Meaning of Financial Management Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. The origin of factoring lies in overseas trade among nations. Both scenarios would approximately result in the same answer, therefore let us assume Finance House obtained funding from a third party and the rate on the funding is 12% per annum. As indicated, the business must balance the of losing a return on the cash that it could otherwise invest, against the costs associated with the use of factoring. The factoring transaction is often structured as a purchase of a , namely the.
The first step is to identify the various elements of the transaction from the perspective of Finance House which need to be accounted for. Thus, the factor is an intermediary between the supplier and customers who performs financing and debt collection services. Bill of Exchange or Promissory Note before it is due and credits the value of the bill after a discount charge to the customer's account. Repayment terms can vary depending on the amount involved. We work outside the bank, our approvals are based not on your ability to service debt, but on the strength of your sales and your clients. The dictionary defines a factor as an agent particularly a mercantile agent.
Typically, the process consists of an online application from a real estate agent, who signs a contract selling future commissions at a discount; the factoring company then wires the funds to the agent's bank account. The rate of discount in factoring ranges from 2 to 6 percent. Further accounting issues The debtors factoring example is notable for providing an example of a multiple element revenue transaction. Why Not Just Wait for My Customers to Pay? Receivables are funded in two parts. The client no longer carries factored receivable on his balance sheet, in effect, having converted them into cash. The reason is lack of professionalism, non-acceptance of change and developed expertise.
Rather than waiting for the due date, a company may quickly convert its receivables into cash by selling them to a factor for a fee which is usually a small percentage of the total value of the receivables being factored. The loss on sale of receivable is also increased by the amount of recourse liability. On maturity of the bill, the amount is collected from the drawer. Citation - Manufacturers' uses of Factoring? As a factor maintains extensive information records generally computerized about the financial standing and credit rating of individual customers and their track record of payments, he is able to advise its client on whether to extend credit to a buyer or not and if it is to be extended the amount of the credit and the period there-for. Different factors have different fee structures. However, the factor does not make the payment of all invoices immediately to the seller.
Invoice factoring is not a relevant financing option for companies because they generally do not have business or commercial clients, a necessary condition for factoring. It also retains an amount equal to 10% of the accounts receivable for probable adjustments against discounts, returns and allowances etc. Debt collection is done by the client who makes over payment of each invoice to the factor. Types of Factoring : Over a period of time, the factor world-over has devised different types of factoring services to suit the requirements of their clients. Some companies factor all of their invoices, while others factor only invoices for customers that take a longer time to pay. Steps Involved in Factoring: The steps involved in factoring are discussed below: Step I. Since the factor bears the risk of non-payment, commission or fees charged for the services in case of non-recourse factoring is higher than under the recourse factoring.
It commenced its operations from September 2001. The cash balance a business holds is essentially a. In addition to this fee, the factor may also retain a small percentage of receivables for probable adjustment for discounts, returns and allowances. Often, clients are given the privilege of overdrawing their account with the factor, or in effect, of borrowing on an unsecured basis, in addition to drawing against the proceeds of the factored accounts also, interest is normally credited by the factor on funds left with him. Factoring as a fact of business life was underway in prior to 1400, and it came to America with the Pilgrims, around 1620. Thus, maturity factoring consists of the sale of accounts receivables to a factor with no payment of advance funds at the time of sale. However, factoring provides many other advantages as well.
The three categories available are: Sale of goods, Rendering of a service, and Interest on use by others of entity assets. This specialised service of a factor assists clients to handle a far greater volume of business with confidence than would have been possible otherwise. Banks and other financial institutions can as well diversify in this area to increase their profitability. The factor uses his computer system to render the sales ledger administration services. Recourse factoring means that the factoring client ultimately takes responsibility for payment of an invoice if the factor cannot collect payment from the customer, or debtor.
Nature of Factoring : Factoring is a method by which a businessman can obtain cash for invoices he sends to his customers in respect of supply of goods and services to them. Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. When seeking a factor for your business, look for a company that has years of financial experience, offers flexible funding options and is familiar with your industry. With the development of larger firms who built their own sales forces, , and knowledge of the financial strength of their customers, the needs for factoring services were reshaped and the industry became more specialized. On the basis of credit worthiness of the firm, a monetary limit is fixed up to which trade credit provided by the client will be taken over by the factor without recourse to the client. The use of this material is free for learning and education purpose.