
< 5 0 - C a p i t a l : < d o n g 1 b i l M e d i u m e n t e r p r i s e - L a b o u r : 5 1 – 2 0 0 - C a p i t a l : 1 - d o n g 5 b i l L a r g e e n t e r p r i s e - L a b o u r : >
2 0 0
–
C a p i t a l :
> d o n g 5
b i l .
B u s i n e s s s t r u c t u r e

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This area also is attracting significant investment to 42.3% of total business sector, including fixed
assets accounted for 36.4% and 57.5% of the total generated revenue in 2008 of entire enterprise. In
terms of business efficiency, but this area of the dominant proportion of business, labor, capital and
business income targets but the profit before tax and contributions to the state budget in 2008 have low
density, with only 16.6% and 30.8%. (Vietnam Enterprises General Statistics 2009)

Clearly, in 2000-2008, non-state enterprises are mainly growing in width, solves many jobs and
contribute significantly to poverty alleviation, social security for the country. However, production
results also showed that most of the non-state enterprises are small and medium enterprises, small
business also, efficiency is low. (Vietnam Enterprises General Statistics 2009)

Foreign direct investment business (FDI) have a small number but rapid growth of investment
scale and particularly the highest efficiency of business.

As of 01/01/2009, the actual FDI are 5,625 active enterprises, only 2.7% of the total number of
enterprises, growing 5.3 times the number in 2000. The number of enterprises grows with an average
annual rate of 23.5%. FDI enterprises attract 1.83 million workers, accounting for 22.2% of total
employment in the country, growing 4.5 times comparing with the year of 2000. By average, each year
FDI attracts more 20.7% of the workforce.

In 2008, despite investment accounted for 16.9%, revenue accounted for 19.5% of total business in
Vietnam, but FDI is the most effective area with high business profit after taxes accounted for 48.1% of
total business in Vietnam. FDI enterprises contribute 40.4% of total business to Vietnam state budget.
Compared to 2000, profit is more than 4.9 times and the contribution to the state budget is more than 5
times.

State-owned enterprise sector is reducing and restructuring

At 01/01/2009, the number of state enterprises are only 3,328 businesses, the lowest proportion in three
business areas. The number of state enterprise has reduced 55% by comparing with the year of 2000 .
This area attracts about 1.71 million workers, accounting for 20.7% of total employees.

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In 2008, in terms of the contributions to the state budget in proportion to the investment sector. Area
state-owned enterprises accounted for 40.8% of the capital investment, contributing 28.8% to the state
budget.
Clearly, in the period 2000-2008, the state enterprises was reorganized and IPO to become more
competitive and profitable.

2.2.3. Overview of small and medium enterprises inVietnam

In this subsection, the researcher will give a review of the background, role, current status, difficulties
and problems of SMEs in Vietnam in recent years. Its objective is to address the current status and
problems that SMEs might face.

In recent years, promotion of small and medium enterprises (SMEs) has been given more attention.
Many laws such as company law, private enterprises law, co-operative law, home investment promotion
law, civil law, and commercial law had been passed to create a favourable environment for the
development of small and medium enterprises. As a result, SMEs in Vietnam have developed, not only
in term of quantity but also in terms of structure and quality of performance. Once the government
commenced programs of promotion for SME development, the studies on SMEs have attracted many
researchers.

SMEs play a very important role in developing the economy and solving social problems at the present
stage when the economy is transiting into the market economy.

Small and medium enterprises in Vietnam faced with many problems irrespective of their process of
development, Ebashi, Sakai and Takada (1997) :

 Funding rising: many SME owners saw financial shortfalls as one of the biggest problems. They
needed funds primarily to finance plant and equipment investment and for securing working
capital to cover expenses involved in exporting their products until they could receive payments
from exporters.

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 Business administration: many SME managers were deeply aware of the importance of acquiring
more sophisticated management skills. Many owners have recently attended seminars and
training sessions for managers
 Other problems such as human resource development, quality control, smuggle effect were less
serious than the two problems listed above.

