Effective Working Capital (1 Viewer)

[hYperTrOphY]

The syllabus states that factoring is a strategy for improved working capital. However, factoring sacrifices your working capital for improved cash flow. So how can this be right?

 

[exa_boi87]

Ok, defining Net Working Capital as the difference between current liabilities and current assets we get the situation that in fact, factoring does improve working capital. Through the selling of acc's rec'd this in turn ensures that working capital isnt tied up while waiting for credit customers to pay.

A textbook response, my response would be that it does both. While improving cash flow, working capital is also improved. While it could be stated that cash itself is a short-term asset, the reason for factoring ones accounts recieveables would be to repay debts, meaning money would be used for expenses relatively quickly (short-term debts), reflecting on the working capital.

 

[hYperTrOphY]

I understand the purpose of factoring, but it doesnt technically improve working capital.

If you have $100 of current assets and $50 of current liabilities your working capital is $50 (100-50)

Lets say that $20 from your current assets were tied up in 'Accounts Receivables'. You factor $20 to a specialist factoring firm in exchange for $15 cash.
Therefore, while your current liabilities is still $50, you current assets is now $95.
New working capital = $45 (95-50)..

See what I mean?

 

[exa_boi87]

Yeah I see what you mean, my assumption would be that 15 dollars however is used to pay off current liabilities (as, *generally speaking*, income/sales are used to repay debts along with funding other ventures) .. really the only way it could possibly make sense as your calculations are correct.