College of Business and Economics

School of Accountancy
Department of Accountancy

Learning Guide: WORKING CAPITAL

Financial Management 200

FMA200

Ms Mariska McKenzie

Mr Thabiso Madiba

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Section A: Learning Outcomes
Explain the terms working capital, net working capital, working capital policy
and working capital management.

Calculate the working capital cycle in days.

Describe the impact of inflation on working capital.

Outline the various working capital policies and their respective impact on risk
and return.

Outline the various working capital financing policies and their respective impact
on risk and return.

Calculate working capital funding requirements using the percentage of sales

method.

Identify the factors that will influence expected sales

Explain credit policy, creditworthiness, collection policy and cash discounts

Calculate the impact of a change in credit policy on profitability and net

present value

Describe the facets of accounts receivable management

Describe inventory management

Calculate the economic order quantity and optimal level of safety

inventory

Outline inventory control systems, including just-in-time

Describe the reasons for holding cash and present a cash budget

Identify the types of short-term finance

Determine the cost of trade credit in terms of foregone discounts

Explain factoring and invoice discounting

Section B: FREQUENCY OF TESTING & EXAM POSSIBILITIES

Working Capital is a basis for many other topics such capital budgeting to be done in
rd year
3 , free cash flow valuations done in CTA. The understanding of this topic is
crucial and it is tested very often either on its own or as part of other topics.
Section C: LITERATURE
th
Correia C et al, Financial Management 9 Edition Chapter 11 and 12

You may be required to know important formulas that are used in these chapters.
No formula sheets will be distributed

Section D: OBJECTIVE TEST

Objective tests will be discussed during the lecture.

Section E: TUTORIAL QUESTIONS

Tutorial Question 22 Marks
Part A
Tall-Mart is the largest retail store in South Africa,and is larger than any other retail chain in
Africa. Currently Tall-Mart operates over 4,150 retail facilities in South Africa. The company
is also the dominant retail store in Botswana, Zimbabwe, Namibia, Nigeria and Tanzania.
However, Tall-Mart is not listed on the Johannesburg Stock Exchange (JSE).

Tall-Mart has been thinking of completely taking over the entire retail market. Their strategy
is to grow through acquisitions. The board of directors identified another retail giant in South
Africa that would completely fit into the company’s strategy. The company identified was
Fatmart. Fatmart is a South African retail and wholesale distributor, with 283 stores in South
Africa and 25 stores elsewhere in Sub-Saharan Africa. Fatmart is listed on the JSE and
would indirectly give Tall-Mart access to liquidity if Fatmart was part of the group.

Company Liquidity
Tall-Mart’s retail stores and divisions sell wholesale to a number of customers as well as to the
public. Tall-Mart’s policies are implemented by the entire group. Tall-Mart’s liquidity ratios were
adverse in comparison to the industry. In order to improve their collection of debtors and
general liquidity, management considered changing the credit terms.
Currently Tall-Mart has credit terms of 3/15 net 30. Management considered changing the
terms to 8/8 net 40. It is expected that sales will increase by 250mil to 1,350mil. Tall-Mart has
always tried to maintain a gross profit margin of 40%. With the implementation of the new
policy, the gross profit margin would increase to 55% as a result of bulk discounts from
suppliers. Currently, 10% of customers buy on credit. With the new policy it is expected that
22% of clients will buy on credit. Management decided that with any additional cash, they
would invest in their money market account that would give a return of 8%.
On average, debtors currently pay within 22 days. It is expected that with the new policy,
debtors will pay on average within 19 days. On average, 10% of customers utilise the discount
currently. It is expected that by increasing the discount, 15% of customers will utilise the
discount. It is expected that with the new policy that 2% of customers will never pay the
company. Currently, 4% of credit customers are bad debts. Other Information:Ignore taxation.
Required:
Calculate the impact on profits that the change in credit policy will have (22)
Solution to be discussed during the tutorial.

Section F: ASSIGNMENTS
 No assignment is required for this topic.

Section G: PRE-CLASS PREPARATION

Please read the articles in Ulink

Section H: SELF-ASSESSMENT QUESTIONS

The question bank contains a pool of previous test and exam questions.

After you have studied this topic in detail, attempt the questions in the attached
question bank. You should do these questions before looking at the solution. Only after
you have done the questions properly, should you refer to the solution and mark your
answer.
QUESTION 1 (15 MARKS)

ThutoPele Ltd manages a group of quality independent schools in Gauteng, North West,
Mpumalanga and Limpopo. Currently, the school does not have credit sales because all fees are
settled upfront at the beginning of each year. This has resulted in the school only being able to
attract a small number of students due to the strict cash upfront payment policy.

As part of the school’s strategy to attract more students in order to increase fees by being more
attractive and inclusive, management is considering introducing additional payment terms. These
payment terms include offering credit to parents as a way to attract students whose parents
would not be able to pay the fees in full at the beginning of the year. Although the new credit
policy will expose ThutoPele to additional costs such as discounts and bad debts, management
believes that the increase in revenue will be far more than the cost of issuing credit. The
additional proposed payment methods are:
1. Settlement of fees through monthly payments payable in arrears
2. Settlement of fees through quarterly payments payable in advance

The proposed payment methods are expected to increase revenue and gross profit by
R1.4millon. Under the new proposed model total revenue is expected to be R8.6 million.
Management estimates the existing cash upfront payments will constitute 50% of the entity’s total
revenue while monthly payments in arrears will constitute 23% of total revenue. The credit policy
will be -5% discount for fees settled in advance, 2/20 net 40 for monthly payments payable in
arrears and no discount for quarterly payments payable in advance. ThutoPele will be able to
collect debtors in 40 days and the bad debt policy is 2% of credit sales.
The opportunity cost associated with an investment in working capital is 13%.

NOTE:
Round all calculations off to the nearest rand.
For calculation purposes, use 365 days in a year.