Implementing the party and state‟s policies on the development of multi-element economy and
international integration, over the past years the number of Vietnamese small and medium enterprises
(SMEs) have increased rapidly in both rural and urban areas, operating in almost all of fields and filling
the gap and shortage which big firms have not yet covered. The SMEs have been exploiting and
mobilizing social sources at localities, creating jobs for a majority of laborers and contributing to set up
a sound competition market.

Today, Vietnam has had more than 500,000 small and medium enterprises, accounting for more than 97
per cent of total businesses, using over 30 per cent of total investments, employing over 50 per cent of
laborers and producing over 40 per cent of consumer goods and exports. The SMEs contribute 47 per
cent GDP and nearly 40 per cent of the state budget, playing an important role in the country‟s socio-
economic development. (VCCI news)

2.3. Small and medium enterprise finance in Vietnam

This section reviews aspects of finance and financial management of SMEs in Vietnam. The objective of
this section is to examine the current state of small and medium enterprise financial management in
Vietnam, including type of finance, use of finance, financial management practices and problems of
financial management. While there is a large number of articles and books on financial management for
SMEs around the world, there is very little research and literature on finance and financial management
for SMEs in Vietnam.

2.3.1. Overview of financial management for SMEs
2.3.1.1. Source of finance

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Different types of finance available in Vietnam for SME owners as sources of finance for their
operations include owners‟ equity, family loans, friends‟ loans, bank loans, share capital, supplier
advances, buyer advances, leasing, hire purchasing, and factoring.

However, the owners‟ equity remains the first choice of SMEs because it has advantages of making the
business owner independent of third parties. But the owners‟ equity is generally not sufficient to allow
for further business growth. For growth, the businesses need an external source of finance.

The traditional debt financing sources such as bank loans, loans from family or friends, supplier or buyer
advances are popular types of debt finance. Other recent types of finance such as leasing, hire
purchasing and factoring were only introduced on the financial market in Vietnam (SMENET Online,
1999). Moreover, some SMEs have used sources of financing from the private equity. Its investments
are based on project needs and anticipated returns.

Other financial products are credit and equity lines, venture capital, and leasing. They are investing in
credit lines and private equity funds to make longer-term finance available to SMEs as they seek to
enhance their competitiveness in more open economies around the world. Credit lines to developing
country banks help redress the limited availability of term funding that constrains the ability of these
banks to provide working capital and investment financing for their corporate customers. Leasing is
often essential to the development of SMEs, which typically lease costly capital equipment. Leasing
plays a critical role in financial sector development in countries with small economies or low per capita
incomes (SMENET Online, 1999).

Regarding financing during the establishment, SMEs were classified in two groups: those who had
obtained bank loans and those who had used alternative financing. Generally they use capital from their
relatives, friends or from their owner saving. Bank loan is not an easy choice for every SME because
they are lack of assets for using as collateral.

Regarding financing after the establishment, some companies use bank loan to finance their operations.
Other SMEs finance their business by using profits, long supplier credits, customer payment in advance
and networks of friends and relatives. The main reason SMEs cannot use bank loans because lack of

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good relations and stipulation with the banks or lack of collateral and high interest rate charged on bank
loans.

Financial management in general and financial management for SMEs in particular has only become
popular in Vietnam when the economy moved into a market economy. To date, there is little research
related to financial management for SMEs. Vuong Quan Hoang (1998) found that the current ratio and
quick ratio are extremely important for SMEs in Vietnam because they usually have little permanent
working capital.

2.3.2. Problems in working capital management

As mentioned in the previous section, there is almost no significant research regarding financial
management for SMEs in Vietnam. Based on the exploratory research conducted by Kack and
Lindgren (1999) and findings of Vuong Quan Hoang (1998), the following gaps are found in SME
in financial management, especially working capital management practices in Vietnam:

 Small in Vietnam use equity as the major source of finance. Sometimes, equity ratios are up
to 90 percent.

