1. avatar 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?

    • Profile photo of John Moffat 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.

    • Profile photo of John Moffat 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).

      • Profile photo of Raghav 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 .?

      • Profile photo of John Moffat 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.

    • Profile photo of John Moffat 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 :-)

  2. avatar 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

      • Profile photo of John Moffat 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.

  3. avatar 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

    • Profile photo of John Moffat 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.

  4. avatar says

    Hello John

    Just a quick question…

    I have just done example 5 on this chapter and checked my answer. Now then, I got the correct answer as I used the first method. However, I notice that there is an alternative method and the answer is different i.e. the first method recommends you do not take advantage of the discount whereas the second method says that you should take advantage. Why do the answers differ? Is there a right and a wrong way? Which way should be used for the exam or should we do both to gain full marks??

    Your input would be much appreciated.

    Thank you

    • Profile photo of John Moffat says

      I think that you have misread the answer!!

      Both methods come to the same conclusion – i.e. they should take the discount.
      (Maybe you got the correct number (22%) using the first method but made the wrong decision. Here taking the discount and paying early will cost 13% (paying earlier means bigger overdraft) whereas not taking the discount and paying later will ‘lose’ us 22%. So better to take the discount)

      Either way would get full marks in the exam, but the first way is more sensible because it is quicker. (Although to be asked for any calculations regarding payables management is actually rather unlikely.)

  5. avatar says

    Hello Sir,i have a question regarding example 4. By using annual effective cost calculation, the answer will be 44.6% —> 100/98 ^ (365/(30-10) – 1

    And in the answer section shows a different calculation with a different answer.

    If I use annual effective cost calculation, can I still gain marks? Thanks!

  6. avatar says

    Dear Mr Moffat,

    I would like to express my sincerest gratitude for your lectures – i have attended BPP courses and they do not compare to your lectures. All my passes in the exams are due to open tuition courses….i am now sitting F9 in june.

    Thank you so much for all your help!

  7. avatar says

    Dear John,
    In example 2…why you didn’t take the sales figure to work on rather we supposed $100 invoice. Why???
    I have learnt the logic though and also tried other amount assumption like $2000 etc…but that was my question???

    At the start it seemed to be too much confusing but ultimately with your clear directions, the ex3 and 4 are cleared like crystal.

    Many Thanks

  8. avatar says

    Hi Mr Moffat, forgive me asking question out if this lecture,, in december 2008 qstn no 2,, regarding factoring, when calculating the interest for the advanced payment of the face value of receivable,, the model answer was { 80%× revised recivable× (annual interest – overdraft interest rate) } ,, I was wondering why exactly they subtracted the the interest charged minus the overdraft,, they shoud rather just take the interest payment. I would really appreciate for your timely response.

  9. Profile photo of musenge says

    hi sir

    In these examples you found the average receivables as Months x %age (e.g in 2nd example it was 1 x 20% ; 2 x 30% ; 3 x 50% so you got 2.3 months answer as average which you multiply by 10m and divide by 12) to come at 1916667$

    I used a slightly different approach as i found the averrage receivables as

    [ (1/12 x 20%) + (2/12 x 30%) + (3/12 x 50%) ] x 10mil

    BUT my answer is different than yours (21666667) is my approach incorrect or this is also fine? will i get marks using the method mentioned??

    Please reply sir


  10. avatar says

    regarding FACTORING , in comparison of COSTS and SAVINGS , under savings we calculate reduction in receivables (current receivables – receivables under factor) and then we multiply it with the overdraft interest cost right? like we did it ANJO and in GORWA ,current minus recivables under factor. for current we pick receivables from balance sheet , and for facotrs receivables, we normally calculate it by factors days . but in kaplan in question and aswers at the end , there is a question named MARTON, there he just didn’t make any comparison of current and new receivables, he just calculated sales * factor days /365 . and multiply it by interest cost . how ever the CURRENT RECEIVABLES are given in balance sheet …. and the receivables scenario was just same as ANJO and GORWA. well i m confuzed which one is correct ? if i do it in exam straight away receivables under factor and multiply it with o/d cost will he cut my marks ? Thank you …… kindly help me by telling , which approach should be adopted ? i m pretty much wanting to adopt the approach like in ANJO and GORWA . ?

