swagmeister
Active Member
- Joined
- Oct 4, 2014
- Messages
- 524
- Gender
- Male
- HSC
- 2015
Heyo,
So I have been a little bit confused with what the HSC wants in terms of financial strategies - this question isn't really as relevant to the other KBFs because there are really just generic strategies, where as in finance it is for specific things (liquidity, growth, solvency...). Here is my question, after giving a bit of background:
Factoring refers to the selling of accounts receivable at a discount to a third party. It is listed as a cash flow (working capital) management strategy, and I get how it helps with cash flow, but can I use as a strategy for improving liquidity as well.
Liquidity refers to the ease at which an assets can be converted into cash to finance current liabilities.
Now, I thought factoring would improve liquidity - it will increase the amount of cash (the most liquid asset) and help the business to pay off their current liabilities, as otherwise it can take significant time to receive accounts receivable and the business may become illiquid depending on other current assets.
For example, the business may have an overdraft (current liability) as well as stock and account receivables left as current assets (assume they spent their all their cash on an investment or something and therefore have none). Stock can be sold or they could wait to receive accounts receivable however both of these options may take some time and factoring gives the business cash to repay their overdraft, which is part of financing current liabilities, thus factoring has assisted in terms of improving liquidity.
Anyways, even if I explained it poorly with my hypothetical example above, I did some research and everything I found (such as this site) suggested that factoring can be a very useful strategy to improve liquidity, however:
1) factoring won't improve the current ratio, it will make it worse (as the business will not gain the full amount of accounts receivable, thus red) so if you get a question stating 'how could they improve the current/liquidity ratio' it wouldn't be relevant
2) even if the question doesn't mention the ratio, it isn't under the liquidity strategies section of the syllabus (it comes under cash flow management strategies)
so if I used factoring in a HSC question which stated 'recommend ONE strategy to improve the liquidity of Business XYZ' does that mean that it would be impossible to get full marks for it? or are they OK with you using other financial strategies that are not explicitly stated, or are even compatible across the different financial objectives?
So I have been a little bit confused with what the HSC wants in terms of financial strategies - this question isn't really as relevant to the other KBFs because there are really just generic strategies, where as in finance it is for specific things (liquidity, growth, solvency...). Here is my question, after giving a bit of background:
Factoring refers to the selling of accounts receivable at a discount to a third party. It is listed as a cash flow (working capital) management strategy, and I get how it helps with cash flow, but can I use as a strategy for improving liquidity as well.
Liquidity refers to the ease at which an assets can be converted into cash to finance current liabilities.
Now, I thought factoring would improve liquidity - it will increase the amount of cash (the most liquid asset) and help the business to pay off their current liabilities, as otherwise it can take significant time to receive accounts receivable and the business may become illiquid depending on other current assets.
For example, the business may have an overdraft (current liability) as well as stock and account receivables left as current assets (assume they spent their all their cash on an investment or something and therefore have none). Stock can be sold or they could wait to receive accounts receivable however both of these options may take some time and factoring gives the business cash to repay their overdraft, which is part of financing current liabilities, thus factoring has assisted in terms of improving liquidity.
Anyways, even if I explained it poorly with my hypothetical example above, I did some research and everything I found (such as this site) suggested that factoring can be a very useful strategy to improve liquidity, however:
1) factoring won't improve the current ratio, it will make it worse (as the business will not gain the full amount of accounts receivable, thus red) so if you get a question stating 'how could they improve the current/liquidity ratio' it wouldn't be relevant
2) even if the question doesn't mention the ratio, it isn't under the liquidity strategies section of the syllabus (it comes under cash flow management strategies)
so if I used factoring in a HSC question which stated 'recommend ONE strategy to improve the liquidity of Business XYZ' does that mean that it would be impossible to get full marks for it? or are they OK with you using other financial strategies that are not explicitly stated, or are even compatible across the different financial objectives?