Explain about invoice discounting, Financial Management

Assignment Help:

Q. Explain about Invoice discounting?

Invoice discounting is a technique which is able to be used to raise finance against receivables.

Invoice discounting works as follows: A company issues an invoice to a customer as well as sends a copy invoice to the discount company which then makes a payment against the invoice and takes responsibility for collecting the debt from the customer. The amount of the payment will differ but is very rarely 100% of the invoice value. The balance of money unpaid is paid across to the selling company when the discount company has received full payment for the customer.

The arrangement has the effect of permitting the selling company to collect its debts in early so reducing the working capital requirement of the business and improving the cash flow.

The price that is paid for the service is typically set at a fixed percentage monthly rate for example 1% of the value of invoices discounted. Although the process operates "with recourse", companies will frequently find that they are only able to discount the invoices of customers with high credit ratings who are therefore reliable receivables. This means that not all invoices are able to be funded and the risk of bad debts remains. The extent to which companies may find that using invoice discounting does improve the cash flow is thus dependent upon the credit profile of customers and their bad debt record. The discounting is mainly advantageous (in cash flow terms) for companies which are selling to customers with high credit ratings and a good payment record.


Related Discussions:- Explain about invoice discounting

Estimating cash flows in valuation process, The first step in valuati...

The first step in valuation process is to estimate the cash flows that are expected to be received in the future. In debt securities, there are two types of possi

Explain monetary approach to exchange rate determination, Derive and illust...

Derive and illustrate the monetary approach to exchange rate determination. Answer: The monetary approach is related with the Chicago School of Economics.  It is relies on two

Evaluate the use of market multiples, The annual report and accounts for As...

The annual report and accounts for Astra Zeneca plc and Epistem Holdings plc and other relevant financial information are available in the ‘TMA 02 Resources folder' in the Assessme

#tFuture Value, You deposit $3,000 in a back account that pays 10% annually...

You deposit $3,000 in a back account that pays 10% annually, how much would you have im your account after 5 years?

#WACC, Filer Manufacturing has 8.9 million shares of common stock outstandi...

Filer Manufacturing has 8.9 million shares of common stock outstanding. The current share price is $59, and the book value per share is $4. Filer Manufacturing also has two bond is

Define relationship between bond''s market price and its ytm, What is the r...

What is the relationship between a bond's market price and its promised yield to maturity?  Explain. A bond's market price relies on its yield to maturity abbreviated as YTM.  Wh

Payback period, Can some one tell me how to calculate payback period and wh...

Can some one tell me how to calculate payback period and which formula i used to calculated payback period? Explain!!!!

Operating leverage, Operating Leverage Operating leverage define the de...

Operating Leverage Operating leverage define the degree to which an organization cost of operation is fixed as opposed to variable. Therefore, it is a measure of how much a fir

Explain about the financial risk, Explain about the Financial risk fina...

Explain about the Financial risk financial risk are presumed to be constant, changing cost of each type of capital, j, over time must be affected only by changes in the supply

Types of investment strategy of hedge funds, Various Types of Strategies ...

Various Types of Strategies Different types of hedge fund strategies are discussed as follows: Relative Value of Strategies: Relative value strategies are also known as no

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd