The Financial Status Of The Firm Essay Example | Topics and Well Written Essays - 500 words

The Financial Status Of The Firm - Essay Example If a company enters in a factoring of receivables it must realize that the discount given to the buyer at the time of the sales constitutes the cost or interest rate being charged on the sale of the account receivables. If the customer defaults on the payment of the account receivable the company that loses are the buyer in the factoring agreement. There is a correlation between sales, cash, and account receivables. All sales end up being either cash or credit sales. A credit sale creates an account receivable for the company. The industry standard is that account receivables should convert to cash within 30 days. If it takes longer to collect the account receivable the cash flow of the company position of the company could be affected. Company A has to revise its credit sales policy. Delinquency in collecting account receivables could be one of the reasons the company is facing cash flow problems. The firm should either discontinue credit sales or change the credit policy to 15 days credit. The management team of the firm does not want to incur more debt. This eliminates the solution of issuing bonds which constitutes a long-term debt. I highly recommend the company apply for a credit line. A credit line does not constitute any debt if it is not used. This solution would provide the company with instant purchasing power in case the company reaches the cero cash point. It is important to remember that cero cash means that the company becomes insolvent and would have to shut down its operations.