REQUIRED MARKS
Advise whether or not ThutoPele Ltd should implement the proposed
(a) credit policy. 14

Layout 1
Question 1 Suggested Solution
(15 Marks)
∆P = ∆G - ∆I - ∆B - ∆D
∆G: Change in Gross Profit
= R1 400 000 (1) (Increase) (1)
∆I: Change in the Cost of Carrying Debtors
= 0 – (8 600 000 * 23% (1) * 40/365 (1)) * 13% (1)
= R28 180 (Decrease) (1P)
∆B: Change in the Cost of Bad Debts
= 0 – (8 600 000 *23% (1) * 2% (1))
= R39 560 (Decrease) (1P)
∆D: Change in the Cost of Discounts
= 0 – (8 600 000 * 23% (1) * 2% (1))
= R39 560 (Decrease) (1P)
Net Impact on Profit:
Change in Gross Profit R1 400 000
Change in the Cost of Carrying Debtors R (28 180)
Change in the Cost of Bad Debts R (39 560)
Change in the Cost of Discounts R (39 560)
Net Increase R1 292 700(1P)

ThutoPele Ltd should implement the new policy. (1P)

Layout (1)
 QUESTION 2:

PART A:

The Eastern Cape Farmers’ Corporation is currently experiencing liquidity problems. One of
the options being considered is the factoring of debtors. You were approached to express an
opinion on the proposed agreement with the factoring house. You were provided with the
following information about the proposed agreement:

The factoring house will levy a service facility charge for its services and a finance facility
charge for the financing that it provides. The service charge will amount to 1,5% of the annual
credit sales and the finance facility will amount to 24% per annum on the finance provided.
Annual credit sales currently amount to R4,2 million per annum and the average collection
period is 24 days. The factoring house will retain an amount of 30% of outstanding debtors.
The estimated cost saving for the Eastern Cape Farmers’ Corporation due to the factoring
house administering the debtors will be R42 000.

(Round all calculations off the nearest rand.)

(For calculation purposes, use 365 days in a year.)

YOU ARE REQUIRED TO:

Calculate the effective costs of the factoring.

PART B:

The Eastern Cape Farmers’ Corporations’ business with its largest trade creditor takes place
on the following terms: 4/10 net 30. The corporation currently pays the creditor 41 days without
incurring interest. You were approached to determine the effective costs for the corporation,
because the corporation does not make use of the cash discount.

(For calculations purposes, use 365 days in a year.)

YOU ARE REQUIRED TO:

Calculate the effective cost of the forfeited cash discount and make a recommendation to the
Eastern Cape Farmers’ Corporation regarding the use of the cash discount.

PART C:

YOU ARE REQUIRED TO:

(i) Compare an aggressive and conservative working capital financing policy and discuss
the three criteria for the measurement of the acceptability of an aggressive working capital
financing policy;

(ii) Define working capital management; and

(iii) Name and discuss four reasons for the holding of cash.
QUESTION 2:

(Suggested Solution)

(a) Factoring Accounts Receivable

Service facility charge

= 1,5% x R4 200 000
= 63 000

Finance facility charge

= 24% x finance provided
= 24% x [70% x R4 200 000 x 24/365]
= 24% x 193 315
= 46 396

Service facility 63 000

Finance facility 46 396
Cost savings (42 000)
Net cost of factoring 67 396

(b)
(i) Effective Cost of = Discount x Days in a year
Trade Creditor Finance 100 - Discount Additional days credit
if discount is foregone

= 4/96 x 365/31
= 49,06%

The effective cost of the trade creditor finance is very high. If the Eastern Cape
Farmers’ Corporation can get finance for less than 49,06%, they should rather use the
4% discount and pay the creditor within 10 days.

(c) Any business has got permanent current assets and fluctuating current assets.

Aggressive financing policy

With an aggressive financing policy a firm will finance all its fluctuating current assets
with short-term finance. The firm will also finance a portion of its permanent current
assets with short-term finance. What is left of the permanent current assets will be
financed with long-term finance.

Conservative financing policy

With a conservative financing policy a firm will finance all its permanent current assets
with long-term finance. The firm will also finance a portion of its fluctuating current
assets with long-term finance. What is left of the fluctuating current assets will be
financed with short-term finance.

Criteria for the measurement of the acceptability of an aggressive working capital

financing policy:
Level of operating risk.
The higher the level of operating risk, the less acceptable an aggressive working
capital financing policy will be. Operating risk is the risk relating to the operating
activities of the company.

Volatility of sales.
 The more volatile the sales, the less acceptable an aggressive working capital
financing policy will be.

Costs associated with short-term finance.

The more expensive the short-term finance, the less acceptable an aggressive
working capital financing policy will be. The costs associated with short-term
finance must be compared to the costs associated with long-term finance.

(ii) Working capital management refers to the administration of current assets and current
liabilities, within the policy guide-lines set under working capital policy.

(iii) Transactions:
Cash balances are necessary to conduct business.
Example: payment of salaries and wages.
Precaution:
Cash held in reserve to cover random or unforeseen fluctuations in inflows and
outflows.

Speculation:
Cash balances held to enable a firm to take advantage of any bargain
purchases that might arise.

Loan Covenants:
In the granting of loans to a firm, banks or other financial institutions might
specify the amount of liquidity that a company needs to maintain.
QUESTION 3:

Houtmeubels Ltd is a prosperous furniture group in the Eastern Cape. Currently 96% of
Houtmeubels Ltd’s annual sales are on credit. Due to a large percentage of uncollectible
debts, Houtmeubels Ltd decided to change its credit policy. You were approached to express
an opinion on the effects of the proposed change in the credit policy. After further investigation
you determined the following:

Houtmeubels Ltd’s current credit policy is 3/10 net 60, and the proposed credit policy is 10/10
net 45. Currently 10% of all clients who purchase on credit make use of the cash discount. In
terms of the new credit policy 20% of all clients who purchase on credit will make use of the
cash discount. Due to the stricter proposed credit policy the total annual credit sales will drop
from R3 million to R2,5 million. Currently the average debtors’ collection period is 59 days.
The average debtor’s collection period should improve to 40 days in terms of the proposed
credit policy. Bad debts, which currently amount to 7% of total sales, will improve to 4% of
total sales with the implementation of the proposed credit policy. The opportunity costs
associated with an investment in working capital are 19%. The gross profit percentage will
remain unchanged at 15%. It is expected that 10% of Houtmeubels Ltd’s total sales will be on
a cash basis with the implementation of the proposed credit policy.

(Round all calculations off to the nearest rand.)

(For calculation purposes, use 365 days in a year.)

YOU ARE REQUIRED TO:

(a) Discuss five considerations which should be taken into account in the evaluation of a
client’s creditworthiness; and
(b) Perform a calculation for Houtmeubels Ltd in which you set out the impact of the
proposed change in the credit policy.
QUESTION 3: (Suggested Solution)

(a) In assessing the creditworthiness of a potential customer, the credit manager needs to
consider the customer’s attitude, credit history, financial position, the security offered and
the environment in which the customer operates.

- Attitude:
Attitude relates to the customer’s commitment to honouring his or her debt obligations.
(Moral issue.)

- Creditworthiness:
Credit history is the debtor’s past ability to meet payments.

- Financial Position:
The financial position of the debtor could be measured by his or her general financial
condition as indicated by an analysis of the debtor’s financial statements.

