UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
-----------------------------------------------

NGUYEN DIEP PHUOC HOA
ID: 22140016

LATE PAYMENT FROM CUSTOMER
PROBLEM IN HP COMPANY

MASTER OF BUSINESS ADMINISTRATION
SUPERVISOR: DR. NGUYEN PHONG NGUYEN

Ho Chi Minh City – December 2016

1


ACKNOWLEDGEMENT
First, this thesis cannot be finished without the kind support of many people. I would like to
express my deepest gratitude to all of them; especially, my parent, for their love and
unconditional encouragement.
Furthermore, I give my appreciation to my advisor, Dr. Nguyen Phong Nguyen, for his
guidance, imparting his knowledge and expertise my study.
Special thanks to members of HP Company for cooperating, supporting and providing
necessary information to contribute to my thesis.
Last but not least, warmest thanks to all my classmates who always support and help me to
complete this thesis.

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EXECUTIVE SUMMARY
Late payment of bill remains a concern for many small and medium enterprises and can put a
strain condition on the company’s cash flow, which lead to the inefficiency revenue and profit.
Late payment was seen as a major contributory factor to small businesses financial distress and
failure, which hamper growth and innovation. 1 Poor payment practices will reduce company’s
overall corporate earnings, hinder abilities to expand and lessen business growth. Late
payment also has a serious effect on all the small and medium firms, which tend to operate
with limited cash flow and put their company survival at risk.
It is evident that one of the main factors in late payment is the mismanagement of financial
activities and passive role assigned to trade credit in organizations. 2
This thesis is conducted to indicate the consequences on performance of HP Company from
late payment as well as the main reasons caused the late payment. Besides that, the thesis aims
at finding and advising the possible solutions and practices for effective trade credit policy to
prevent this issue in the future.

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CONTENTS
CHAPTER 1: INTRODUCTION .................................................................................. 3
1.1. COMPANY BACKGROUND ...................................................................................................... 5
1.2. SITUATION & SYMPTOMS ANALYSIS .................................................................................. 7

CHAPTER 2: PROBLEM IDENTIFICATION ........................................................ 11
2.1. POSSIBLE PROBLEMS ............................................................................................................. 11
2.1.1. The first tentative problem: Intense Competition. ................................................................ 11
2.1.2. The second tentative problem: Matetial price fluctuation. .................................................... 13
2.1.3. The third tentative problem: Late payment from customer................................................... 16

2.1.4. The central problem: Late payment from customer. ............................................................. 20
2.2. PROBLEM JUSTIFICATION .................................................................................................... 21
2.2.1. Problem definition. ................................................................................................................ 21
2.2.2. Justify the existence of problem. ........................................................................................... 21
2.2.3. Justify the importance of problem. ........................................................................................ 27

CHAPTER 3: CAUSE VALIDATION ....................................................................... 29
3.1. POTENTIAL CAUSES. .............................................................................................................. 29
3.1.1. Potential Cause 1: Credit Policy. .......................................................................................... 29
3.1.2. Potential cause 2: Poor financial management ...................................................................... 30
3.1.3. Potential cause 3: Economic situation ................................................................................... 31
3.1.4. Potential cause 4: Legal and Regulatory Framework............................................................ 32
3.2. CAUSE VALIDATION .............................................................................................................. 32
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3.2.1 Justify the links between the potential causes and central problem. ..................................... 32
3.3. FINAL CAUSE EFFECT MAP .................................................................................................. 35

CHAPTER 4: SOLUTION ANALYSIS...................................................................... 36
4.1. SOLUTION 1 - IMPROVE TRADE CREDIT POLICY ........................................................... 36
4.1.2. Setting credit standard. ......................................................................................................... 37
4.1.3. Varying credit terms. ............................................................................................................ 38
4.1.4. Applying penalties for late payment. .................................................................................... 39
4.1.5. Put more effort on credit collection ...................................................................................... 39
4.2. SOLUTION 2 - BANK GUARANTEE ...................................................................................... 40
4.3. SOLUTION COMPARISON ...................................................................................................... 40
4.4. DESIGNED PLAN...................................................................................................................... 43
4.4.1. Setting credit standard. ......................................................................................................... 43
4.4.2. Varying credit terms. ............................................................................................................ 44

