Factoring: Alternative Model of Financing

Liquidity is important for any firm as it is an assessment of the ability to pay its' liabilities in the short term. There are two main liquidity ratios: the current and the quick ratio. The current ratios divides the current assets by the current liabilities to assess how many times the current assets can pay the current liabilities (Elliott and Elliott, 2011). Traditional ratios are usually in the region of 1.5, but this may vary depending on the industry and nature of the business (Elliott and Elliott, 2011). The current ratio is shown in table 1.

One determinant of a company’s debt capacity is the liquidity of its assets. An asset is liquid if it can be readily converted to cash, while a liability is liquid if it must be repaid in the near future. Liquidity is the company’s working capital, current ration and acid-test ration. The components of Liquidity are Working Capital, Current Ratio and Acid Test Ratio.

Although the company’s liquidity ratios have dropped their ratios are still outperforming their RMA industry average by 15%. The decrease in the company’s liquidity ratios is the result of their current liabilities increasing 6.5% from fiscal year 2014 and their current assets only increasing 0.7% from fiscal year 2014. The company saw a decrease in cash and equivalents, accounts receivable, and income tax receivable in 2015. While also increasing accounts payable, accrued expenses, and deferred revenue and other liabilities. The combination of the movement in these accounts result in lower liquidity ratios for fiscal year 2015.

The liquidity ratios of the firm are slightly below the industry averages. This is due to inventory and accounts receivable making up a significantly larger portion of the current assets than cash and marketable securities. This may be indicative of a problem with inventory management and/or collection on accounts.

Liquidity ratio. The firm’s liquidity shows a downward trend through time. The current ratio is decreasing because the growth in current liabilities outpaces the growth of current assets. The quick ratio is also declining but not as fast as the current ratio. From 1991 to 1992, it only decreased 0.35 units while the current ratio decreased 0.93 units. Looking at the common size balance sheet, we also see that the percentage of inventory is growing from 33% to 48% indicating Mark X could not convert its inventory to cash.

Liquidity is a financial term used to determine the ability of a company to pay off its short-term debts, which will be due within the next year or in an operating cycle. In another word, liquidity is a very important indicator to evaluate a company’s financial health. Liquidity ratio shows a comparison between the most liquid assets and short-term obligations of a company. A higher liquidity expresses that the company has not only a better ability to pay off its short-term debts but also a greater amount of cash for an unexpected needs. In another word, when a company has a low liquidity, the company may face a risk to pay its short-term debt and struggle to fund its long-term operation. The current ratio is one of the most common and useful terms used to measure the liquidity of a company. It suggests the capability of a company to pay back its liabilities with its assets. The current ratio is computed by dividing current assets by current liabilities. According to a financial

The liquidity of firm can be measured by computing certain ratio’s such as current ratio and acid ratio. For measuring Target Corporation’s 2014 liquidity; the firm’s current ratio and the acid ratio is computed. The company’s current ratio is 0.91 times which is computed by comparing current asset ($11, 573,000) with current liabilities ($12,777, 000) of the year 2014 (TGT Company Financial, n.d). The firm’s acid ratio is 0.26 times which is computed by deducting inventory ($8,278,000) from current assets. The inventory is deducted from current assets because the company has not received any money for the unfinished good or from unsold inventory worth ($8,278,000). To analyze the Target Corporation’s liquidity trend in 2014; the current ratio and acid ratio of 2014 is compared with the 2015’s ratios. In 2015, the firm’s current ratio was 1.20 times and the acid ratio was 0.45 times. These liquidity ratios reflect that the firm’s liquidity was better in 2015 than 2014. (See Table 1).

Liquidity represents a company’s ability to pay its short-term obligations. In the following schedule is the calculation of the ratios that are indicators of the liquidity position of a company.

Liquidity is an important factor in financial statement analysis since an entity that can not meet its short term obligations may be forced into liquidation. The focus of this aspect of analysis is on working capital, or some computer of working capital.

The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity

Liquidity ratios measure the ability of a firm to meet its short-term obligations. A company that is not able

Factoring is increasing volume and scope in the financial industry, and its many benefits to the industry are its economic

Thus, factoring is a method of financing whereby a company sells its trade debts at a discount to the financial institution. In other words, factoring is a continuous arrangement between the financial institution and a company which sells goods and services to trade the customer on credit. As per this arrangement, the factor purchase the client’s trade debts including account receivables either with or without recourse to the client, and thus, exercise control over credit extended to the customers and administer the sales ledger of his client. The client is immediately paid 80percent of the trade debts taken over and when the trade customers repay their dues, the factor will make the remaining 20 percent payment. To put in layman’s language, a factor is an agent who collects the dues of his client for a certain.

The economic upsets of 2008-2009 proved that exotic transactions such as collateralized debt obligations and gambling on derivatives only resulted in the disappearance of capital across the world. It remains that Factoring is a simple and easy to understand process based on a practice that has been around for thousands of years. It is expected that this financial service will continue to grow because it is an effective and sustainable way for companies to get cash injections with which to operate their business.

This article deals with two novel financial services availed by the organization for working capital management, namely Factoring and Forfaiting. While these services are commonly used in many foreign countries, in spite of its huge advantages they are less popular and less in vogue in India. It is nearly impossible for any producer, manufacturer and service provider to sell the goods and services without offering credit though credit sales have certain inherent risks like risks of bad debts and other incidental and consequential risks. Factoring and Forfaiting offers best solution for these problems. Factoring involves the conversion of credit bills into cash and the risks associated with it are borne by the factoring agents. The unique feature of Factoring Agencies is offering services in one package by financing inventories and receivables thus helping the organization to unlock the money in working capital. Factoring is also called “Invoice Discounting” or “Receivables Discounting” which can be with recourse or without recourse. The discounting rates vary and cover loss of interest,