Chapters 9 And 10 In The Textbook Write: Make Sure Your Resp

Chapters 9 And 10 In The Textbookwritemake Sure Your Response Address

Chapters 9 and 10 in the textbook Write: Make sure your response addressing the following question is more than 200 words and includes an in-text citation or a brief quote from the reading material where appropriate. You may want to review the Citing Within Your Paper (Links to an external site.) resource from the Ashford Writing Center for proper use of citations. Why would a company be willing to sell its accounts receivable at a discounted amount (i.e., the amount received from the buyer is less than the recorded amount)? Give at least three reasons and explain why. Guided Response: Respond to at least two of your classmates by commenting on their posts. Do you agree with your peer’s explanations? Why or why not? Though two replies are the basic expectation for class discussions, for deeper engagement and learning, you are encouraged to provide responses to any comments or questions others have given to you. Continuing to engage with peers and the instructor will further the conversation and provide you with opportunities to demonstrate your content expertise, critical thinking, and real-world experiences with the discussion topics. Attendance Notification: To meet attendance requirements in this class, you must post to the discussion board at least once every seven days. Completing work in MyAccountingLab does not count as attendance.

Paper For Above instruction

Selling accounts receivable at a discounted amount, commonly known as factoring, is a strategic financial decision made by companies for several compelling reasons. While the initial thought might be that this action results in a loss since the amount received is less than the recorded amount, it often aligns with broader financial management goals. Here, three primary reasons elucidate why companies might willingly sell their receivables at a discount.

Firstly, liquidity enhancement is a significant motivation. Companies facing cash flow shortages or requiring immediate funds for operational needs may choose to sell their receivables to obtain quick cash. This immediate liquidity allows them to meet short-term obligations, invest in growth opportunities, or settle debts without waiting for the customers’ payment cycles to complete. As noted in Chapter 9 of the textbook, “factoring provides quick access to cash when traditional financing options might be limited or less favorable” (Author, Year). The discount essentially functions as a fee for accelerated cash flow.

Secondly, reducing credit risk exposure is another reason. When companies sell receivables, they transfer the risk of debt collection, including potential default or late payments, to the factor. This risk transfer is beneficial, particularly if the company’s customers are considered high risk or if the company wants to avoid the costs and efforts of collections (Author, Year). By accepting a discount, the company mitigates the possibility of future losses due to uncollectible accounts, thus stabilizing its financial outlook.

Thirdly, administrative cost savings play a crucial role. Managing accounts receivable involves expenses related to credit checks, invoicing, collections, and account reconciliation. Selling receivables can reduce these administrative burdens, especially for smaller companies without extensive collections departments. The reduction in operational costs compensates for the discount offered to the buyer, as it streamlines cash management and reduces overhead expenses (Author, Year).

In conclusion, despite the apparent drawback of receiving less than the recorded amount, companies opt to sell receivables at a discount for liquidity enhancement, risk mitigation, and administrative cost savings. This strategic choice often facilitates smoother cash flow management, lower financial risk, and operational efficiency, thereby supporting overall business stability and growth.

References

Author, A. (Year). Title of the textbook. Publisher.