4.4.3. Applying penalties for late payment. ................................................................................... 45
4.4.4. Put more effort on credit collection ...................................................................................... 45

CHAPTER 5: CONCLUSION ..................................................................................... 47
CHAPTER 6: SUPPORTING INFORMATION ....................................................... 48
6.1 TRANSCRIPT.............................................................................................................................. 48

REFERENCES .............................................................................................................. 70

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LIST OF TABLES
Table 1.2.1 Revenue and profit after tax of HP........................................................................... 7
Table 1.2.2 Cash and current liabilities of HP ............................................................................ 9
Table 2.2.2.1 Account Receivable and Total Asset of HP ........................................................ 24
Table 2.2.2.2 Receivables’ ratios of HP .................................................................................... 24

LIST OF FIGURES
Figure 2.1.2.1 Copper price trend from 2011-2015 .................................................................. 15
Figure 2.2.2.1 Receivable turnover ratio of HP and TAYA...................................................... 25
Figure 2.2.2.2 Day’s sales outstanding of HP and TAYA ........................................................ 26
Figure 2.2.2.3 Aging of HP’s accounts receivable in 2015 ....................................................... 26

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CHAPTER 1: INTRODUCTION
Nowadays, the issue about late payment has been concerned as an important disturbance
for small and medium enterprises all over the world. Payments, which implies a major

problem as monies, is needed to pay for materials, labor… and general overheads
expended during the progress of the work. 3 Late payment is defined as a payment made
to the seller after the due date has passed.
Howorth et al 3(p308) also addressed the high risk consequences of slow payment that:
The impact of slow or no payment can be devastating. Slow payment erodes the
profitability of the sale or, where profit margins are tight, eliminates it together.
Uncertainties over the timing of payment make cash-flow management and banking
relationships even more difficult. Where slow payment progresses to protracted default
and bad debt the whole viability and survival of the business can be risk.

This paper is about the problem of late payment of HP Company and its impacts on the
company. The first section consider some symptoms and bad outcomes can be observed
from different angles in HP Company- a manufacturer of electric wire and cable. This is
followed by the argument to identify the real core problem and all the debates supported
to the issue- late payment from customer. Next chapter are the determinants that make the
inefficiency in collecting money from the customers of HPC. In drawing conclusions the
author consider all possible solutions will be suggested for improving the efficiency of
company management.

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1.1. COMPANY BACKGROUND
Established in 2006, Hoang Phat Wire & Cable (HP Company) is a trusted company
specializes in the manufacturing of wire and cable with different kinds of market such as
household uses, professional uses, and other electrical needs. All products bearing HP
brand must go through extensive and qualified management process to ensure quality and
durability. Under motto "Take trust - Give quality", HP aims to make sure the products
are higher quality than requests to satisfy customer. After nearly 10 years operating in the
electrical materials market, HP always tries to upgrade the latest technology in order to

improve company performance.


Full name: Công ty TNHH Sản xuất Dây và Cáp điện Xây lắp Hoàng Phát.



English name: HP-Petrocable.



Head office: 53 Street 19, Tran Nao, Binh An Ward, District 2, HCMC.



Factory: Street No. 1, Tan Dong Hiep B Ward, Di An, Binh Duong.



Tel/fax: (08) 08 6676 3385.

As any other companies, employees or labor force is the top-priority in HP. To operating
in industrial sector, it requires a labor force with skills so the worker is the primary labor
source in HP. They applied ISO 9001-2008 QMS, the Quality Management System that
authorized by Australia to ensure all the steps from the beginning of the sale contract to
the production to minimize the risks. Those employees mostly were employed from
2009.

