1. Working Capital Management – Account Receivables
ACCA - F9 - WCM
Factoring
Working Capital Management – Account Receivables

2. ACCA - F9 - WCM
Introduction
Factoring is a financial transaction whereby a business sells its accounts receivables to a third party at a discount in exchange for immediate money which to finance continued business

3. Why a Firm Uses Factoring
ACCA - F9 - WCM
Why a Firm Uses Factoring
Factoring used by a firm when the available cash balance held by the firm is insufficient to meet current obligation and accommodate its other cash needs, such as new orders or contracts

4. ACCA - F9 - WCM
How Factoring works

5. ACCA - F9 - WCM
Recourse Factoring
Up to 75% to 85% of the invoice Receivables is factored
Interest is charged from the date of advance to the date of collection
Factor purchases Receivables on the condition that loss arising on account of non-recovery will be born by the client
Credit risk with the client
Factor does not participate in the credit sanction process

6. Non – Recourse Factoring
ACCA - F9 - WCM
Non – Recourse Factoring
Factor purchases receivables on the condition that the Factor has no recourse to the client, if the debt turns out to be non-recoverable.
Credit risk is with the factor
Higher commission is charged
Factor participates in credit sanction process and approves credit limit given the client to the customer

7. ACCA - F9 - WCM
Benefits of Factoring
Factoring provides a large and quick boost to cash flow
Assists smoother cash flow and financial planning
Protect from bad debts (non-recourse factoring)
Saves management time on credit management
Optimum inventory levels can be maintained
The business can pay its supplier promptly

8. Disadvantage of Factoring
ACCA - F9 - WCM
Disadvantage of Factoring
It may reduces the scope for other borrowing - book debt will not be available as security
Factor will restrict funding against poor quality debtors, therefore the business need to manage these funding fluctuation
It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet
Some customer may prefer to deal directly with you
How the factor deals with your customer will affect what your customer thinks about you

9. ACCA - F9 - WCM
Factoring
example

10. ACCA - F9 - WCM
Thank you