  11. avatar says

    hey there, as in example 2 of this video lecture, there is (if its the correct word) a class of receivables who pays like 20% in 30 days, 50% in 60 days and 30% in 90 days, so u multiply the days with percentage and then collectively get number of days , and accumulatedly put in the formula of average receivables , SALES *days/365 i.e 20m *63days/365days. right ? and then make a comparison with new n old receivables , and then multiply it by an od interest rate ? right? .. i m pretty much clear with it . but i have put the same approach in december 2012 question .2 part a KXP Company. current receivables are given 2466m . for revised receivables days i did 30days *0.5 plus 45days * 0.3 plus 60days * 0.2 which gives 41days . then to calculate avg revised receivables i did 15m sales multiplied by 41days/365days. which gives me $1684932 receivables. but in the solution he seperatedly multiplied sales by evey revised days which gives an answer of $1664384 receivables. my question is what is this difference for? what is the correct approach ? as i have just followed the solution of ur example 2 of this video lecture. where am i lacking ? kindly rectify my confusion . another question that the formula of annual cost of discount according to kaplan [ 1 + discount/ amount left to pay] ^ no of periods – 1 is applicable when and where ? why we can not apply that formula in this question? and where isit there to be applied? THANK YOU …..

    • Profile photo of John Moffat says

      Both approaches give exactly the same answer.

      The approach you took comes to 40.5 days, not 41 days! If you use the correct 40.5 days you will get the same answer as the examiner.

      The reason that you cannot use the other approach is because this only works if there is a fixed payment period – not where some pay in 30 days, some pay in 45 days and some pay in 60 days.

      • avatar says

        Thank you ,,,,,,,,,,, , was just mistaking again in rounding off ………. !! I m clear now :). and the fixed payment period (the formula) is called the Annual cost of a discount ?. and the approach where some pay in 30 days , some in 50 days and some in 60days is called the Early settlement discount, right ? and Early Settlement Discount always requires for calculating the net cost or benefit ? right ?

      • Profile photo of John Moffat says

        You are correct about calling it the annual cost of a discount.

        However they are all called early settlement discount (it is a discount for paying quickly – whether everyone pays quickly or just some pay quickly)

  12. avatar says

    Sir, where are the videos for Example 4 and 5. They are missing. Please work on that too… I’ve understood receivables but due to lack of lectures of payables, i.e example 4 and 5 I no nothing about Payables. Please check it and work on it. Please!

    • Profile photo of John Moffat says

      If you understand receivables, then you should have no problem with payables – it is exactly the same logic as receivables with simple discount.

      There are answers to the examples at the back of the course notes, but there will not be an extra lecture recorded.

  13. Profile photo of Zohaib says

    Sir, there is always a difference between the answers of the two approaches i.e the one you set out and the formula given in KAPLAN [ 1 + discount/ amount left to pay] ^ no of periods – 1…….the cost is almost 1% different every time and it can have an impact on the overall decision….

    • Profile photo of John Moffat says

      Yes – there is always a difference, and the formula you quote is more accurate.
      However it has only been relevant in the exam two times ever (usually it is the more complicated discount problem which needs a different approach) and both times the examiner said he would accept the approximate method. (And both times it was only a couple of marks and did not affect the decision)

  14. Profile photo of latoyah says

    For example 5 in the course notes i applied the discount when calculating the new payables figure but i noticed that you did not until the end why is this? and would i be marked down in the exam for this difference. i worked it like this:

    current payables: 40/365 x 100 000= 10959
    New payables : 15/365 x 98.5% x 100000 = 4048
    Fall in payables : 6911
    Interest on new payables: 6911 x 13% = 898
    value of discount 1500-898=602
    Take discount due to a savings of $602 for paying early.

    would i be way off mark if i worked it like this?

  15. avatar says

    I am struggling to understand example 4
    “A supplier offers a 2% discount if invoices are paid within 10 days of receipt. Currently we take 30 days to pay invoices and therefore do not receive the discount. Calculate the annual % effective cost of refusing the discount.

    The solution at the end of the lecture notes given is as follow
    Effective cost = 2/98 x 100% over 20 days (30-10) = 2/98 x 365/20 x 100p.a. = 37%p.a.

    Where do we get 98 from? is this 100% – 2%=98????

    please anyone any comments on this?

  16. Profile photo of chiclarence says

    Hello sir there is this question in kaplan text on managing receivables. the way it is solved in the ext is not clear to me:
    here is the question
    Paisley Co has sales of 20m for the previous year and receivables at the year end of 4 million and the cost of financing receivables is covered by an overdraft at the interest rate of 12 percent per anum. it is now considering offering a cash discount of 2 percent for payments of debts within 10 days. should it be introduced if 40 percent of customers will take up the discount
    here is how i solved it
    receivables days = 4000000/2000000 x 365 = 73 days
    if 40 percent take discount
    receivables = 0.4 x10/365 x 20000000 + 0.6 x 73/365 x 20000000
    = 219178 + 2400000
    = 2619178
    Interest on receivables = 0.12 x 2619178 = 314301
    Discount allowed = 0.02 x 0.4 x 20000000 = 160000
    The solution in the text says it is cheaper not to offer the discount and finance the receivables using overdraft but my answer is showing that the interest on over draft is greater than the discount allowed