- Security:
Security is ensured by valuing the assets that the customer may offer as security to
obtain credit.

- Environment:
The environment refers to any general economic trends or special developments that
might affect the customer’s ability to meet obligations.

(b) P = G- I- B- D

G = (R2 500 000/90% - R3 000 000/96%) x 15%

= 2 777 777 – 3 125 000
= -R347 223 x 15%
= -R52 083

I = [(3 000 000 x 59/365)] – [(2 500 000 x 40/365)]

= 484 932 – 273 973
= 210 959 x 19%
= 40 082

B = R3 125 000 x 7% 218 750

R2 777 778 x 4% (111 111)
107 639

D = R3 000 000 x 10% x 3% 9 000

R 2 500 000 x 20% x 10% (50 000)
- 41 000

P = -R52 083 + R40 082 + R107 639 - R41 000

P = +R54 638

Houtmeubels Ltd must therefore implement the proposed change in the

credit policy.
QUESTION 4:

Viagra Ltd started trading a year ago in South Africa. All sales are on credit. Credit terms are
30 days, but the debtors are paying late and the average collection period has been 50 days
with 1% of sales resulting in bad debts that are written off. Viagra is convinced that it is not
because of an inferior product, but rather because of poor debt administration.

Legfin, a factoring company, made the following proposal:

1. They would take on the task of debt administration at an annual fee of 3% of credit
sales.
2. The guaranteed payment period would be 30 days.
3. Viagra can do away with the debtors department and this will lead to a saving of
R25 000 per year.
4. An advance of 75% of invoiced debts will be provided at an interest rate of prime plus
2%.
5. There would be no bad debts.

Viagra can obtain an overdraft facility to finance its debtors at prime plus 1%. This facility will
be utilized to fund the remaining 25% of the debtors book excluding the 75% advance from
Legfin. Viagra has got the option of either using an overdraft facility to fund all of its debtors or
to use the factoring house to factor 75% of its debtors and fund the remaining 25% using the
bank overdraft facility.

Viagra purchases under terms of 5/10 net 30. Viagra pay by cheque and can delay
payments therefore for up to 51 days. The supplier is satisfied with this situation.

Viagra makes annual credit sales of R4 500 000. Assume 365 days in a year. Prime = 25,5%

YOU ARE REQUIRED TO:

(a) Calculate whether or not Viagra must make use of Legfin’s services; and
(b) Calculate whether or not Viagra must make use of its creditor’s
discount.
QUESTION 4:

(Suggested Solution)

(a) Current situation: Annual sales

Average payment period 4 500 000
50 days

Annual cost:
50
x R4 500 000 x 26,5% 163 356
365

Bad debts 1% x R4 500 000 45 000

Total cost R208 356
Factor
An advancement of 75% of sales is allowed at a cost of 27,5%. The remaining 25%
must be financed with the bank overdraft at 26,5%.

Annual costs:
Factor financing 30 x 75% x 4 500 000 x 27,5% 76 284
365

30
Bank financing x 25% x 4 500 000 x 26,5% 24 503
365

Annual fee 3% x R4 500 000 135 000

Bad debts -
Minus: saving in administration fees (25 000)
Total cost R210 787

The factor is more expensive if the financing package of 75% is used.

(b) Discount not used = 5%

Amount “borrowed” = 95%
Term (51 – 10) = 41 days

Kf = D/(100 – D) x 365/t
= (5/95) x (365/41)
= 46,85% per annum

Financing can be obtained at the bank at 26,5% to take advantage of the

discount.
QUESTION 5:

Whizzkids (Pty) Ltd develops and sells educational computer programmes for toddlers. The
company started doing business two years ago, and was an immediate success. Turnover
amounted to R9 147 870 in the first year, and increased by 33% in the second year.
Unfortunately, the debtors’ clerk, Mrs. Greyshoes, is unable to deal with the ever-increasing
debtor’s book. She started working at Whizzkids two years ago to supplement her pension,
and has no real experience in collecting money from debtors. As a result, the debtors’
collection period has increased from 15 days to 45 days. Mrs. Greyshoes is sure that all
debtors will settle their accounts eventually, but at the moment the company is in a liquidity
crisis: there is not sufficient cash to pay salaries.

Management is now considering factoring the debtors’ book, and relieving Mrs. Greyshoes
of her duties. (The company will thus save Mrs. Greyshoes’ salary of R3 000 per month).
Bad debts amounting to R96 000 per year will also be avoided if debtors are factored. The
factor requires a 10% reserve for returns and allowances and charges a 2% factoring
commission. Whizzkids can borrow funds from the factor at 3 percentage points over
the prime rate (currently 14%). Management can also negotiate an additional bank overdraft
facility at prime plus 2.

You may ignore taxation in your calculations. All calculations should be based on 365 days
per year.

YOU ARE REQUIRED TO:

a) Explain the meaning of the concept “factoring of debtors”;

b) List the advantages of a factoring agreement;
c) Determine the net annual cost of this factoring agreement; and
d) Advise management whether they should go ahead with the factoring agreement.
QUESTION 5 (Suggested
Solution)

a) Factoring accounts receivable involves the outright sale of accounts receivable at a

discount to a financial institution. A factor is a financial institution that specializes in
purchasing accounts receivable from businesses.

b) It gives the firm the ability to turn accounts receivable immediately into cash,
without having to worry about repayment.

It ensures a known pattern of cash flows.

If factoring is undertaken on a continuous basis, the firm can eliminate its credit
and collection departments.

c) Turnover in current year: R9 147 870 x 1,33 R12 166 667

Average level of receivables: 45/365 x 12 166 667 R1 500 000

Amount advanced by factor:

Average level of receivables R1 500 000
Reserve for returns (10% x R1 500 000) (R150 000)
Advance R1 350 000

Costs of factoring:
Factoring commission (2% x R12 166 667) R243 333
Interest on advance (17% x R1 350 000 ) R229 500
R472 833
Savings:
Credit department costs (3 000 x 12) R96 000
Bad debts (96 000) R36 000
R132 000
Net cost of factoring R340 833
Effective cost R340 833 / R1 350 000 25%

d) Management should rather make use of the additional overdraft facility, as the cost of
the overdraft is 16% , compared to the cost of factoring of 25%.
QUESTION 6 [25 marks]

Proline Ltd is a competitive golf pro shop in the Midrand area. They sell golf clubs and
accessories but they also provide golf lessons by professional golfers who have retired.
Currently 58% of Proline’s sales are on credit. They are, however, experiencing problems with
collecting their accounts receivable and have high levels of bad debt. To rectify this problem
they are considering changing their credit policy. You have been approached for your opinion
on the proposed change.

