Chapter 3: Working Capital (receivables)

Question 1

Techniques for managing accounts receivable - Credit analysis

Answer 1

Credit Analysis
-customers creditworthiness needs to be assessed to give confidence that they will meet their debts as when they fall due.
-can be done by obtaining: a bank reference, trade references, credit rating agency report, financial statements, media coverage

Question 2

Techniques for managing accounts receivable - Credit control

Answer 2

Managed by ensuring:
-invoices and statements are issued on time
-credit limit is not exceeded and reviewed regularly
-On-going financial performance is kept under review

Question 3

Techniques for managing accounts receivable - Debt collection

Answer 3

Ensure that amounts owing are collected when due. This will include the following:
-Ensuring any queries are investigated promptly
-The account is put on hold is any amounts are overdue
-Legal action is taken (when necessary) to recover funds

Question 4

Factoring

Answer 4

An arrangement to have debts collected by a factor company

Question 5

Factoring - debt collection and administration

Answer 5

Factoring usually involves administration of the clients invoicing, sales accounting and debt collection service and credit protection for the client’s debts.

Question 6

Factoring - Financing

Answer 6

The factor will advance usually up to 80% of the face value of the debt - the finance is repaid once the invoices have been settled and the balance is passed to the issuing company after a deduction fee.

Equivalent to an interest charge on the cash advanced.

Question 7

Factoring - Credit insurance

Answer 7

Non-recourse service:
If the customer fails to pay, the factor bears the loss and the client receives the money from the debt.

however with non-recourse, the factor will decide what action to take against the non-payers.

Question 8

Invoice discounting

Answer 8

Source of finance and involves the purchase of trade debts at a discount (effectively a loan to the company secured on specific receivables)

Invoice discounter does not take administration of clients sales ledger. Only want to have some invoices discounted when he has a temporary shortage of cash, invoice discounting tends to consist of one off deals.