Q.1 Delhi Ltd Manufactures & sells good on credit. It Current Annual Sales amount Rs.900 Lakhs.

The Credit Terms are 45 Days

Currently the company is bearing Bad debts loss of 2% of total credit sales & cost of collection of Debtors goes upto Rs.1.5 Lak
Company is in Financial Problems due to blockage of funds. They had received the following two offers from the Factoring age
Offer from Firm A
Funding @ 90% of Debtors
Baddebts will be beared by them at the commission of 1% & Finance Charges will be 12% p.a. of Funds. Assume 360 Days in a

If Bank Finance is availbale @14% Interest, Should the firm avail Factoring Finance .
Amt in Lakhs
Debtors. 112.5 Steps : 1
Less: Factoring Comm @ 1% 1.125 Calculate the Amount Available for Funding
Factoring Reserve @ 10% 11.25
Amount Available for Advance 100.125 Step:2.
Calculate the Net Effective Cost of Factoring
Interest on Advances 1.5019 (Cost of Factoring - Savings in Costs)
(100.125 Lakhs x 12% x 45/360)
Net Effective Cost = Net Cost / NET funding Amount *
Net Amount of Advance 98.6231

Annual Cost of Factoring

Comission (1.125*360/45) 9.00
Annual Interest 12.015
(1.5019*360/45)
(a) 21.02

Savings in Cost
Baddebts (900*1%) 9.00
1.50
(b) 10.50

Net Cost of Factoring (a-b) 10.52

Effective Cost of factoring 11%

(1.52/98.6231*100)

Bank Int @ 14% 14%

hs. The Credit Terms are 45 Days & Total Sales is on Credit.
n of Debtors goes upto Rs.1.5 Lakhs p.a
wo offers from the Factoring agency

of Funds. Assume 360 Days in a year

t Available for Funding

ective Cost of Factoring

avings in Costs)

Net Cost / NET funding Amount *100

Q.1 Delhi Ltd Manufactures & sells good on credit. It Current Annual Sales amount Rs.900 Lakhs. The Credit Terms are 45 Days
Currently the company is bearing Bad debts loss of 1% of total credit sales & cost of collection of Debtors goes upto Rs.1.5 Lak
Company is in Financial Problems due to blockage of funds. They had received the following two offers:
Offer from Firm A- Factor Agent
Funding @ 90% of Debtors
Baddebts will be beared by them at the commission of 1% & Finance Charges will be 12% p.a. of Funds. Assume 360 Days in a

If Bank Finance is availbale @14% Interest, Should the firm avail Factoring Finance .

Steps : 1
Calculate the Amount Available for Funding
Particulars (Rs. In Lakhs)
Debtors (Total Cr Sales x Credit Period/ 360 Days) 112.5 (900 * 45/360)
Less: Factoring Comm @ 1% 1.125 (1% of Debtors)
Less: Factoring Reserve @ 10% 11.25 (10% of Debtors)

Amount Available for Advance (a) 100.125

Interest Charges @12% p.a (b) 1.501875

(100.125 x 12% x 45/360)

Net Amount Availble for Funding (a-b) 98.623125

Step:2.
Calculate the Net Effective Cost of Factoring (Yearly Basis)
(Cost of Factoring - Savings in Costs)
Total Cost of Factoring Amt in Lakhs
Comission (900*1%) 9.00
Yearly Interest
(1.501875 x360/45) 12.02
(a) 21.02
Saving in Cost
Bad Debts Saved (900*1%) 9.00
Cost of Collection (Given ) 1.50
(b) 10.50

Net Cost of Factoring (A-B) 10.52

Step:3
Net Effective Cost = Net Cost / NET funding Amount *100
(Step 2 / Step 1 x 100)
Effective Cost of Factoring 10.666869459
(10.52/98.623125*100)
 10.67%