Proline’s current credit policy is 5/12 net 45 and the proposed credit policy is 6/10 net 60.
Under the current policy only 15% of customers that use the credit facility take up the cash
discount. Under the new policy 25% of customers will make use of the cash discount. The
more lenient credit policy will result in an increase so that 70% of sales will be on credit. Under
the n e w policy the average collection period will increase from 44 days to an estimated 58
days.

Total sales under the current policy amounts to R2.7 million which will increase to R3.2 million
with the new policy. The gross profit percentage will remain unchanged at 14%. An opportunity
cost of 18% is involved with an investment in accounts receivable. Bad debts amounted to 7%
of credit sales under the old policy and will change to 2.5% of total sales under the new policy.
Assume a 365 day year. Round calculations to no decimals.

REQUIRED

6.1 Calculate what the change in net income will be for Proline Ltd if they implement the
New policy. Recommend whether the policy should be implemented or not. (25)
QUESTION 6 (Suggested Solution)

6.1
Change in Gross Profit
14% x (3.2 mil – 2.7 mil) = 70 000 (increase)

Change in Bad debt losses

(2.5% x 3.2 mil) – (7% x 58% x 2.7 mil)
= 80 000 – 109 620
= 29 620 (decrease) 

Change in Cost of discount

6%  (70% x 3.2 mil x 25%) – 5% (58% x 2.7 mil x 15%)
= 33 600 – 11 745
= 21 855 (increase) 

Change in opportunity cost of accounts receivable

([70% x 3.2 mil] x 58/365) – ([58% x 2.7 mil] x 44/365)
= 355 945 – 188 778 P
= 167 167 (increase) 

Increase in opportunity cost

167 167 x 18%
= 30 090 (increase) 

Net
Change in Gross Profit 70 000P(+ive)
Change in Bad debt losses 29 620P (+ive)
Change in Cost of discount (21 855) P (-tive)
Increase in opportunity cost (30 090) P (-tive)
Change in net income 47 675

There is an increase of R47 675 in net income under the new policy. Therefore they should
implement the new policy.  (25)
QUESTION 7

Being fed up with late payments on accounts from clients and trying to collect debt, your aunt
from Polokwane has approached you for advice on the following issue. A factoring house has
made her the following offer for her business’ debtor’s book:

Your aunt has also given you the following information:

She has calculated that she will save 1,1% of credit sales if she closed her accounts
receivable division.
She can obtain financing from the bank for 17%.
The factoring house will retain 23% of outstanding debtors.
The factoring house will also levy two charges:
o one, a service charge that will amount to R25 000 and
o two a finance facility charge that will amount to 19% per annum on the finance
provided.

Annual credit sales currently amount to R3,7 million per annum and the average
collection period is 27 days.

Assume a 365 day.

REQUIRED:

Advise your aunt whether she should make use of the factoring or not by calculating the
following:

7.1 Service facility charge and the finance facility charge. (4)
7.2 Cost saving (1)
7.3 Net cost of factoring (Both in rand in as a percentage) (5)
7.4 Advise your aunt on taking the offer or not. (1)
QUESTION 7 (Suggested Solution)

7.1 Service facility charge = 25 000

Finance facility charge

= 19% x finance provided
= 19% x [77% x R3 700 000 x 27/365]
= 19% x 210 748
= 40 042 (4)

7.2 Cost saving

R3 700 000 x 1,1% = 40 700 (1)

7.3 Service facility 25 000

Finance facility 40 042
Cost savings (40 700)
Net cost of factoring 24 342

24 342 / 210 748

= 11,55% (5)

7.4 The effective cost of the factoring is lower than the 17% financing she can obtain. 
Thus, make use of the factoring.  (2 MAX 1)
QUESTION 8 [15 marks]
This question consists of TWO independent parts
PART A (4 marks)
A company can be liquid but not solvent and it can be solvent but not liquid.
REQUIRED:
8.1 Evaluate this statement by discussing the difference between solvency and liquidity.
(4)

PART B (11 marks)

Credit terms offered by Steward Ltd to its customers are 5/20, net 60. 90% of sales of
R2.5million are on credit, and 50% of the customers take advantage of the discount. The bad
debts level is currently 3% of credit sales.
The terms offered by the suppliers of raw materials to Steward Ltd are 3/20, net 90. The store
has up to now taken the maximum credit allowed. Mr. Little has suggested changing the
credit
policy offered to customers is amended to accelerate cash flow, to an average collection
period of 25.4 days which can then be used to pay creditors earlier, and so take advantage of
the attractive discounts available. The cost of capital of Steward Ltd is 12% p.a. Management
is able to borrow from the bank at 17% p.a. The profit margin is currently 35% and will be
maintained when the credit policy is changed. Sales are expected to increase to R3million and
bad debts will increase to 5% of total sales when the credit policy is changed.

REQUIRED:

8.2 Calculate the current average collection period of Steward Ltd. (3)

8.3 Calculate the cost of foregoing the discount offered by suppliers of raw materials.
(3)

8.4 Calculate the opportunity cost of carrying accounts receivable (assuming the average
collection period for accounts receivable under the old policy is 36.3 days).
(5)
QUESTION 8 (Suggested
Solution)

PART A

8.1
Solvency illustrates the effect to which company uses external financing to finance
assets. 
Solvency is the ratio between assets and debt
Company would be solvent if its assets > liabilities
Solvency is the long-term financing of assets
Liquidity is the way in which a company is able to cover its current obligations with it’s
current assets
Liquidity shows short-term financing of assets
A company would be liquid if current assets > current liabilities
You can be solvent meaning assets > debt, but you don’t have money/current assets to
pay your short-term liabilities
Although in the long-term you are fine, you’re not fine in the short-term
Liquidity refers to how quickly an asset can be converted into cash without changing
the value thereof (Max 4)

PART B

8.2 (50% x 20)  + ((50% - 3%) x 60) 

38.2 days (Max 3)

8.3 (0.03 / 0.97)  x ((360 / (90 – 20)) 

15.91%

OR

(0.03 / 0.97)  x ((365 / (90 – 20)) 

16.13% (Max 3)

8.4 New: 25.4 / 360 x (R3m x 90% ) 190 500.00

Old: 36.3 / 360 x (R2.5m x 90% ) 226 875.00
36 375.00
Opportunity cost (12%) 4 365.00
(Max 5)
QUESTION 9 [40 marks]

This question consists of FOUR independent parts

PART A (10 marks)

The CEO of Microsoftie Ltd’s wife, Mrs. Gatie really wants a cellphone contract, as to be in
contact with her busy husband. She applied for a contract at a young, hip cellphone shop
called Cell-shack. Cell-shack is new to the business and therefore asked you, a credit
specialist, what they should consider before selling a contract to Mrs. Gatie on credit.

