Question:
(a) Describe the main elements of Working capital management?
(b) Belle Rive Ltd
Belle Rive Ltd has an annual turnover of Rs 60 million of which 80% is on credit. Debtors are allowed one month to clear off all the dues. A factor is willing to advance 90% of the bills raised on credit for a fee of 2% a month plus a commission of 4% on the total amount of debts. As a consequence, Belle Rive Ltd is likely to save Rs 216,000 annually in management costs and avoid bad debts at 1% on the credit sales.
On the other hand, a financial institution has proposed to make an advance equal to 90% of the debts at an interest rate of 18% per annum with a processing fee of 2% on the debts.
Which of the options would you recommend? Support your recommendations by detailed calculations.