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Dear Mr.John Moffat,
I hope you are well.
Currently, I am learning management of the trade receivable through your video. I have a question for you as followings:
1. Why do we need to calculate the finance cost for the advanced amount that the company received from the debt factor for both the current policy (i.e. policy that is not using debt factor) and proposal policy (i.e. policy that is using debt factor)
2. When calculating the finance cost of the advance amount received from the debt factor, why do we use NEW AR (the average AR balance after considering the effect of using the debt factor) for both the current policy (i.e. policy that is not using the debt factor) and proposal policy (i.e. policy that is using debt factor). Why did we not use the OLD AR (the average AR balance that has not been considered the effect of using debt factor) for the current policy and the NEW AR for the proposed policy
I am looking forward to hearing from you,
Best regards,
Toan
1. When calculating the finance cost for the advanced amount received from the debt factor, it is important to consider both the current policy (without the debt factor) and the proposed policy (with the debt factor). This is because the advanced amount received from the debt factor represents borrowed funds that need to be accounted for in terms of finance costs.
In the current policy, where the company does not use the debt factor, the finance cost would be calculated based on the interest rate or cost of borrowing applicable to the company’s existing financing arrangements, such as bank loans or overdrafts.
In the proposed policy, where the company utilises the debt factor and receives an advanced amount, the finance cost would be calculated based on the interest rate or cost associated with the advanced funds provided by the debt factor. This cost represents the additional interest expense incurred by the company for borrowing the funds from the debt factor.
By calculating the finance cost for both scenarios, the company can compare the costs associated with the current policy and the proposed policy, helping them make an informed decision regarding the use of the debt factor and its impact on overall finance costs.
2. When calculating the finance cost of the advance amount received from the debt factor, it is necessary to use the new average accounts receivable (AR) balance for both the current policy (without the debt factor) and the proposed policy (with the debt factor). This is because the new AR balance reflects the impact of using the debt factor and provides a more accurate representation of the company’s financing needs.
In the current policy, using the old AR balance would not account for the advanced funds received from the debt factor. By using the new AR balance, which considers the effect of the debt factor, the finance cost calculation reflects the actual borrowing requirements of the company.
Similarly, in the proposed policy, using the old AR balance would not accurately capture the financing needs of the company after implementing the debt factor. By using the new AR balance, the finance cost calculation considers the advanced funds received from the debt factor and provides a more comprehensive assessment of the company’s finance costs.
Using the new AR balance for both scenarios allows for a fair comparison of the finance costs associated with the current policy and the proposed policy, enabling the company to make an informed decision regarding the use of the debt factor.
Glad that you understand what I am asking as my English writing is not while well. I understand the logic of the finance cost for trade receivable management using the debt factor now. Thank you very much. Wish you have a good day.
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