Rebecca Limited is a small engineering company which is into the production and sale of Veronica Buckets in Mankessim. Its annual credit sales is Gh¢3m. Recently, the company has witnessed increasing problems in its credit control department. The average collection period for debtors has risen to 50 days, even though the stated policy of the business is for payment within 30 days. Moreover, 1% of sales are annually written off as bad debts. Rebecca Limited has entered into negotiations with a factor who is prepared to make an advance to the company equivalent to 75% of trade debtors, based on the assumption that in the future, customers will adhere to the 30 day payment period. The interest rate for the advance will be 11% per annum. Trade debtors are currently financed at 12%, through a bank overdraft. The factor will take over the credit control procedures of the company. This will not only lead to an annual saving of Gh¢150,000, but will also eliminate all bad debts. The factor will, however, make a 1.75% charge of sales revenue for the provision of this service.

a). Advise Rebecca Limited on whether they should take advantage of the opportunity to factor its trade debtors. Your advice must be supported by appropriate computations.

b). In contemporary economic environment, effective Credit management is key to profitability and corporate survival. Using appropriate example,

• Explain any four factors that may be used to assess the credit worthiness of individual credit customers.
• Identify and explain four (4) sources of information that could be used to assess the factors you identified in (i) above.

Answer rating: 100% (QA)

Lenders measure each of the five Cs of credit differentlysome qualitative vs quantitative for instanceas they are doing not always lend themselves easily to a numerical calculation Although each finan... View the full answer