- 5 Marks
Question
The management of COM is seeking advice from the finance team on whether or not to accept the proposed trade receivable factoring arrangement. The management is interested in knowing whether the factoring arrangement will benefit the company in totality.
Required:
You are the Financial Controller, and the CFO has assigned you the responsibility to determine the net benefit of the factoring financing arrangement. Prepare a brief presentation on the net benefit of the proposed factoring arrangement to be submitted to the CFO.
Answer
Analysis of Proposed Factoring Arrangement
The following data is used to assess the net benefit of factoring:
- Credit Sales: GH¢1.9 billion
- Trade Receivables (90 days credit): GH¢468.49 million
- Trade Receivables under factoring (60 days credit): GH¢312.33 million
Present Cost of COM Managing Receivables:
| Cost Item | Amount (GH¢) |
|---|---|
| Interest cost on loan @ 20% (on GH¢468.49m) | GH¢93.70 million |
| Administration Costs | GH¢24 million |
| Total Cost | GH¢117.70 million |
Costs of Factoring:
| Cost Item | Amount (GH¢) |
|---|---|
| Finance cost (80% Finance @ 18%) | GH¢44.98 million |
| Finance cost (Remaining 20% @ 20%) | GH¢12.49 million |
| Commission on advance finance @ 1% | GH¢2.50 million |
| Receivable management fees @ 1.5% of turnover | GH¢28.50 million |
| Total Cost | GH¢88.47 million |
Net Gain/Cost Savings:
- Net savings from factoring: GH¢29.23 million
Conclusion:
Based on the analysis, the factoring arrangement would result in a net cost saving of GH¢29.23 million. Therefore, it is recommended that COM accepts the factoring arrangement to enhance its liquidity and reduce finance costs.
- Tags: Factoring, Finance Costs, Financing Options, Liquidity, Trade receivables
- Level: Level 3
- Topic: Sources of Finance
- Uploader: Dotse