Arora Industries (AIL) has an annual turnover of Rs.700 lakhs.

Credit sales normally account for 90% of turnover. The company has a credit policy of 2/10 net 60. On an average 45% of the customers pay on the tenth invoice date. The bad debt losses, in the past, have averaged around 1% of the turnover generated through credit sales. Easy money Factors, a subsidiary of Janata bank (which provides cash credit facilities to Arora Industries Limited) has approached the Finance Manager of AIL with a proposal to undertake the management of receivables. The details of the proposal are as under. Facility A . B. C. Recourse Factoring NonRecourse Factoring 3.5% 20% 19% p.a.

Commission (payable 1.5% upfront) Reserve 25% Interest on Advance 20% p.a. (Payable upfront)

Easy Money Factors also agree to a collection period of 50 days. The finance Manager reckons that the company can increase its annual sales by at least Rs.50 lakhs if the sales executives who are responsible for collection efforts are relieved from such responsibilities. The gross margin earned by the company on its sales average around 20%. The Finance Manager also estimates that the company can save a minimum of Rs.5 Lakhs per annum

the company has been plagued by a abed debt problem averaging 2 percent of credit sales for the past several years. The company offers its dealers a 3 percent discount on cash and carry transactions. The costs associated with administration total Rs.incurred on administrative overheads if the sales-ledger administration and credit monitoring activities are hived off. it finances using own funds whose national cost is estimated at 24 percent p. The remaining half.a. On an average 50% of the receivables are paid at the end of ten days thus availing the 2% discount.a. has approached Precision instruments with a factoring proposal.a. Approximately 10% of the dealers representing 10 percent of total sales opt for the cash and carry offer. the cost of own funds for the company is around 30% p. The company has hitherto been financing75% of its receivables through short-term bank finance at a cost of 21% p.a. The rest of the receivables from Banco India at a cost of 22 percent P.8 lakhs. a factoring company. is factoring financially more desirable than in-house management of receivables for AIL? Should AIL opt for non-recourse factoring? Show all calculations. . Imfacs. Its credit terms ate 2/10 net 45. You may assume 360 days a year. Precision Instruments is a unit manufacturing clinical instruments in the Then District of Maharashtra.

assuming 360 days to a year and ignoring taxes.800 lakhs. Assuming that all figures mentioned hold good for the coming and if projected sales for the same year is Rs.450 lakhs and its variable cost to sales ratio is 0.5% p. its sales turnover for the financial year 2008-2009 has been Rs.75. payable in advance Sunder industries sells goods on terms 2/10.The details are given below: Type of contract Interest on advances Factoring commission 3. Advance Type 22. Non-recourse. on average over the last 3 years. net 45. The bad debts to sales ratio has been around 0.a. would you recommend that Precision Instruments go in for a factoring arrangement? Your recommendation must be based on a cost benefit analysis. .5% of the face value of Factor Reseve factored receivables 20% (percentage applied on receivables net of Average Maturity commission payable) period 30 days The credit administration costs can be totally avoided when the receivables are factored.a.5 percent p.

a pre-tax basis. Assume that the variable cost to sales ratio and the bad debts to sales percentage will remain unchanged.50 Lakhs. and the notional cost of own funds is 22% p. He has obtained the following information from Hind Bank Factors: Type of Contract Advance NonRecourse Factoring Interest Rate on advances 20% p. (payable in advance) Commission for other services 3% of the face value of the factored (Including credit protection) receivables Factor Reserve 20 %( Percentage applied on Receivables net of commission Payable) Average Maturity Period 36 days Hitherto the company has been financing its book debts as follows: Cash credit from Hind Bank 50% Own Funds 50% The interest cost of cash credit is 18% p. The projected credit sales turnover for 1991-92 is Rs.a. It is estimated that the .a. An analysis of the debtors ledger of the company reveals that 40% of eh customers avail of the cash discount and pay on the 10th day while the other 60% pay (on an average) after 60 days from the date of sale.The finance manager of the company is contemplating the possibility of factoring the receivables of the company on a nonrecourse basis.a.

company will save about Rs. Based on a cost-benefit analysis. Ignore taxes. The net profit margin on sales is estimated to be 5 Percent. . Assume 360 days to a year. • The client must pay a commission of 1.A. The terms and conditions of the proposal are as follows: • The accounts will be purchased without recourse • The collection will be remitted to the client on the last day of the average maturity period or on the date of collecting the account whichever is earlier. will you recommend factoring? Show all calculations that are necessary to support your recommendation.a. The average maturity period will be determined with reference to the recent ledger experience of the client. on credit administration expenditure by opting for full factoring.5% per annum for the collection and book-keeping functions rendered by the factor and a del-credere commission of 1% per annum for the credit risk borne by the factor. At your request. Growell Pesticides is evaluating a factoring proposal submitted by Prompt Factoring Services. • The client can borrow upto 75% of the uncollected and notdue receivables at an interest rate of 17% p.3 Lakhs P. the finance manager of Growell Pesticides has provided the following additional information: • The projected sales turnover of the next year is 720 lakhs of which 80% will be credit sales.

• The sales executives who are also responsible for expediting collections spend about 30% of their time on collection efforts. Assume that the company will prefer an advance factoring arrangement.a.12.5 percent of the annual credit sales for the last two years. the potential sales forgone by the company is estimated to be Rs. 000 per annum as the avoidable administrative costs associated with the collection of the accounts. In addition.60 lakhs per annum. • Since the firm has been classified under Health Code 1 of the RBI classification it can borrow upto 75% of its receivables from a commercial bank at an interest rate of 16% p. . monitoring. Based on the financial analysis would you recommend factoring as an alternative to in-house management of receivables? Show all calculations.1. net 45. If the receivables are factored. and collection of receivables.000 per annum by way of the salaries paid to three clerks and one accountant who look after the accounting. it has been found that 30% of the customers pay on or before the tenth day and the remaining 70% pay 50 days after their purchases. • The loss on account of bad debts has been around 1.• The credit terms are 2/10. the accountant and the three • Clerks can be transferred to the expense accounting wing of the finance department which is presently under-staffed. On account of this. 08. • The firm incurs an expenditure of Rs. Based on the recent ledger experience. the finance manager estimates an expenditure of Rs.