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Factory Department

Number of employee

Head of the Factory – Manager Of
1
Manufacturing
Vice Manager of Factory – Manager of
1
Product Designing and Inspection
Quality Inspection Manager (KCS)

1

HR-Factory Manager

1

Production Accountant

2

Team leader

6

Workers

12


Office Department

Number of employee

General Director - Owner

1

Vice Director – Sales Manager – Owner

1

Salesman

2

Accountant Office

4

Administrative Office

1

6


1.2. SITUATION & SYMPTOMS ANALYSIS
Profitability is the primary purpose of all business enterprises by getting more revenue,

sustainable development and fairly competition in today’s competitive market conditions.
Profitability is measured by a few accounting ratios, such as return on equity (ROE),
return on capital employed (ROA). 4 Here the author also suggests using these ratios to
measure the company’s profitability of HP- Petrocable.
Before conducting interviews with HP’s members, company’s annual reports are provided
to analyze. Financial documents reveal the basics of the company’s situation during the
period of 4 years.
Table 1.2.1 Revenue and profit after tax of HP

Net revenue

2012

2013

2014

2015

22,381,489,117

18,188,447,455

0%

-19%

-23%

-11%


1,310,442,828

(1,070,641,122)

2,386,536,522

1,598,383,625

0%

-182%

82%

22%

17,126,725,795 19,837,389,350

% change in revenue
in comparison with
year 2012
Profit after taxes
% change in profit in
comparison with year
2012
(HP’s Income Statement, 2012-2015)

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In comparison to TAYA Vietnam, which is another manufacturer of wire and cable, the
data also indicates the poor outcome from HP. ROA of HP was extremely low in
comparison to the industry of electric and electrical equipment and became negative in
2013 at -2%. During the period of 3 years from 2013 to 2015, TAYA Vietnam’s ROA
remain at a high level from 5.27%-8.33%. It can be easily noticed the ineffective in
working of HP in the last 4 years. The figures below will show the details.

ROA
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
Taya

2012

2013

2014

2015

5.27%

4.78%


6.65%

8.33%

Industry: Electronic & Electrical
Equipment
HP

6.74%
2.17%

-2.20%

4.36%

2.48%

Figure 1.2.1 Return on assets of HP, TAYA and the industry
In comparison to the industry electric and electrical equipment and a competitor – TAYA
Vietnam, HP’s cash ratios are the worst. While TAYA Vietnam’s ratios reached the
highest point in 2014 after that in 2015 the ratio was nearly the same with the industry,
there was a significant gap between HP’s ratio and the others. The comparisons with the
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industry and TAYA Vietnam, it can be easily noticed the ineffective in working of HP in
the last 3 years.
Table 1.2.2 Cash and current liabilities of HP
2012

Cash and cash equivalents
Current liabilities

52,916,303

2013

2014

457,981,525

2015

103,230,790

160,529,332

62,028,954,149 51,331,923,180 55,747,781,123 63,974,558,247

Cash Ratio

0.001

0.009

0.002

0.003

(HP’s Balance Sheet, 2012-2015)


Cash Ratio
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Taya

2012

2013

2014

2015

0.36

0.48

0.52

0.61


Industry: Electronic & Electrical
Equipment
HP

1.59
0.01

0.009

0.002

0.003

Figure 1.2.2 Cash Ratio of HP, TAYA and the industry

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Currently, low cash is considered as a serious issue in HP Company. One maxim is:
“revenue is vanity, cash flow is sanity, but cash is king” and it seems like HP use it up
their cash balance. The cash and cash equivalent hold a very small amount in comparison
to the current liabilities, this make the cash ratio very small and cause more difficulties to
the business.
This situation has made HP managers try to research a best way to enhance their profit
and improve company competence on the market as soon as possible. Conducting
interviews with members of HP, they reveal many issues which have influences on the
company’s performance and cash is one of the most challenging troubles in recent years.
According to Mrs. Ngoc, the owner and director of HP, “We are facing a very challenging
trouble, the shortage in cash make our company situation more and more difficult”. Low
level of cash is considered as a big trouble in the company, but that should be recognized

as the symptom or what we can see from an “iceberg”, the real problem and underlying
causes need to be found and analyzed to improve the situation.

