Factors Affecting the Efficiency of Working Capital Use in Enterprises

Inventory turnover

Revenue (cost of goods sold)

goods for sale)

Average inventory

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In addition to the indicators reflecting the efficiency of working capital use in general, financial managers also use the following indicators to evaluate the effectiveness of inventory and receivables management.

* Number of days in inventory turnover

Number of days 1 inventory turnover	=	360
		Inventory turnover

This ratio shows us the number of times inventory is turned over during the period.

This ratio reflects the average number of days of inventory turnover.

Average collection period	=	360(days)
		Receivables Turnover

* Average collection period

This indicator shows the average number of days that a sold product is collected. If the average collection days in a period are short, it shows that the enterprise is not being capitalized in the payment stage, and the debt collection management is well implemented. This ratio can also be due to the enterprise's intention (the enterprise implements a loose sales policy to achieve certain goals in the future such as expanding the enterprise's market).

In addition, to be able to comprehensively and effectively evaluate the use of working capital of the enterprise, it is necessary to consider the relationship between working capital and short-term debts of the enterprise. Thereby, we can see the payment capacity of the enterprise.

When evaluating, financial managers often use the following criteria:

Above are some financial indicators to evaluate the effectiveness of organization and use of working capital of the enterprise to help financial managers make correct assessment.

Review the situation of the previous period and then propose measures to improve the effectiveness of capital management for the next period. However, the assessment and comments require attention to the following points:

- Although each financial indicator must be calculated and evaluated based on its own values, ratio analysis is most effective when all ratios are used. Not only must it be combined with indicators for analysis, but it must also consider the business environment factors of the enterprise, the specific characteristics of the enterprise and the development trends that the enterprise is aiming for in the future to make accurate decisions.

- When analyzing indicators, it is necessary to compare with financial ratios of other businesses in the industry and with the industry average ratios to see the position of the business in the market and the competitiveness of the business.

6. Payment status and payment ability

- Payment situation During the operation, enterprises always have a situation where the enterprise's capital is appropriated by other enterprises from outside. This appropriation gives rise to debt collection and payment. Not only that, these payables and receivables also have a great impact on production and business activities. Therefore, analyzing the payment situation is to evaluate the reasonableness of these appropriations, find the cause of payment stagnation, thereby helping enterprises to master the financial situation, ensuring long-term existence and development.

- Ratio of receivables to total capital. This is an indicator showing what percentage of capital actually participates in business activities in the total mobilized capital.

* Current solvency (H1):

This indicator shows the level of guarantee of current assets for short-term debts of the enterprise, showing how much current assets and short-term investments are guaranteed by one dong of short-term debt.

Current ratio

=	Current assets
		Total current liabilities

H1 = 1: is the most reasonable because then the business will maintain short-term payment ability while also maintaining business ability.

H1 > 1: Shows the current payment capacity of the enterprise is surplus.

Sometimes H1>2 is too much, it shows that the business's working capital is stagnant, then business efficiency is not good.

H1 < 1: Shows that the current payment ability of the enterprise is not high. If H1 < 1 is too high, the enterprise cannot pay all short-term debts due, and at the same time loses prestige with creditors, and does not have assets to reserve for business. Thus, whether this ratio is maintained at a high or low level depends on the field or business line of the enterprise. If the industry where current assets account for a large proportion of total assets, this ratio is even higher and vice versa.

*Quick payment ratio (H2):

𝑛ℎ𝑎𝑛ℎ

𝐻𝑠𝑡ℎ𝑎𝑛ℎ 𝑡𝑜𝑛

TSLD + Financial investment

short term

Total current liabilities

This is a measure of the ability of a business to pay its debts immediately. The higher this ratio, the higher the ability of the business to pay and vice versa. This indicator reflects the ability of the business to pay without relying on the sale of goods and materials of the business.

H2 = 1: Considered the most reasonable so that the business can both maintain the ability to pay quickly and not lose the opportunity brought by the ability to pay debt.

H2 > 1: Shows that the debt payment situation is not good because cash and cash equivalents are stagnant, slow capital turnover reduces capital usage efficiency.

H2 < 1: Shows that the business has difficulty paying debts.

Above are some financial indicators to evaluate the effectiveness of organization and use of working capital of the enterprise, helping financial managers to correctly assess the situation of the previous period, thereby proposing measures to improve the effectiveness of capital management organization for the next period. However, the assessment and comments require attention to the following points:

1.5.5 Risk analysis and working capital preservation

 Risk analysis Working capital is very important in the production and business process as mentioned in the previous section. However, in the process of circulating working capital, there will be more or less risks due to objective or subjective factors. These risks reduce the working capital of the enterprise, possibly due to the following reasons:

- Goods are stagnant, of poor quality or not suitable to customer tastes, not consumed or sold at low prices.

- Unusual risks occur in production and business activities.

- Capital in payments is occupied for a long time in large quantities while the currency is devalued due to inflation.

- Unrecoverable capital while the company does not make provisions for doubtful debts. - Prolonged business losses after a certain period of time gradually cause a shortage of working capital.

