November 3, 2014 at 5:35 pm
Hello. I’m having some difficulty in solving this question regarding the topic of Management of Working Capital ( Receivables & Payables)
okay here goes :-
Over the recent months R Co’s receivable days have increased. The receivables ledger now amounts to $200,000 which represents 65 days of sales, despite the credit period allowed being 30 days. Irrecoverable debts have also risen to 2% of sales. Working capital is financed by an overdraft, at an annual cost of 6%. This rate is not expected to change in the foreseeable future.
You are provided with the following further information
R Co has approached F Co, a factoring company. F Co offers the following terms:
(i) 80% of amounts receivable would be advanced immediately for a fee of 5% of the amount advanced.
(ii) F Co would bear the cost of bad debts.
(iii) Receivable days would be reduced to the 30 days customers are allowed.
(iv) F Co would charge 2% of sales as credit insurance.
If F Co’s services are engaged, R Co will no longer employ their credit controller thus saving $13,000 per annum. R Co also believes that sales will fall by $25,000 if the factoring company is used.
Annul profits are approximately 60% of sales.
Assume 365 days per year.
Prepare calculations that show whether F Co’s Services should be engaged. State your conclusion.November 5, 2014 at 8:33 pm
Calculation 1: current situation
Credit controller 13,000
Interest cost of financing receivables (6% x $20,000) 1200.00
Irrecoverable debts (w1) 1684.61
This calculation is not quite so straightforward. The irrecoverable debts are
1.5% of sales, but there is no sales figure given. However, the information on
receivables allows the sales figure to be calculated:
20,000 x 365/65 = $112307.70
Therefore, the irrecoverable debts can be calculated as
1.5% x $112307.70 = $1684.61
Calculation 2: factoring company is used
$November 5, 2014 at 8:34 pm
Thats just the first partNovember 10, 2014 at 2:06 pm
I actually don’t get how to answer this type of question. For instance, where and what should i start my workings for and how do i know if i’m doing it correctly etc. Is there any pattern in these type of question? To be complete honest, this is one of the areas in FFM i’m very clueless about. 🙁November 10, 2014 at 3:55 pm
Erica, I think you will find it helpful to watch the free Management of Receivables lectures on the Paper F9 section of this website.November 10, 2014 at 4:10 pm
well i did watched it a few days back and tried to apply it to the question i have doubts in with reference to the examples you did in the lectures, i just seem to not get the picture yet.
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