A firm may employ a specialized entity to manage account receivables. A firm may employ a specialized entity to manage account receivables. This specialized entity is called Factor. This specialized entity is called Factor. Main function of a factor is to collect the accounts receivables on behalf of seller but may also involve in invoicing and sales accounting. Main function of a factor is to collect the accounts receivables on behalf of seller but may also involve in invoicing and sales accounting. Factoring

Factor makes advance payments to seller in return for commission of certain %age of total debt. Factor makes advance payments to seller in return for commission of certain %age of total debt. This is often referred as Factor Financing. This is often referred as Factor Financing. In case of action against defaulters, factor initiate action. In case of action against defaulters, factor initiate action. Factor also take over the risk of loss in case of bad debt. Factor also take over the risk of loss in case of bad debt. This type of factoring is known as Non-Recourse. This type of factoring is known as Non-Recourse. Factoring

Significant positive effect on cash cycle. Significant positive effect on cash cycle. Ensuring early payments to vendors and benefit of obtaining early payment discounts. Ensuring early payments to vendors and benefit of obtaining early payment discounts. Optimum stock level can be maintained. Optimum stock level can be maintained. Financing (Factor) is directly linked to level of sales/accounts receivables. Financing (Factor) is directly linked to level of sales/accounts receivables. Reduction in collection expense and staff payroll costs. Reduction in collection expense and staff payroll costs. May prove much expensive May prove much expensive May have adverse effect on customers’ loyalty. (Factors attitude may be harsh with customers) and may tarnish company’s image. May have adverse effect on customers’ loyalty. (Factors attitude may be harsh with customers) and may tarnish company’s image. Factoring

A company is considering to seek the services of a factor because of poor collection of debtors which has pushed up the ACP from 30 days to 45 days coupled with bad debt of 1% of annual sales. Sales are Rs.1.80 Million. A company is considering to seek the services of a factor because of poor collection of debtors which has pushed up the ACP from 30 days to 45 days coupled with bad debt of 1% of annual sales. Sales are Rs.1.80 Million. With factoring in place, the company will save Rs. 25,000 per year on account of debtors administration and collection costs, bring down ACP to 30 days but will cost 2% of sales. With factoring in place, the company will save Rs. 25,000 per year on account of debtors administration and collection costs, bring down ACP to 30 days but will cost 2% of sales. Factor will provide 80% on invoice value of sales and will charges 11% interest. Rest 20% shall be paid after 30 days. The company can obtain short term 10%. Sales are assumed evenly spread over the months. Factor will provide 80% on invoice value of sales and will charges 11% interest. Rest 20% shall be paid after 30 days. The company can obtain short term 10%. Sales are assumed evenly spread over the months. Required: Evaluate the Policy? Required: Evaluate the Policy? Example: Factoring

Debtors Management Solution: Factoring Cost Data Credit Sales Annual 1,800, ,800, Current ACP Days Cost of Short Financing Bad Debts (1%) Factor Financing (80%) Factor Financing Days Factor Fee (2%) Factor Financing Charge or 11% or 11%

Existing Cost Components Current Annual Cost 22, , =Sales 1.8Million x 45/365 x 10% Bad Debts 0.1% 18, , = 1.8M x 1% Administration Cost 25, , Total Existing Cost 65, , Cost of Factoring Factor Financing Cost 13, , = (1.8Million x 80%) x 30/365 x 11% Factor will provide 80% Finance, 20% will be through Short Term Financing: Short Term Financing Cost 2, , = (Sale 1.8M x 20%) x 30/365 x 10% Cost of Factoring 36, , = Sales (1.8M) x 2% Factor Fee Total Cost of Factoring 51, , Net Saving 13, ,213.70

We need to work out the total cost of employing factor and saving thereof. We need to work out the total cost of employing factor and saving thereof. In this case the comparison is between the existing cost of debtor administration and cost of factoring. In this case the comparison is between the existing cost of debtor administration and cost of factoring. If the later is less than the former, then we will accept or implement the new policy, otherwise not. If the later is less than the former, then we will accept or implement the new policy, otherwise not. It is “Current Cost Vs Factor Cost” It is “Current Cost Vs Factor Cost” Solution

CREDITORS MANAGEMENT CREDITORS MANAGEMENT OR OR MANAGEMENT OF CREDITORS MANAGEMENT OF CREDITORS

A vendor has offered credit terms of 2/15, net 50 to M/s ABC Limited. The company can invest in Short Term 24%. The average creditors level is Rs. 100,000. A vendor has offered credit terms of 2/15, net 50 to M/s ABC Limited. The company can invest in Short Term 24%. The average creditors level is Rs. 100,000. Evaluate the offer from vendor. Evaluate the offer from vendor. Example: Creditors Management

If ABC Ltd refuses discount and pay after 50 days, then interest cost will be: If ABC Ltd refuses discount and pay after 50 days, then interest cost will be: = ( D /100 –D ) x 365/ T = 2/( 100 – 2 ) x 365 / 35 D = Days in terms when Discount is valid T= Reduction in days if Discount availed Discount 2% 2 Discount Validity Days 15 Reduction in days is discount taken 35 Total Days 50 Average Creditors 100, Short Investment Return 24 Accept Discount Saving will be 2% of Avg. Creditors 2, Discount is Declined ABC can invest the money in Short Securities For 35 days to 24% 2, Benefit of Rejection is > Discount It is better to Decline the Discount.

Combination of two business for increasing the value of business through Synergies in the form of Acquisition or Merger. Combination of two business for increasing the value of business through Synergies in the form of Acquisition or Merger. Mergers and Acquisitions

A process of accruing an other company. A process of accruing an other company. Acquisition is also known as takeover. (Purchase Merger) Acquisition is also known as takeover. (Purchase Merger) Mergers may be termed as Amalgamation. (Also consolidation Mergers) Mergers may be termed as Amalgamation. (Also consolidation Mergers) Two businesses become single entity after Merger or Acquisition. Two businesses become single entity after Merger or Acquisition. We will use combination for both Mergers and Acquisitions. We will use combination for both Mergers and Acquisitions.

Vertical Mergers

Main purpose of combinations is to cultivate Synergies. Main purpose of combinations is to cultivate Synergies. Synergy is a force that creates enhanced cost efficiencies when two business Merge. Synergy is a force that creates enhanced cost efficiencies when two business Merge. The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. Purpose of Combinations

Sources of Synergies are as under: Sources of Synergies are as under: - Scale of Economies - Staff Reduction/Cost Cutting - Financial Strength - Market/Distribution Network - Acquisition of New Technology

Horizontal Combination: Horizontal Combination: When two companies in similar business combine horizontal combination, to reduce cost and increase profit / value due to large economies of scale. When two companies in similar business combine horizontal combination, to reduce cost and increase profit / value due to large economies of scale. In other words both companies are in Direct Competition and have same product line but may or may not have same markets In other words both companies are in Direct Competition and have same product line but may or may not have same markets Vertical Mergers: Vertical Mergers: This may be eliminating backward or forward Integration. This type of Mergers increase value by the middleman/level. This may be eliminating backward or forward Integration. This type of Mergers increase value by the middleman/level. Synergy from Operational Economies

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