- The economy has inflation, prices increase rapidly, so after each cycle of turnover, the working capital of the enterprise will gradually be lost according to the rate of inflation. Therefore, enterprises should consider the causes of risks and their level of impact on working capital in order to have measures to limit and further improve their business efficiency.

 Analyze the situation of preserving working capital. Managing and using working capital is an important step in financial management, in which preserving working capital is an extremely important issue that determines the existence and development, state-owned enterprises must be responsible for preserving working capital in terms of value. This means ensuring that the working capital at the end of the period is enough to buy an amount of goods and materials equivalent to the beginning of the period when prices increase under the condition that the scale of production does not change but actually maintains the actual value or purchasing power of capital to ensure enough capital in the production and circulation stages, maintaining the solvency of the enterprise.

Each enterprise, depending on the specific characteristics of production and business, develops a reasonable method of preserving working capital and follows certain principles.

1.5.6 Factors affecting the efficiency of working capital use in enterprises

In a market economy, managing and using working capital effectively and reasonably has a very important impact on the completion of the overall tasks of the enterprise. However, the use of working capital of the enterprise is affected by many different factors.

Objective factors

Including factors:

+ The production and business cycle primarily affects the need for working capital and the ability to consume products, thereby also affecting the efficiency of working capital. Enterprises with short business cycles often do not have large fluctuations in working capital needs, and enterprises often receive sales proceeds. This helps enterprises easily pay off debts, ensure capital for business, and thus also affects business efficiency. On the contrary, enterprises with long production and business cycles often have large fluctuations in working capital needs, irregular sales proceeds, and difficulties in payment, affecting the efficiency of working capital use. Therefore, business managers need to base on the characteristics of production and business activities of the enterprise as well as the actual situation to propose specific plans to improve the efficiency of working capital use.

+ Market and product consumption capacity: This is one of the factors that greatly affects the efficiency of working capital use and it is more meaningful in the current market economy, when we are facing a situation of oversupply in all industries and fields, along with fierce competition in the market. That requires businesses to conduct market analysis considering competitive factors. At the same time, based on the current situation, businesses choose appropriate business plans to create advantages for businesses in the market.

+ State economic policy in economic development: The leading role of the state in a market economy is demonstrated through the regulation of economic activities at the macro level. The state is the one who guides, controls and regulates the activities of enterprises in economic sectors. Through policies, laws and economic measures. Therefore, it has a great influence on the efficiency of production and business and the efficiency of capital use of enterprises.

+ Advances in science and technology: in today's era, the level of advancement in science and technology also affects the development of businesses in general as well as the efficiency of working capital use in particular. Therefore, businesses

must pay attention to the application of scientific achievements, in order to modernize equipment and improve quality. If enterprises do not promptly access the advances of science and technology to innovate in equipment and products, there is a risk that the enterprise will suffer losses because the products produced are no longer suitable and suitable for market demand.

+ Business reputation: Business reputation has a very rich content expressed in the relationship with credit institutions, commercial banks, financial companies, partners, customers of the business about its products, goods, services... A reputable business, the material conditions are fully exploited to create a solid development for the business. At that time, the business can still conduct normal production and business activities without having to reserve too much capital. This will affect the efficiency of using the business's working capital.

+ Inflation: Is the process of money losing value over time, it always appears constantly in every economy, in every period of social development, so it will affect the value of working capital in business of the enterprise. If the enterprise does not have appropriate supplements, it will cause working capital to decrease according to the inflation rate and affect the efficiency of using working capital.

+ Risks in production and business: The higher the profit, the greater the risk, the production and business process always contains uncertain risks. Therefore, if the enterprise does not have appropriate plans and measures, it can lead to a decline in working capital, even bankruptcy.

Subjective factors

Besides the above objective factors, subjective factors also have a great influence on the efficiency of using working capital of the enterprise, which are the factors.

+ Human factor: It can be said that people always play a central role and have a direct impact on the efficiency of using working capital of the enterprise. Especially in the current market economy, when enterprises have to compete fiercely, people are increasingly asserting themselves as an important factor affecting business efficiency. For leaders

Their management level and professional ability will help the business achieve optimal profits. In addition, the sense of responsibility in work as well as the ability to adapt to market requirements of the staff will contribute to promoting production and business, improving the efficiency of working capital use for the business.

+ Management level and ability: in the market economy, it plays an important role that determines the existence and development of the enterprise. If the enterprise management level is still weak, it will lead to loss of materials, goods, wasteful use of current assets, and low efficiency in using working capital.

+ Building business strategies and plans: Business strategies and plans must be determined on the basis of market access as well as being consistent with the state's economic development guidelines. This is one of the basic factors that greatly affects the efficiency of working capital use of enterprises. In addition to the above factors, the efficiency of working capital use is also affected by a number of other factors such as accumulated losses, provisioning, etc. These factors affect profits and therefore also affect the efficiency of working capital use of enterprises. Above are some basic factors that affect the efficiency of working capital use of enterprises. Enterprises need to consider the scale and type of their enterprises to limit possible negative impacts in order to improve the efficiency of working capital use in enterprises.

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