REQUIRED:

9.1 Discuss the considerations that Cell-shack should take into account before awarding
the contract to Mrs. Gatie. (10)

PART B (8 marks)

Paragon Paints uses 60 000 litres of paint per year. The cost of ordering paint is R200 per
order, and the cost of carrying the paint is R1 per litre per year. The company uses paint at a
constant rate every day throughout the year.

REQUIRED:

9.2 Calculate the economic order quantity (EOQ). (4)

9.3 Assuming that it takes 20 days to receive an order once it has been placed, determine
the reorder point in terms of litres of paint. (4)

PART C (8 marks)

Green Cushion Ltd factors all its accounts receivable. They have reached the following
agreement with a leading factoring house:
A 10% reserve is held, and a 2% commission is charged on the book value of the account.
Furthermore 1.25% interest per month (15% per year) is charged on advances. Green Cushion
Ltd wants to factor an account of R4 000 which is due in 30 days.

REQUIRED:

9.4 Calculate the advance Green Cushion Ltd will receive. (4)

9.5 Calculate the net cost of the factoring to Green Cushion Ltd if the debtor pays the full
amount of R4 000. (2)

9.6 Explain why a company would factor their debtors. (2)

PART D (14 marks)

Chipoeka Ltd has an inventory turnover of 8 times a year, an average collection period of 30
days, and an average payment period of 40 days. The company spends R900 000 on
operating cycle investments each year. Assume a 360 day year.

REQUIRED:

Calculate the following:

9.7 The operating cycle of the company. (2)

9.8 The cash conversion cycle of the company. (2)

9.9 The amount of financing required to support the cash conversion cycle. (2)

The financial director of Chipoeka Ltd was overheard in saying that holding cash is only for
conservative managers, as there are so many things you can do with cash.

9.10 State with reasons whether you agree or disagree with the statement made by the
financial director. (8)
QUESTION 9 (Suggested Solution)
PART A
9.1 - Character (Attitude): 
Attitude relates to the customer’s commitment to honouring his or her debt obligations.
(Moral issue.) 

- Capital (Creditworthiness): 
Credit history is the debtor’s past ability to meet payments. 

- Capacity (Financial Position): 

The financial position of the debtor could be measured by his or her general financial
condition as indicated by an analysis of the debtor’s financial statements. 

- Collateral (Security): 
Security is ensured by valuing the assets that the customer may offer as security to
obtain credit. 

- Conditions (Environment): 
The environment refers to any general economic trends or special developments that
might affect the customer’s ability to meet obligations. 
(10)

PART B

9.2 EOQ = √2 x S x O / C √2TxF/CC 

= √2 x 60 000 x 200 / 1
= √24 000 000
= 4 899 litres
(4)

9.3 Daily usage = 60 000/365 days

= 164.38 litres/day

Reorder point = 20 days x 164.38(A) days

= 3 287.6 litres (Max 4)

PART C

9.4 BV of account 4 000

Less: Reserve (10%) (400) 
Less cost (2%) (80) 
Funds available for advance 3 520
Less: interest (44) 

Net Advance 3 476 (4)

9.5 Cost of factoring + Interest n advance

= 80 + 44
= 124 (2)

9.6 To obtain immediate cash instead of waiting for debtors to pay. 

Part D

9.7 Operating cycle = 45 + 30 days = 75 days (2)

9.8 CCC = 75 – 40 days = 35 days (2)

9.9 The daily expenditure on the operating cycle investment is R2 500   (R900
000/360). Financing of R87 500 (R2 500 x 35 days) is required to support the CCC. (
Max 3)

9.10 Transaction motive

- payments in the ordinary course of business e.g. Services, labour etc

Speculative motive
- to take advantage of unexpected profitable opportunities e.g. bargain purchases

Safety / Precautionary motive

- maintaining a buffer or cushion to meet unexpected contingencies. Easy access to
borrowed funds decreases the need for safety motive. 
(Max 8)
QUESTION 10 Part A (20 MARKS)

This question consists of TWO independent parts. Both parts relate to Blue Limited. Mrs. Green,
the newly appointed credit manager of Blue Limited, has approached you to assist her with some
tasks.

PART A (20 Marks)

The company is considering changing its credit terms from 5/15 net 30 to 7/7 net 45.

At present 80% of clients make use of the discount and under the new policy 75% of clients
will make use of the discount.

The average collection period will change from 29 days at present to 42 days.

Sales will increase by R500 000 to R10 000 000 under the new policy.

The gross profit percentage will remain unchanged at 20% and 5% of sales are for cash.

Bad debts losses amount to 5% of debtors for which discounts are not taken and under the
new policy this will change to 3%.

The opportunity cost associated with an investment in working capital is 15% per year.

REQUIRED:

Advise Mrs. Green as to whether the proposed change in credit policy should be
implemented.
QUESTION 10 SUGGESTED SOLUTION

PART A:

P = G+ I+ B+ D
P = Change in net income
G = Change in gross profit
I = Change in carrying cost of debtors
B = Change in bad debt losses
D = Change in cost of discounts

(a) Change in gross profit

20%  x 500 000 = +R100 000 (increase)

(b) Change in bad debt losses

{3%  x 25% x 95% x R10 000 000 ) – (5% x 20% x 95% x R9 500
000)
= R71 250 – R90 250
= -R19 000 (decrease in expense)

(c) Change in cost of discounts

7%  (95% x R10 000 000 x 75%) –5%  (95% x R9 500 000 x 80%)
= R498 750 – R361 000
= -R137 750 (increase)

(d) Change in carrying cost of debtors

= [(9 500 000 x 0,95) x 29/365] – [(10 000 000 x 0,95) x 42/365]
= 717 054.79 – 1 093 150.68
= -R376 095.89 (increase) 
Increase in carrying costs = R376 095.89 x 15%
= R56 414.38 (increase)
Net
Change in gross profit 100 000
Change in carrying cost of debtors (56 414)
Change in bad debt losses 19 000
Change in cost of discounts (137 750)
Change in net income R(75 164) 

Green Limited should therefore not change their credit policy.  (20)
QUESTION 11 (25 MARKS)

This question consists of TWO independent parts.

