# Management of Receivables and Payables Example 2 and 3

1. says

When looking at factoring, how would you handle bad debts that existed before the factoring? In addition if the factor is only offering 80% on invoice rates at an interest rate?

• says

Irrecoverable debts existing before using factoring would be ignored. We are looking to see if factoring would be worthwhile as a long term policy for the future. Existing bad debts would be the same whether or not we decided to factor.

The situation where the factor charges interest on advances is dealt with in the revision lectures – I go through an example that it in the free revision notes.

2. says

Hello Sir,

Where are video lectures of Example 4 & 5 (Working Capital Management- Payables Part)?

• says

There are no videos for those two examples because the technique is identical to that of simple discounts to receivables.
You can test yourself on them (and, of course, the answers are at the back of the Lecture Notes).

• says

Thank you so much sir !!!.for such a quick reply
one more thing that I want to know..the questions given in Kaplan’s complete text book are sufficient for practice .?

• says

You should really get an Exam Kit because they contain lots of exam standard questions (including past real exam questions), and practice is vital.

3. says

Hello,

What if 60% of the customers only account for 1% of sales. In practice, would this be accounted for?

• says

It doesn’t make any difference.

You cannot force the customers to take a discount. However, you will offer one if it costs less that the interest we would otherwise paying – and then we would hope that everyone would take advantage of it

• says

I’m still unclear as the calculations are based on the percentage of customers and not the dollar amount they represent.

4. says

Hello,

What if 60% of the customers only account for 1% of sales. In practice, would this be accounted for?

5. says

Dear Sir Moffat,

Thank you for your grateful lectures.
I have one question.
In the example 2, when interest saved on lower receivables is calculated, new level of receivables is calculated as 20 million * 54 days/365 days.
1% of discount was offered. 60% of customers are taking the discount. So new level of receivables is 20,000,000 – 120,000 after discount.
Why is new level of receivables calculated as above, and not as follows?
(20,000,000 – 120,000discount) *54days/365 days?.

Best regards

• says

Certainly you can subtract the discount. In some answers the examiner has subtracted the discount and in other answers he has not – he gives full marks for either.

• says

Thank you Mr Moffat

Best regards

6. says

Sir, why do we not minus the \$20k of credit control staff? and do we not need to include overdraft under cost of new policy but under benefits instead?

• says

I mean “why do we not minus the \$20k of credit control staff? and why do we not need to include overdraft under cost of new policy but under benefits instead?

• says

The fact the we need fewer credit control staff means that we will save 20,000 if we use the factor. The saving of 20,000 is therefore listed as a benefit of using the factor.

Using the factor will mean that average receivables are reduced throughout the year (because we are collecting money faster). Therefore the overdraft will be reduced, and therefore there will be less interest payable. It is the interest saved that is listed as a benefit.

• says

Yes it is. (There are answers to all of the examples at the back of the course notes – it is listed on the contents page.)

7. says

the management of recievables and payables when I tried some of previous paper exams it will become complicated how can I ease them and the lecturer said first list the costs and then the savings but that didn’t work at all exercises can you show other ways to solve them ease my understanding of this management of receivable and payables

• says

Although you can set out your workings in different ways, the approach is always the same – we need to calculate the costs and the savings resulting from the new policy and make the decision on that basis.

Every question is worded differently and when there is a problem it is in interpreting the question.

If you have problems with any specific past exam question then do ask in the F9 Ask the Tutor forum and I will try and help.

8. says

Working Capital part at the side of recievables and payables when I tried some of previous Paper it will become complicated how can I ease them