- 15 Marks
FM – MAY 2017 – L1 – Q4 – Management of receivables and payables | Working Capital Management
Differentiate between factoring and invoice discounting and advise ATA Ghana Ltd on whether to take on new customers based on the proposed credit policy.
Question
a) Factoring and Invoice Discounting are both financial services that can release the funds tied up in your unpaid invoices, involving a provider who agrees to advance money against outstanding debtor balances. However, factoring is not the same as invoice discounting.
Required:
Differentiate between factoring and invoice discounting.
(5 marks)
b) ATA Ghana Ltd is a company in Ghana engaged in the trading of commodities. The annual sales are GH¢24 million. The average age of debtors is one month, and the percentage of bad debts is 1%.
A new Marketing Director has been hired by the company to improve its sales. The new Marketing Director proposed that sales could be increased up to GH¢30 million if new customers were taken on. Taking on new customers will lengthen the average credit period to 2 months and increase bad debts to 1.5% of sales.
The Finance Manager provided that the variable cost is 70% of the selling price and the company’s cost of capital is 20%.
Required:
Advise whether the company should take on the new customers.
(10 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Credit Policy, Factoring, Invoice Discounting, Working Capital
- Level: Level 2
- Topic: Management of receivables and payables, Working Capital Management
- Series: MAY 2017