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I’m reading ACCA Technique Article: Alternative Receivables Collection Techniques. Can anyone let me know detailed calculation of Finance Saving on Reduced Receivables Collection for the following question:
Velmin Co has a turnover of $700,000. Receivable days are currently 48 despite the company only offering 30-days’ credit and bad debts are currently 3% of turnover. Velmin Co finances its receivables using its overdraft which has an annual interest cost of 8%.
Velmin is considering the use of a factor. The factor would charge 4% of turnover for a non?recourse agreement and would expect to reduce receivable days to 34 and bad debts to 2%. The factor would lend Velmin 75% of the outstanding receivables and would charge Velmin 1% above their current overdraft interest cost. It is anticipated that using the factor would reduce administration costs by $6,000 per annum.
You need to watch my free lectures on the management of receivables, because the technique needed is explained in detail, with examples.
I have watched free lectures for the receivables. However, my question is if bad debts involved in the cost such as this question. However to tackle it?
When listing the costs, you will include the 4% factors fee.
When listing the savings you will include the 3% current bad debts which will not longer exist. (The fact that they fall to 2% is of no relevance because it is non-recourse factoring).
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