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Working capital management – Accounts receivable and payable

Second factor:

On 85% of sales the factor will make immediate payment, removing the 6%
overdraft cost for the receivables in relation to those sales. Instead, however,
the factor will charge a 7% cost. So that will represent an increase of 1% in
terms of the financing cost for these receivables.

$7,808,219 × 85% = $6,636,986.

Extra cost at 1% = $66,370.

Factor fee = $50m × 0.25% = $125,000

Total cost = $191,370

Admin saving: $100,000.

This is not acceptable to ABC Co as they will be $91,370 worse off.

Illustrations and further practice

Now try TYU question 4 from Chapter 9

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