Please forward this error screen to sharedip-10718057119. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries. However, in some other markets, such as the UK, invoice discounting is considered to be a accounts receivable journal entry pdf of factoring, involving the “assignment of receivables”, that is included in official factoring statistics.
It is therefore also not considered to be borrowing in the UK. In the UK the arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. In the UK, the main difference between factoring and invoice discounting is confidentiality. Scots law differs from that of the rest of the UK, in that notification to the account debtor is required for the assignment to take place. The arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. The factor’s overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment. Factoring is a method used by some firms to obtain cash.
The use of factoring to obtain the cash needed to accommodate a firm’s immediate cash needs will allow the firm to maintain a smaller ongoing cash balance. By reducing the size of its cash balances, more money is made available for investment in the firm’s growth. Debt factoring is also used as a financial instrument to provide better cash flow control especially if a company currently has a lot of accounts receivables with different credit terms to manage. Accordingly, factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with factoring the receivables. Therefore, the trade-off between the return the firm earns on investment in production and the cost of utilizing a factor is crucial in determining both the extent factoring is used and the quantity of cash the firm holds on hand. Many businesses have cash flow that varies.
It might be relatively large in one period, and relatively small in another period. Because of this, businesses find it necessary to both maintain a cash balance on hand, and to use such methods as factoring, in order to enable them to cover their short term cash needs in those periods in which these needs exceed the cash flow. Each business must then decide how much it wants to depend on factoring to cover short falls in cash, and how large a cash balance it wants to maintain in order to ensure it has enough cash on hand during periods of low cash flow. Generally, the variability in the cash flow will determine the size of the cash balance a business will tend to hold as well as the extent it may have to depend on such financial mechanisms as factoring. The length of time cash flow can remain at a below average level. If cash flow can decrease drastically, the business will find it needs large amounts of cash from either existing cash balances or from a factor to cover its obligations during this period of time.
As stated, the size of the cash balance the firm decides to hold is directly related to its unwillingness to pay the costs necessary to use a factor to finance its short term cash needs. The problem faced by the business in deciding the size of the cash balance it wants to maintain on hand is similar to the decision it faces when it decides how much physical inventory it should maintain. In this situation, the business must balance the cost of obtaining cash proceeds from a factor against the opportunity cost of the losing the Rate of Return it earns on investment within its business. Today factoring’s rationale still includes the financial task of advancing funds to smaller rapidly growing firms who sell to larger more credit-worthy organizations. While almost never taking possession of the goods sold, factors offer various combinations of money and supportive services when advancing funds. A second key service is the operation of the accounts receivable function. The services eliminate the need and cost for permanent skilled staff found within large firms.