A small graphic-design business has sent a $7 500 invoice to a national retailer. Fig. 1 shows an invoice factoring option offered by a finance company. The...
Question 1 Report
A small graphic-design business has sent a $7 500 invoice to a national retailer. Fig. 1 shows an invoice factoring option offered by a finance company. The retailer is reliable but will pay in 75 days. The studio needs cash this week for specialist software and freelance employees. The owner is considering the option because the business has no retained profit available after moving to a new office. The finance company will collect the invoice from the retailer.
(a) Calculate the cash paid immediately to the studio. [2]
(b) State three reasons why the studio may need short-term finance. [3]
(c) Analyse whether invoice factoring is likely to be a suitable option for this studio. [5]
Answer Details
(a) Immediate cash is 85% of the invoice:
\[0.85\times$7500=$6375\]
Cash paid immediately = $6375 [2 marks].
(b) The studio may need short-term finance to buy specialist software [1], pay freelance employees [1], and bridge delayed customer payments [1]. Rent, utilities and materials are also valid short-term needs. [3 marks]
(c) Factoring provides $6375 immediately [1], allowing the studio to pay for software and freelancers rather than waiting 75 days for the retailer [1]. The factor collects the invoice payment, reducing administration [1]. However, the studio does not receive the full invoice value immediately and factoring involves a fee [1]. This reduces cash received and potentially profit, so the owner should compare the fee with the value of receiving cash now [1]. [5 marks]
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