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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Sharma Ltd. has annual credit sales of Rs 7,20,000 (360-day year). It factors its receivables with recourse-free factoring: the factor advances 80% of invoice value, charges commission of 2% of invoice value, and interest at 15% p.a. on the advance, for an average collection period of 60 days. Interest is deducted upfront. What is the net cash the company receives per year on the advance basis, i.e. total advances less commission and interest, if sales are uniformly spread and the factor funds the full period for all invoices (compute on annual sales)?

The net cash is Rs 5,47,200. The advance is 80% of Rs 7,20,000, which is Rs 5,76,000. Commission of 2% is Rs 14,400, and interest at 15% for 60 days on the advance is Rs 14,400. Deducting both from the advance gives Rs 5,47,200.

  1. ARs 5,76,000 - Rs 14,400 - Rs 14,400 = Rs 5,47,200Correct
  2. BRs 5,76,000 - Rs 14,400 - Rs 21,600 = Rs 5,40,000
  3. CRs 7,20,000 - Rs 14,400 - Rs 14,400 = Rs 6,91,200
  4. DRs 5,76,000 - Rs 14,400 - Rs 8,640 = Rs 5,52,960

Explanation

Advance = 80% x 7,20,000 = 5,76,000. Commission = 2% x 7,20,000 = 14,400. Interest = 5,76,000 x 15% x 60/360 = 14,400. Net = 5,76,000 - 14,400 - 14,400 = 5,47,200. Option with 21,600 wrongly uses 90 days; option with 8,640 wrongly uses 36 days; the 7,20,000 option ignores the 80% advance.

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