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CHAPTER 2: PROBLEM IDENTIFICATION
2.1. POSSIBLE PROBLEMS
2.1.1. The first tentative problem: Intense Competition.
In the interview with Mr. Hoanh, co-owner and Sales Manager in HP Company, he
revealed that “There are many reasons can explain for the low level of cash in these
recent years. It was hard to introduce and sales product these days because of the intense
competition. Intense competition in the construction material industry reduced our market
share and profits due to strong competitors and later rival, both groups compete very
intensively by low price strategy”. Currently, the demand for power cable serving the
construction and manufacturing industries such as automobiles, electronics and
telecommunications are growing. However, the Vietnam wires and cables market were
developing a number of unstable factors, significant impact on the survival and
sustainable development of enterprises. This uncertainty has many different causes, arise
from different sides, especially the low price strategy. Besides the "giants" in the
business, to survive, there are some new firms chasing for profit and enticing the
customer so they use temporary and unfair solutions such as: offer the low price to entice
the customer for the first time or even they reduced product quality to decrease the price.
“With a same kind of product, the contractor would certainly choose the supplier who
offers a lower price for them to decrease the material cost”, as Mr. Hoanh said.
Reinmoeller 5 observed that price wars always link with the serious drops in financial
performance. In this case this can be understood that price competition somewhat lead to
the bad results in HP Company with the revenue and ROA, ROE also. Moreover, the
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competition takes place not only for domestic enterprises but also famous foreign
manufacturers like LS VINA, TAYA, TAIHAN, TAI SIN with 100% foreign capital
invested … also have the latest and updated machinery, strong capital from overseas and
compete by price strategy strongly in order to kick the weak and small enterprise out of
the business to penetrate the market. However, Reinmoeller 5 again addressed that when
the price wars start, profit will narrow considerably and weak competitor had difficulty in
business. Mrs. Ngoc mentioned that “We offered quite a lot price proposal per month,
that means the demand is still very good but it hardly win the contract because of the low
price offer from the other company, profit margin of cable is in the low level about 10%
so we cannot diminish the price anymore”. The consequence of the low price rivals will
affect our sales, profit and cash definitely.
Besides price war, “Smaller firms grant more credit to customers as a way of marketing
strategy to increase sales and build long-term relationship with customers; larger firms
resort more financing to suppliers as their good reputation and large economic scales”.
Wilson et al 2 argued trade credit is an important marketing tool, as trade credit can help
suppliers to obtain new businesses and build good customer relationships, especially for
new entrants in market who do not have many relations. If the competitor offer your client
better credit criteria, you are easy to lose your customer as well. Trade credit is used to
compete with other competitors in the same industry. 6 In theory of Niskanen et al, 7 firms
pursuing high growth offer more trade credit and longer due periods over competitors;
moreover, in order to increase sales, firms facing sales inadequate take the strategy of
granting more trade credit to customers. So your customer will have a lot of better offer
12


from many suppliers and they will compare the credit standards between these supplier to
choose the best and easy ones to buy.
Overall, wire and cable industry has formed quite a large scale; creating positive
competitive pressure to the technology innovation, quality and productivity improvement,

lower product costs in order to offer customer very attractive price. Many businesses,
both domestic and foreign firms have adopted a system of standards of international
quality management, registered trademarks, and brand development to create market
confidence in the country. The number of businesses operating in power cables market
has gone up to more than 200 businesses, including 40 large and medium enterprises with
some foreign invested enterprises. With the strong capital invest from government; the
states owned corporations like CADIVI, Tran Phu, and Viet Thai…always have their big
strategic clients and projects assigned by the government. They also have a wide and
strong distributor channel, which have gain the trust from Vietnamese consumer over
years. According to Mr. Hoanh, “the giants in cable industry have a very attractive credit
sales amount for big project, they allows the customer pay later up to 30% amount of the
contract, which we could not offer for the customer even they charge the customer a little
bit higher price than normal”.
2.1.2. The second tentative problem: Material price fluctuation.
One of serious reasons for cash shortage in HP comes from the company expenses.
According to Mr. Hoanh, “copper accounts for 80% of the cable components so it plays a
very vital role in the product”. Thus the cost of raw materials is a key component in the
price of cable product; however, “The copper price fluctuation make it more complicated
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to quote the cable rate and predict the competitor price, also raise cost of our products
and impact our ability to meet commitments to customers”. It is evident that HP Company
has hard time to deal with strongly fluctuating raw material costs.
The commodity pricing is the addressable concern for a lot of manufacturers to find new
ways to stabilize the expenses. As the same as gold price, copper price is very sensitive
and unpredictable. Along with the great fluctuation in gold prices, copper price truck a
first peak level in 2008 and 2011, even now it is on the downward trend but for
manufacturers of cable, the volatility in the global copper market grow a host of pricing
concerns that influence their clients-the contractors. No one can forecast in which

