State two features of debt factoring.

Using the information in Table 1, construct a fully labelled cash flow forecast for MV for the first six months of 2021.

Explain the potential impact on MV’s gross profit margin if the prices charged by its suppliers increase in the second half of 2021.

PLEASE NOTE: Debt Factoring is not included in the syllabus for 2024 exams onward. Related parts of this multi-part question may be used.

Debt factoring:

• is short-term form of finance
• is an external source of finance
• enables a business to receive immediate cash from the factor, instead of waiting for its customers to pay their invoice.

Another feature is that the business selling its invoices does not receive the full value of the invoices as factor makes a charge (buys at a discount).

If a candidate defines debt factoring accurately, award at least [1] for some understanding. Examiners should review the definition to determine if, in defining the term, candidates have included at least two features. If so, award [1] for each feature up to [2]. Maximum award: [2].

Award [1] for each feature identified up to a maximum of [2].

Award [1] if the candidate has some idea of a six-month cash-flow forecast but otherwise has numerous errors. Award [2] if the cash flow has four or more errors or has a largely inaccurate format. Award [3] if it is largely formatted correctly and/or has three errors. Award [4] for a correctly formatted forecast with just two errors. Award [5] for a correctly formatted forecast with just one error.

Award [6] for a correctly formatted and mathematically correct forecast.

MiniVS Cash flow forecast 2021

Some possibility exists that candidates will misinterpret one portion of the stimulus and think that marketing, warehouse overheads, and office salaries total 36 000 for the three-month period Jan – Mar. and for the three-month period Apr – Jun. If a candidate interprets the stimulus in that fashion, accept as accurate provided that the candidate consistently applies the stimulus based upon that interpretation.

MV’s gross profit margin is forecast to be 50 % for the first half of 2021.

Eg $\frac{75 000 – 37 500}{75 000}$ for months 1 to 3 OR $\frac{70 000-35 000}{70 000}$ for months 4 to 6.

If supplier prices increase in the second half of 2021 and the finance director is correct that the online market for light bulbs in the UK will become increasingly price competitive, MV’s gross profit margin would fall. Under this scenario, MV would be unable to pass on to its customers the increase in prices that it, MV, is paying to suppliers. The margin would fall below 50 %.

If the candidate says “the margin will decrease” but with no clear explanation and application to the stimulus, award [1].

Award [1] for a basic explanation that conveys partial understanding.

Award [2] for a full explanation that conveys knowledge and understanding similar to the above.

Many candidates were able to provide two features of debt factoring.

As noted above, many candidates failed to include cost of sales in cash outflows. Otherwise, candidates who chose question 1 often did quite well on the cash flow and earned 4 or 5 marks.

Most candidates attempting this question earned at least one mark and many received full marks.