PART A: (21 MARKS)

Maseko (Pty) Ltd is currently experiencing liquidity problems. They have to pay five senior
citizens who manage debtors and collect outstanding debtors payments a salary of R3 500 per
month each. Due to the interest rate hikes and petrol price hikes, it has become difficult
fulfilling their payment liabilities. One of the options being considered is the factoring of
debtors. You were approached to express an opinion on the proposed agreement with
the factoring house. You were provided with the following information about the proposed
agreement:
The factoring house will levy a service facility charge for its services and a finance facility
charge for the financing that it provides. The service charge will amount to 6% of the annual
credit sales in the first year and a fixed management fee of R40 000 from the second year
onwards. The finance facility cost will amount to 25% per annum non- cumulative on the
finance provided. Annual revenue currently amounts to R15,5 million per annum. Maseko (Pty)
Ltd was giving great credit terms and so 25% of customers were making use of the credit
facility. The average collection period is 21 days. The factoring house will retain an amount
of 33% of outstanding debtors.
(Round all calculations off the nearest rand. For calculation purposes, use 365 days in a
year.)
REQUIRED:
11.1 Calculate the effective costs/saving of the factoring in the first year. (9)

11.2 Calculate the effective cost/saving from the second year onwards assuming all stays
constant. (3)

11.3 Would you recommend factoring of debtors to Maseko (Pty) Ltd? Give reasons. (3)

11.4 What other factors should Maseko (Pty) Ltd consider before implementing the above
decision in the context of South Africa? (3)

11.5 What are the advantages of factoring debtors? (3)

PART B: (4 MARKS)
Maseko (Pty) Ltd’s business with its largest trade creditor takes place on the following terms:
6/14 net 35. The corporation currently pays the creditor 52 days without incurring
interest.

REQUIRED:

11.6 Determine the effective costs for the corporation, because the corporation does
not make use of the cash discount. (2)
11.7 What should Maseko (Pty) Ltd’s strategy be in light of your answer in 3.6 (2)

(For calculations purposes, use 365 days in a year.)

QUESTION 11 SUGGESTED SOLUTION

PART A:

1. Factoring Accounts Receivable

Service facility charge

= 6% x (R15 500 000 x 25%) 
= 6% x (3 875 000)
= 232 500 

Finance facility charge

= 25% x finance provided
= 25% x [67% x R3 875 000 x 21/365 ]
= 25% x 149 373.29
= 37 343.32 

Cost Saving
= 5 x R3 500 x 12
= 210 000 

Service facility 232 500

Finance facility 37 343
Cost savings (210 000)
Net cost of factoring 59 843 

Effective cost = 59 843 149 373 = 40% Total (10)

Max (9)

2. Cost saving
= 5 x R3 500 x 12
= 210 000 P

Finance facility charge

= 25% x finance provided
= 25% x [67% x R3 875 000 x 21/365]
= 25% x 149 373.29
= 37 343.32 P

Finance Facility 37 343

Management fee 40 000
Cost Saving (210 000)
Net cost saving (132 657)  (3)

3. Yes, I would recommend factoring of debtors. We can see from the calculation that
from year two, Maseko (Pty) Ltd saves more than double the initial cost of factoring
debtors. The factoring may even free up the company to focus on their core
operations.
Any other valid reason Max (3)

4. Factors to be considered
The reputation of the factoring house
The opportunity cost of debtors/cash vs. the effective cost of factoring,
especially with interest rate hikes opportunity costs are high
It may be difficult retrench staff due to unions
Retrenchment packages and costs have to be taken into account
 BEE credentials after the retrenchment have to be considered if there were any
employees of colour in the debtors department
Any other valid factors Max (3)

5. Advantages of factoring
There is no administration of running a debtors department. 
There are no associated human resource costs. 
The risk of default of your debtors is eliminated. 

Any other valid advantage Max (3)

PART B:
6. Effective Cost of = Discount x Days in a year
Trade Creditor Finance 100 - Discount Additional days credit
if discount is foregone

= 6/94 x 365/38
= 61,31% 
(2)
7. The effective cost of the trade creditor finance is very high. If the Maseko (Pty)
Ltd can get finance for less than 61,31%, they should rather use the 6% discount
and pay the creditor within 14 days. 
Any other valid point  Max (2)
QUESTION 12: 20 Marks

Builders Warehouse, the Home Improvement A to Z store, offers the widest range of home
improvement products catering to Home owners, DIY enthusiasts and professional
contractors alike.

Builder’s Warehouse is currently in the process of requesting tenders for the provision of
bamboo nesting tables. They aim to distribute and sell these bamboo nesting tables in their
retail outlets located through-out South Africa.
In order to obtain full benefit from the economies-of-scale principle, they have decided to
source their annual demand of 50,000 nesting tables from a single supplier. The demand for
bamboo nesting tables is at a constant rate all year. The cost to Builder’s Warehouse of
holding one bamboo nesting table in stock is R3 plus 5% of the purchase price.

After careful deliberation, they have concluded that they can either source the bamboo nesting
tables from Realgood Furniture or Ballard Designs. Each has offered to provide the required
number of shower units each year under an exclusive long-term contract.

Realgood Furniture is a manufacturer based in the United States of America. They are able to
ship the merchandise from the United States to South Africa at discounted rates, but delivery
will only take place 5 weeks after receipt of an order. Shipping costs will amount to $1,000 per
order. They will supply each nesting table at a price tag of $20. There is also a minimum order
of 10,000 nesting tables per order. As there is a high level of uncertainty about time to delivery,
Builders Warehouse has decided to maintain safety inventory of 3,000 nesting tables. In the
event that Builders Warehouse decides to purchase the nesting tables from Realgood
Furniture, they will be able to enter into a currency option with Rand Merchant Bank, which
will provide them with the option of purchasing US dollars at a fixed rate of R8,50 for $1.
Ballards Designs is a South African based manufacturer of nesting tables. They have offered
to supply nesting tables at a price of R228 per table (VAT inclusive). With transport charges of
R8,000 per delivery (VAT exclusive). It has guaranteed such a regular and prompt delivery
service, that there is no need for Builder’s Warehouse to maintain any safety inventory.
Note:

Assume a value added tax rate of 14%

Management decided that if the economic ordering quantity is calculated as a
decimal, round the number of orders up to the nearest whole number.