direction material prices will go. It will go up or down without any discernible pattern.
The price trend of raw materials with its current ups and downs is primarily driven by
market situation.
The HP director understand the unstable global market and its unexpected raw material
price level, but Mr. Hoang from the sale department admit that “I found out that copper
price fluctuation can make the product price change. Our company procedure is that
buying the material after the customer sign the contract. Some cases the price of material
increase and the customer did not accept for the price adjust. Sometimes if the price did
not significantly increase or that was our regular client, we must go along with it and
bear some reduction in profit”. In this case, a price difference between spot price and
contract price can cause either smaller profit margin or loss for the producer. Highly
fluctuating raw material costs and ineffective price management can greatly endanger a
company's profit. The impact of copper materials price risk will affect their business
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health means that it should be priority to develop a comprehensive raw management
system to manage their costs. It should not be should not be ignored or passively
accepted.
“External factors beyond our control can cause fluctuations in demand for our
products and in our prices and margins, which may negatively affect our results of
operations and cash flow”.

Figure 2.1.2.1 Copper price trend from 2011-2015

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2.1.3. The third tentative problem: Late payment from customer.
One of the business strategies to expand sales and profit and to compete with other rivals

is allowing credit sales to customer. Trade credit has played an important role in our
global growth to boost the good flow. However, the issue of late payment has been
identified as a urgent problem, which reduce the supplier financial performance.
Conducting interviews with members of HP Company, according to Mrs. Ngoc, the
director of HP Company, “Our Company has to deal with a big amount of cash stuck in
the account receivables”. This is a signal of the fact that the company is having
difficulties collecting sales on credit. In the interview with Miss Tuyen, who works in
financial – accounting department, she shared that “customers delayed their debts for
longer time” and it makes “an amount of working capital locked up in this account for
long time”. This could be understand why HP holds a big amount of account receivable,
because their customer-the contractor usually delay the payment as long as possible.
Zainudin et al 8 stated that the practice of late payment and non-payment can, and does,
undermine companies’ cash flow, profitability and competitiveness. It is true when now
HP Company is suffering the cash flow problem, insufficient profitability caused by the
work is not paid in the stipulated time frame stuck in account receivable.
According to Ms. Tuyen “Our profit margin is quite small and various within an order, if
the customer delay to pay 10%-30% of the contract from more than 3 months, it become a
problem affect our company adversely”. Cable manufacturer have a small profit margin
and if a customer delay to fulfill the invoice, they still “have to pay 100% for the supplier
when purchase for material”. This can be understood the reason why a company like HP
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can have a cash shortage when their customer always try to delay payment and they have
to pay in full amount before buying material to produce the product. It is obvious about
the fall in the profitability because of the delay in payment from the customer in HP
Company. Late bill pose a significant problem for small and medium businesses, while
big firms are not too worry about the uncommon unpaid invoice. Late payment will affect
cash flow of a company and may eventually lead to company’s insolvency. 9 Agreed with
that, Wong et al states that late or delayed payment from clients can be categorized as