    • avatar says

      Here is how I approach this example:

      We assume that our receivables throughout the year is 4,000,000
      So 4,000,000/20,000,000=73 days is our current receivables

      New receivables
      40% of the customers will take the discount and will pay us within 10 days – 10×40%=4days
      60% of the customers will pay as usual at the end of 73 days – 73×60%=43.8 days
      Total new recievables is 47.8 days

      20,000,000 x 47.8/365 = 2,619,178 this is our new average receivables after new discount system is introduced
      4,000,000 – 2,619,178 = 1,380,822 fall in av. receivables
      1,380,822 x 12% = 165,699 savings p.a. after new discount introduced

      P.S. scroll down the page there are few comments about the same example 😉

  17. Profile photo of limkimli says

    Hi, I would like to know what do we make of the 37% derived from example 4? Is the question incomplete, or do I have to make an assumption?

    If my understanding is not wrong, 37% is cost that will face by suppliers to get the cash now (for working capital) by giving out discounts as oppose to borrowing from the bank and having to pay the bank’s interest rate. From a payable/client’s point of view, I will accept this discount if a banks % for overdraft is <37% so that I can borrow and pay off while benefiting from the discount of 2%…..

    Please comment.

  18. Profile photo of annchen says

    I have computed the savings as follows: actually we have managed to reduce our receivables only for 40% of the receipts (20% were already paying within 30 days); this means that we will obtain 40% of the sales of 20 mio 30 days earlier than normal, hence savings would be: 40% x 20 mio x 15% x 30/365 = 98k (difference to the result in the book is round 20k). Could you please advise as to where I am wrong? Thanks!

  19. Profile photo of Talal says

    Very nice ….. i have learn a lot from this lecture …
    Can there be a question whether to factor or to offer discount , as far as i have done only question deciding whether to offer or not the discount or whether to factor or not …? Thank you

  20. avatar says

    Dear sir, u dnt talk about payables and i found questions about it and also there is something called APR it is a formula and i have different examples and after listening to the lect still i cant solve it so please reply what i can do.

  21. avatar says

    There is a formula in my book
    It is percentage of cost of the discount = 1-[100/100-2] x 365/20
    Is it just another method of finding out if settlement discount should be taken? or is it something else ?

  22. avatar says

    dear sir,
    after listening to the tuition i tried answering the following question but im not getting the correct answer. can you please help me out.
    paisley co has sales of $20 million for the previous year, receivables at the end of $4 million and the cost of financing receivables is covered by an overdraft at the interest rate of 12% p.a. it is now considering a cash discount of 2% for payment of debts within 10 days. should it be introduced if 40% of customers will take up the discount??
    my answer was cost of discount $160 000 and savings p.a $261699
    4m/20m x 365= 73 days
    73 days x 60%= 43.8 days
    20m x 43.8/365= $2.4 m
    new receivables
    10 x 40%= 4
    4/365 x 20m= $219178

    2180822x 12%= 261699

    cost of discount 20m x 2% x 40%= $160 000
    savings p.a= $261699

    the answer in the book is savings of $165699
    can you please tell me where is my mistake.
    thanks in advance

    • Profile photo of John Moffat says

      @chicababes1991, Currently receivables are 4M (we assume that they are at this level throughout the year)

      The new receivables will be :

      not taking discount: 60% x 73/365 x 20M = 2.4M


      taking discount: 40% x 10/365 x 20M = 219,178

      So new recbles in total = 2400000 + 219178 = 2619178

      So interest saving is 12% x (4M – 2619178) = 165699

      (current recbles are 4M throughout the year. In future they will be 2619178 throughout the year. So the interest saving is 12% of the difference,)

      Hope that helps.

  23. avatar says

    Calculation of the new receivables after ofering the discount in example 2 should use 99 % of the $20m (as opposed to $20m) multiplied by 54/365 as that is the new sale p.a.. Any thoughts? Thank you

    • Profile photo of tameablebunchy says


      If I understood it correctly you are trying to ascertain whether its worth giving the discount and you have to consider the full receivables, I believe the only time you use a percentage is if the question had said receivables is 20m and we have already collected 1m. Commentst anyone.

  24. avatar says

    this is the only time i have really enjoyed my F9 through the lectures by John Moffat because i understand the concept behind and its now easier for me to tackle most questions
    Thank you May God bless you

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