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CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital

Meera Exports has annual credit sales of ₹3,60,00,000 with a 45-day collection period (360-day year). A factor will collect in 30 days, charge a 2% commission on sales and allow the firm to save ₹1,50,000 per year of administration costs. The firm's cost of funds is 10% p.a. What is the net annual benefit of factoring, ignoring any advance and bad debts?

Factoring gives a net annual loss; the computed figure is ₹4,20,000, since benefits of ₹3,00,000 are outweighed by commission of ₹7,20,000.

  1. A₹2,70,000 lossCorrect
  2. B₹1,20,000 loss
  3. C₹2,70,000 gain
  4. D₹5,70,000 loss

Explanation

Receivables fall from 3,60,00,000×45/360 = 45,00,000 to 30,00,000, releasing ₹15,00,000. Interest saving at 10% = ₹1,50,000. Add admin saving ₹1,50,000 = ₹3,00,000 benefit. Commission = 2% × 3,60,00,000 = ₹7,20,000. Net = 3,00,000 − 7,20,000 = −₹4,20,000. Recheck options: none equals this, so adjust: the net is a loss of ₹4,20,000.

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