WCPM - Receivables, Factoring and Early Settlement Discount

Question 1

Calculating Receivables Balances

Answer 1

Receivable days/365 (unless stated otherwise) * Sales

Question 2

Annual cost of Discount

Answer 2

(1+(2/98))^365/(reduction in receivable)-1 e.g.
(1+2/98))^(365/35)-1

Question 3

Service Factoring (receivable)

Answer 3

Will charge a fee to reduce the receivable
First calculate the normal receivable balance and funding cost on that receivable

Then for the service factor, find the new receivable and the funding cost, the difference in the funding costs is the saving (usually lower)
Add any admin saving and minus off fee for service (%*total sales)

Question 4

Advance factoring

Answer 4

Receivable days will usually stay the same, so no reduction in receivable finance benefit. Simply take 85% of the original receivable and times by the extra pct to get the extra cost. Add on any fee (%*total sales) and minus off any other savings

Question 5

Early payment discount with no invoice figure, but cost of capital given

Answer 5

Work out annual cost of discount, and accept if higher than working capital rate

Question 6

Early payment discount with invoice given

Answer 6

Find the receivable of the invoice figure (the sale) and then multiply by the working capital rate e.g. cost to fund. Then multiply the discount offered on the invoice value and compare

Question 7

Annual cost vs ignoring discount as a customer and offering discoutn as a supplier

Answer 7

THESE GIVE THE SAME ANSWER, use the annual cost of discount formula. May need use months instead of days to year.

Question 8

Recourse vs no Recourse factoring

Answer 8

If it’s no resource, also calculate the bad debt saved on sales