 Due to difficulties in obtaining long-term loans, SMEs in Vietnam are willing to use short-
term loans to finance non-current assets.

 SMEs in Vietnam seem likely to maintain very high current ratios.

In the difficult economic situation, SMEs in Vietnam cannot bear high interest rate of bank loan.
They also bear the high cost of inventory. Some companies are using short-term loans to finance
long-term investment.

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CHAPTER THREE: WORKING CAPITAL MANAGEMENT THEORIES

3.1. Concept of small and medium business
3.1.1. Concept of small and medium business in Europe

Sara Carter and Dylan Jones-Evans (2006) said that there wasn‟t any simple or single definition of what
constitutes a small enterprise. The earliest definition was provided by the Bolton report. He suggested
that a SME enterprise should to meet three criteria:
–
Independent (not part of a larger enterprise)
–
Managed in a personalized manner (simple management structure)
–
Relatively small share of the market
One factor that distinguishes SME from their larger counterpart is the nature of the uncertainty they
face. Generally, smaller enterprises are often reliant upon a limited number of customers and have a
limited product portfolio (Cosh Hugh, 2000); they tend to be exposed greater levels of uncertainty in
their market.
In The new SME definition (2012), European commission introduces the definition of three different
categories of enterprises. In general, most SMEs are autonomous since they are either completely
independent or have one or more minority partnerships (each less than 25%) with other enterprises.
Europa commission also defines three criteria to classify enterprises: staff headcount, annual turnover,
and annual balance sheet.
Table 3.1. Enterprise categorries
Enterprise category
Headcount:
annual Work Unit
(AWU)
Annual turnover
Annual
balance
sheet total
Medium sized
<250 =<€50 million =<€43 million Small <50 =<€10 million =<€10 million Micro <10 =<€2 million =<€2 million 2 5 E f f e c t i v e W o r k i n g M a n a g e m e n t i n S m a l l a n d M e d i u m E n t e r p r i s e s i n V i e t n a m M B A F i n a n c e 2 0 1 2 - 2 0 1 3 . S t u d e n t n u m b e r : 1 7 1 5 6 9 2 - S u p e r v i s o r : E N D A M U R P H Y 3.1.2. Concept of small and medium business in Vietnam Before 1998, there are not an official definition of size of SME. Some provinces had defined their own SME criteria including: number of regular laborers of less than 500; or fixed assets of less than VND10 billion; or mobilized capital or monthly revenue of less than VND 20 billion. (Le, 2005) In June 1998, the Government issued Public Letter 681/CP-KCN on the policy and strategic directions in developing SMEs. As a result, SMEs are defined as establishments with a registered capital of less than VND 5 billion or regular workforce of less than 200 laborers. This legal document had laid an initial legal ground for implementing supporting measures to SMEs‟ development. (Le,2005) Recognizing that the SME grouping by Decree 90/2001/ND-CP is too general to provide useful data for policy formulation, therefore, in June 2005, the Agency for SME Development (ASMED) introduced a further size segmentation in its SME Development Plan for 2006-2010 period. According to the new segmentation, SME is categorized into micro enterprises (less than 10 persons), small enterprises (10 to 49 persons) and medium-sized enterprises (50 to 299 persons) 3.2. Financial concept for small and medium business Robin Jarvis (2006) explained the distinct different between the financing of large quoted companies and small companies. Most of literature, however, relating to finance focuses on large firms. From a financial-economic perspective, the main difference lies in the lack of availability of capital markets where small firm can raise funds compared with their larger counterparts who can obtain fund from stock market. In the case of small firms, the owner normally represents the enterprise in the capacity of both the owner and manager. There are different types of finance employed by small business but only limited information is available on the extent to which each type is actually used. This is because not all the information related to the finance of small firms in the public domain. By contrast, information source of finance of big firm publicly available from variety of sources including annual report