REQUIRED:
a) Calculate the Economic Ordering Quantity for both suppliers of nesting tables
(8)
b) Calculate whether Realgood Furniture or Ballards Designs should be the preferred
supplier to Builders Warehouse by calculating the total annual cost payable per
 supplier. (12)

Suggested solution
EOQ = SQRT 2 x demand (units) x ordering cost
holding cost

Where O = cost of placing an order

D = annual demand
H = cost of holding one unit in inventory for one year
√ for formula
Realgood Furniture
Ordering costs = $1,000 x 8.50= R8,500 √
Demand = 50,000 units
Holding costs = R3+(5% x $20 x 8.50) = R11.50 √
EOQ = SQRT (2 x 50,000 x 8,500 ÷ 11.50) = 8,597 units √

However, this is below the minimum order size and therefore it will be assumed that the
minimum order for Realgood Furniture will be 10,000 units per order. √

Ballard’s designs
Ordering costs = R8,000 √
Demand = 50,000 units
Holding costs = R3+(5% x R200) = R13 √
EOQ = SQRT (2 x 50,000 x 8,000 ÷ 13) = 7,845 units √

B)
Realgo Ballar
odAmount ds
Amount
Number of units purchased 50,000.0 50,000.0
Unit price 0 170.0 0 200.0
Total price paid 0 8,500,000. 1 0 10,000,000. 1

Number of orders placed 5.0 7.0

Cost per order 0
8,500.0 0
8,000.0
Total ordering costs 0 42,500.0 1 0 56,000.0 1

Average Inventory level

* 10,000 units /2 +3000 safety 8,000.0 3
* 7845 units / 2 3,922.5 2
Carrying cost per unit 11.5 13.0
92,000.0 1 50,992.5 1

Total annual costs 8,634,500. 10,106,992.

00 50
Realgood should be the sole supplier as their price is R1,472,492.50 lower than if Ballards is 1
Question 13 20 Marks

Banana Banana (Pty) Ltd (BANANA) is a new company that launched in 2004 when it was
announced that South Africa would be hosting the FIFA World Cup ™. The company has a
December year end. The company deals in the sales of all types of sports equipment ranging
from soccer boots to badminton rackets. They wanted to take advantage of the sports fever
that had gripped South Africa and, using the World Cup as a boost, establish themselves in the
market for success after the World Cup was complete.

BANANA release their financial statements for the current year soon after their statutory audit.
Their results are attached as Appendix 1:

Additional information:
75% of the annuals sales of BANANA are on credit.
Normal credit terms for all customers currently stands at 35 days
Currently BANANA gives a discount of 4% if customers pay within 15 days
Currently 6% of credit customers make use of the discount

To stimulate demand, BANANA considered changing their credit terms. In a press release
from the business day, the sales manager was quoted saying, “We need to increase our sales
without compromising the collectability of sales.” They wanted to change to terms to 8/10 net
30. The sales manager, however, was uncertain how that would impact their bottom line. You,
as a financial management student, astute in all things financial management, were tasked with
the job of calculating the effect of the change in credit terms on company profits. The financial
manager gave you the following additional information regarding the proposed change
in credit terms;

Additional information:
Sales were expected to increase to R10,500,000 per annum
40% of all customers would become cash customers
The gross profit percentage would remain the same
It is expected that 8% of credit customers will take advantage of the proposed discount.
Expected bad debts would increase from 1.5% to 3% of the debtors who do not make
use of the discount.
Average debtor days would decrease from 32 days to 30 days
BANANA can invest excess cash in a money market account and receive effective
interest income of 9%.
An average year regarded as having 360 days

REQUIRED:
a) Who is the current finance minister? (1)
b) What is the current prime interest rate? (1)
c) Write a report to the Sales Manager advising him whether he should change the credit
policy or not. Show all relevant calculations (18)
Appendix 1

BANANA BANANA (PTY) LTD

EXTRACT OF THE STATEMENT OF COMPREHENSIVE INCOME

FOR THE PERIOD ENDED 31 DECEMBER

2009

Notes

8,08
Revenue 1 9,600

(4,69
Cost of turnover 2 4,400)

3,39
Gross profit   5,200

1,30
Interest received   0,700

1
Dividends received   9,100

57
Other revenue   9,500

(3,26
Trading expenses 3 9,000)

Operating profit before 2,02

finance charges   5,500

(24
Interest paid   9,800)

3,80
Profit before tax   1,200

(56
Income tax expense   4,400)

3,23
Profit for the year   6,800
Question 13 SUGGESTED SOLUTION

a) Nhlanhla Nene 
b) Current Prime rate (18/02/2015): 9.25%  (Note to marker: Accept an answer within 1 %
either way)
c)

Report format

To: The Sales Manager – BANANA (Pty) Ltd

From: A Student
Date: 19 April 2010 (2)

Subject: Change in credit policy

With respect to your request to show the effects of your proposed change in credit policy, I
have shown all calculations below and given my advice as to whether you should change it or
not;

P = G+ I+ B+ D
P = Change in net income
G = Change in gross profit
I = Change in carrying cost of debtors
B = Change in bad debt losses
D = Change in cost of discounts
Change in Gross Profit
([3,395,200/8,089,600]  x 8,089,600) – (41.97% x 10,500,000) = R1,011,643
OR
(3,395,200) – (4,406,843) = 1,011,643 (increase in gross profit)

Change in carrying cost of debtors

[(75% x 8,089,600 x 32/360) – (60% x 10,500,000 x 30/360)] x 9%
= (539,307 - 525,000) x 9%
= 1,288 (decrease in cost of debtors)
OR
[([30-32]/360 x {75% x 8,089,600}) + ({[60%x10,500,000] - [75%x8,089,600]}  x 30/360
x (100%-41.97%)] x 9%
= (-33,706 + 11,257) x 9%
= -2,020

Change in bad debt losses

(75% x 8,089,600 x 94% x 1.5%) – (60% x 10,500,000 x 92% x 3%)
= 85 547 - 173 880
= 88 332 increase in bad debt

Change in discounts
(4% x 6% x 75% x 8,089,600) – (8% x 8% x 60% x 10,500,000)
= 14,561 - 40,320
= -25,759 increase in discount

Change in Gross Profit 1,011,643

Change in Carrying cost of debtors 1,288
Change in bad debt losses (88 332)
Change in cost of discounts (25,759)
Total 898 840 P

I advise that you change the credit policy to the proposed credit policyP
Question 14 15 Marks

Monisha Strass, the warehouse manager of AGA (Pty) Ltd was having trouble getting stock to
his customers on time, especially closer to the end of the month when the inventory was being
ordered. The problem was that he was uncertain which element he needed to focus on having
lots of stock on hand and paying for storage costs which amounted to R17 per unit per year or
having less stock on hand but ordering more regularly from their suppliers.

The suppliers of AGA had improved their lead time for delivery and promised to deliver on any
orders within 15 days. This would mean that AGA would only need to order 17 times in the
year and not 22 times as was previously done. This was “music” to Monisha’s ears as the cost
per order of admin, receiving and other related costs was R227. Market demand had grown for
AGA’s product to 10 500 units per annum.

