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

Find out the future value of annuity at the end of five year, Goral is requ...

Goral is required to pay five equal annual payments of Rs. 10,000 each in his deposit account that pays 10% interest per year. Find out the future value of annuity at the end of fi

Allocation head for revenue expenditure, Q. Allocation head for Revenue Exp...

Q. Allocation head for Revenue Expenditure? All revenue expenditure is recorded in revenue allocation registers by various heads of accounts classification, The expenditure on

Compare diversifiable and nondiversifiable risk, Compare diversifiable and ...

Compare diversifiable and nondiversifiable risk. Which do you think is more important to financial managers in business firms? Diversifiable risk is able to be dealt with by of

Non-interest rate indexes, Generally, an interest rate or an interest...

Generally, an interest rate or an interest rate index is used as a reference rate for However, through financial engineering, issuers have been able to construct

Define the common pattern of cash flows, What is the common pattern of cash...

What is the common pattern of cash flows for a share of preferred stock? How does the market define the value of a share of preferred stock, specified these promised cash flows?

What is redeemable debt, What is Redeemable debt Company will have to...

What is Redeemable debt Company will have to re-pay the debt at redemption date or between the two redemption dates (i.e. 20X5/20X9, means debt can be redeemed any time betwe

Enumerate the cash flow statement analysis, Cash flow statement analysis ...

Cash flow statement analysis Cash flow statement is a primary financial statement and shows cash generating ability of the organisation. Cash generated from operations can b

Steps, how control the steps

how control the steps

Explain the effect of foreigners’ portfolio investments, As the early 1980s...

As the early 1980s, foreign portfolio investors have purchased an important portion of U.S. treasury bond issues. Discuss the short-term and long-term influences of foreigners’ por

Financial audit, To begin this topic, the case of China Sky describes the a...

To begin this topic, the case of China Sky describes the appointment of a special auditor  in the organization that is also a rule in the procedures of Singapore Exchange (SGX). Th

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