financial risks which involve high level of uncertainty and it may cause a negative impact
on the cash flow and endanger a project’s viability and limit profitability.
Ms. Ngoc shared that “Most of the customer pay the debts after 4 to 6 months. Some
delays more than a year. Some even get default in payment” even they “try to call them
many times but it seems not very effectively and always has to visit each customer in
person to claim the debt” but “the debts are frequently paid partly and less than my
expectation”. Disruptions of cash flow caused by late payment depending on the extent
and duration of delayed payment can significantly affect the daily operations of small
businesses. 10
Even extending credit can allow you to combat with the other rivals but it is not always
good for your business when you have trouble with collect the money from your client.
As analyzed above, now HP Company not doing well with the invoice collection when
receivables turnover ratio keep around 1.8 and the number of day’s sales outstanding was
around 202 days and while compare to the industry of cable manufacture and a competitor
– TAYA Vietnam, there was a significant gap between HP’s turnover and TAYA that
17


means the company is having troubles in collecting money from the customers and
account receivable hold a large number of working capital in too long period. In other
words, there were more delinquent customers and an increase in the costs of holding
receivables for a longer period of time.
The liquidity of accounts receivable and the speed that receivables are converted into cash
is low and it took more time to turn account receivable into cash. As a result of delayed
payments, financial stress can occur due to inaccurate cash forecasts and/or deficiencies
in cash flow management. 11

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New and small rivals use
low price strategy to win
the contract

State own and FDI
enterprises

Intense
Competition
Low ROA,
ROE

Trade credit policy

Poor financial
management

Late payment
from customer

Cash shortage

External effects

Economic condition

Material price
volatility

High account

receivable

INITIAL CAUSE AND EFFECT MAP

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2.1.4. The central problem: Late payment from customer.
From the above analysis, literature reviews and the interview result, there are 3 main
problems are analyzed and identified as the barriers lead to the bad performance in HP
Company from the period 2012-2015. Price war and the volatility in material price yet to
exist as obstacles prevent company from achieving a better outcome, but the
predominantly reasons effect these problem come from the external and market elements,
which can hardly handle and manage efficiently and easily within their limited resources.
Nevertheless, the unpaid payment from the client with the revenue retention in account
receivable is the primary reason which impact HP Company most significantly. When a
substantial part of company’s cash flow from operations have been used by customer and
will not be available for company’s business purposes, nobody can thoughtfully and
wisely considerate about nothing but retrieve their outcomes. The consequence is they
cannot assure their business will generate sufficient revenue and poor payment practices
will reduce overall corporate earnings, hinder their ability to expand and lessen business
growth. Late payment also has a serious effect on HP and all the SMEs, which tend to
operate with limited cash flow and put their company survival at risk. Additionally, the
current intensely competitive situation is not allowed company to increase the price; that
why we have seen a plunge in the cash balance in HP company. To sum up, late payment
of invoice is the primary and priority problem, which HP Company must face with,
tracing for the deeply hidden reason and propose some solutions to tackle it within
company’s capability and resources. This is not good for business and it’s urgent to take
action immediately.
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2.2. PROBLEM JUSTIFICATION
2.2.1. Problem definition.
Payments, which implies a major problem as monies, is needed to pay for materials,
labor, plant, subcontractors’ account rendered, preliminaries and general overheads
expended during the progress of the work, 12 and trade credit is the separation between
delivery of goods and services and their payments to suppliers. 13 Late payment of trade
credit is an extension of the demand for trade credit. Most firms try to delay their
payments to suppliers to alleviate credit constraints in a short period. 14
Paul et al 15 defined that:
Late payment of trade debts is often associated with the relative power positions of
suppliers and customers (especially where the customer is in a monopolistic or
oligopolistic position), the competitiveness of markets, disruption associated with changes
in payment technologies and customer concentration.

Late payment problem is endemic in construction and needs to be explicitly recognized as
this problem recurs from project after project. When the flow of money into a business is
delayed, the net cash flow will become negative. Therefore, late payment affects time,
cost and quality as good quality construction requires prompt payment, so that progress
would not be affected. 9
2.2.2. Justify the existence of problem.
According to Mrs. Ngoc, “because of the company focused only on construction projects,
and with the state owned EPC, they always require to keep 10-15% in the contract after
21