Question: Annual sales 1.2 cr. Factoring commission 2%. Factor advances 80% of receivables @ 10% pa. Average collection period 50 days. Bad debts 2% of credit sales. Savings in admin cost 50k.
Doubt: 1) Bad debt should have been calculated on 80% of credit sales?
2) While calculating factoring cost (refer image) how come net *annual* cost is being divided by *50 day* debtor?
1) bad debt will be on the entire receivables…it dkesnt matter how much has been advanced…
How much has been advanced is used to calculate the interest cost
2) they are converting periodic into annual using unitary method