REQUIRED:

a) What is the most economic number of units that AGA should order on every order to
ensure total holding and ordering costs are minimised? (4)

b) What is the total annual cost that Monisha should budget for based on the most
economic order quantity? (1)

c) Monisha considered changing to a JIT system of ordering. Explain to her in a memo

what the risks are of a JIT system. (6)

d) Why is it important for a company not to hold too much stock (4)
Question 14 Suggested solution

2FS
a) EOQ =
C
F = 227 
S = 10 500 
C = 17 

2(227)(10500 )
EOQ = 
17
EOQ = 529.5 = 530

Note to marker: give a mark for applying the amounts correctly in the equation

b) Total Cost for budget = 2xFxSxC

= R9 002 

c) To: Mrs. Monisha Strass

From: A Student
Date: 11 May 2010
Subject: Risks of a JIT system (1) memo format

In response to your request regarding the risks of a JIT system, I have outlined the
risks below:

If the system is fully optimised, interdependencies are compounded and there

are higher risks of shutdown 
Companies should not rely on only one supplier for any component or
material

Increases in insurance premiums and transportation costs 
Higher risks of business disruption 
Volatility of input pricing 
If suppliers become inefficient, then this will disrupt our supply to our customers
causing reputational damage 

Available (7)
Max (6)
d) Excessive inventories affect profitability:
They have substantially storage/carrying costs

The costs erode profit margins
 Reduce the asset-turnover
ratio  more stock is exposed
to theft 
Risk of obsolete stock  (4)
Question 15 25 Marks

Part A

Letsatsi (Pty) Ltd is a small to medium sized enterprise involved in the purchase and sale of
IT hardware and accessories. The Johannesburg Municipality is their largest client which they
have obtained through the annual tender process. The entity has experienced cash flow
difficulties since the Soccer World Cup as the majority of their clients are now cash strapped
due to low returns on Soccer World Cup investments. Letsatsi has enjoyed tremendous
support from the Johannesburg Municipality, however, as is customary with government
institutions, Johannesburg Municipality have a 60 day payment policy. In other words, the
Johannesburg Municipality has up to 60 days to pay before they allow their suppliers to
charge them interest. The Johannesburg Municipality has on certain occasions paid within
the
20 days but on other Occasions they have paid on the 60 day.
On 1 March 2019, Letsatsi delivered IT equipment to the Johannesburg Municipality and
issued an invoice of R800,000 for this sale. Letsatsi could not afford to wait 60 days so
they approached a factoring house to discount this debt. If they don’t receive the advance
from the factoring house, Letsatsi stands a chance of not surviving the next financial
quarter due to serious cash flow constraints. On several occasions, the Johannesburg
Municipality has defaulted on trade debts due to budgetary constraints. The factoring house
agreed to advance them 80% of the invoice amount. The residual
20% of the invoiced amount will fall due to the factoring house. The Johannesburg
Municipality debt will serve as collateral on the advanced amount.

Additional Information
The factoring house will follow up on the debt owed by the government and actually
collect the repayment from the government on behalf of Letsatsi.
The factoring house will charge an effective interest rate of 10% per annum on the
amount advanced, and interest will accrue on a daily basis, for every day the amount is
unpaid.
There is a management fee levied of 1.5% of the amount advanced.
The factoring house charges a cheque fee of R200 for delivering a cheque for the loan
amount.
There is also a penalty charge of 1% on the advanced amount if the Johannesburg
Municipality does not settle the debt within 60 days.
Letsatsi will benefit from not having to employ 4 debtors’ clerks for their
debtors department for the 60 day period. They would have paid each clerk R15,000 per
month
Savings on telephone and fax related collection costs made by Letsatsi would amount to
R6,500 per month.
Letsatsi would save on the rental of additional space for the debtors department of
R8,000 per month.
nd
The Johannesburg Municipality eventually paid on the 2 of May 2019.
Assume a year consists of 360 days and a month consists of 30 days.

Required
a) Calculate the actual cost /saving for Letsatsi as a result of the factoring arrangement.
(13)

b) Did Letsatsi make the correct decision to factor the R800,000 Johannesburg
Municipality invoice? Discuss your considerations in this regard. (7)
Part B

Letsatsi has really been struggling with their cash flow due to customers defaulting on their
debts. Management has decided to strengthen their credit management policies. The first
policy that management decided to strengthen is the creditworthiness checks for any new
customers as management identified this area as a weakness.

Required
a) Identify the key procedures that management should follow in assessing the
creditworthiness of new customers. (5)

Suggested Solution
Part A
a)

Advanced 800,000 x 80% = R640,000  (800,000x80%)

Amount Forgone 160,000  (800,000x20%)

Days outstanding 62
Interest 11,022.22 
Management fee 9,600
Cheque fee 200
Penalty 6,400
Total Cost 187,222.22
2 Months of savings
Debtors dept. Salaries 120,000 (15,000x4x2)
Telephone and Fax 13,000 (6,500x2)
Rental 16,000 (8,000x2)
Total Savings 149,000
Total Net Cost 38,222.22P

Available: 14
Max: 13

b) Letsatsi should consider that there is a net cost factoring 

Letsatsi management is freed from managing debtors and can focus on

operations 
Letsatsi should also consider that the saving will only be for two months. What will
happen after the two months is over? (May incur more costs to again appoint
more people etc.) 
Letsatsi does not have the admin of chasing up the debt from the Johannesburg
Municipality
Factoring will mean that there will be no bad debts
Letsatsi should consider that they are in need of cash and stand a chance of not
surviving the next quarter if they do not if they do not receive the advance.  Taking
this into account, I think that Letsatsi should definitely factor in order to survive 
Other factors
Letsatsi will lose control of the collection process, thus they may lose clients if
unscrupulous collection tactics are being used by the factoring house. 
It will benefit the factoring house to collect debts late (Late payment fee),
therefore they may not put effort into collections when debts fall due. 
 If clients settle their debts late, it will be vastly expensive for Letsatsi to keep on
factoring their debts. Perhaps they should consider an overdraft facility instead.

Consider financing, but use debtors as collateral. 
Letsatsi may incur expenses in retrenching current debtors’ clerks 
Letsatsi may experience problems with trade unions when attempting to
retrench current debtors clerks. 
Factoring debtors will limit job creation and skills retention within Letsatsi

Total: 14
Max: 7
Part B
The financial position of new customers
The Credit history of new customers
The attitude of the new customers in paying their debts
Any security provided by the debtor
The economic climate that the customer is trading in
Total: 5