Bank Interest Rate 14%

Decision >> GO with Firm A Offer because its cost is lesser than bank Rate.
s. The Credit Terms are 45 Days & Total Sales is on Credit.
of Debtors goes upto Rs.1.5 Lakhs p.a

f Funds. Assume 360 Days in a year

Debtors - Fact Comm- Fact Reserve

Turn over Credit

Month In Lakhs Days
April 100 45
May 100 45
June 100 45
July 100 45
August 100 45
September 100 45
October 100 45
November 100 45
December 100 45
January 100 45
February 100 45
March 100 45
 A LTD
Total Sales (80 % on Credit) 500 Crores calculation for offer A
Credit Terms - 90 Days Step.1 Amount Availble For Funding
Bad Debts 1.5% on Sales PARTICULARS
Cost of Sales Administration 300000 p.a Debtors
Cost of Collection 200000 p.a (500*80%*90/365)
Less: Factor Commision @2%
Less: Reserve @ 15%
Offer From Factor Firm X 85 % Funding Amount Avail for Funding
Comm- 2%
Interest Charges -18% p.a Interest @ 18% p.a
(81.86301*18%*90/365)
If Bank Finance is avaibable at 15% p.a
Will you go for Factoring or not. Net Amount Avail for Funding (A)

Step.2
Calculate the Net Effective Cost of Factoring (Yearly Basis)

PARTICULARS
Factoring Cost
Commision @ 2%
(500*80%*2%)
Interest
(3.6333721*365/90)
(a)
Savings
Baddebts (500*80%*1.5%)
Cost of Sales Administration
Cost of Collection
(b)
Total Effective Cost (a-b)

Effective cost of Factoring

Bank Rate
ffer A

Rs. In Lakhs
98.63013699

1.97260274
14.79452055
81.8630137

3.633372115

78.22964158

ctoring (Yearly Basis)

Rs. In Lakhs

8.00

14.74

22.74

6.00
3.00
2.00
11.00
11.74

15.00114564

15 Select This
Delhi Ltd Manufactures & sells good on credit. It Current Annual Sales amount Rs.900 Lakhs. The Credit Terms are 45 Days &sa
Total Sales is on Credit. Currently the company is bearing Bad debts loss of 2% of total credit Sales
Company is in Financial Problems due to blockage of funds. They had received the following two offers from the Factoring age
Offer from Firm A
Funding @ 90% of Debtors
Bad debts will be beared by them at the commission of 1% & Finance Charges will be 2% of Funds
Offer from Firm B
Funding @ 90% of Debtors
Bad debts will be beared by them at the commission of 0.75% & Finance Charges will be 2.25 % of Funds
Advice the Company which offer should be accepted

Offer from Firm A

Funds availbe for Finance
Debtors 110.9589
(900 *45/365)
Less: Factoring Comm @ 1% 1.109589
Less: Reserve @ 10@% 11.09589
Amount Avail for Funding 98.75342

Less: Int @ 2% 0.243502

(98.75342*45/365)
Funds Available for Finance 98.50992

Net Cost of Factoring (Yearly Basis)

Factor Cost
Comm (900 x 1%) 9.00
Interest(98.75342 *2 %) 1.98
10.98
Savings in Cost
Admin Cost of Coll. 2.50
baddebts (900 * 2%) 18.00
20.50

Net Savings -9.52

Offer from B Should be Selected

ount Rs.900 Lakhs. The Credit Terms are 45 Days &sales & cost of collection of Debtors goes up to Rs.2.50 Lakhs p.a
f 2% of total credit Sales
ived the following two offers from the Factoring agency

ges will be 2% of Funds

harges will be 2.25 % of Funds

Offer from Firm B

Funds availbe for Finance
Debtors 110.9589
(900 *45/365)
Less: Factoring Comm @ 0.75% 0.832192
Less: Reserve @ 10@% 11.09589
Amount Avail for Funding 99.03082

Less: Int @ 2.25% 0.274709

(99.03082*2.25%*45/365)
Funds Available for Finance 98.75611

Net Cost of Factoring (Yearly Basis)

Factor Cost
Comm (.832192*365/45) 6.75
Interest(.274709*365/45) 2.23
8.98
Savings in Cost
Admin Cost of Coll. 2.50
baddebts 18.00
20.50

Net Savings -11.52

B Should be Selected
Reliance Ltd.
Present Situation
Total Sales 200 Lakhs
Cash Sales 20% EFFECTIVE Cost of Factoring
Credit Terms 80 Days
Bad Debts 1% Bank Rate
Cost of Collection' 2.4Lakhs
GO WITH BANK
Offer from Factor
Comm 2% Step -1 30.0324
Funding After 10% Reserve @ Interest of 18% P.A.
Step.-2 4.83292
Assume 360 Days in a year
Step-3 16.09235
Bank Finance is avaible @ 15% Interest.
 16.09

15.00

WITH BANK

Comm- 200*80%*2% 3.20

Interest 5.63
8.83

Badddebts (200*80%*1%) 1.60

2.40
4.00

4.83