Faculty of Postgraduate Studies and Scientific Research German University in Cairo
Factoring and Accounts Receivable Discounting
By
Ibrahim Ahmed Ibrahim Farag Date
Sep. 2013
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ABSTRACT This paper spots the light on the Factoring and invoice discounting as alternative finance methods and account receivable management policies. Through Inductive content analysis approach, this research develops and tests different hypotheses suggesting a linear relationship between a company’s decision to factor its receivables and company’s size (Large corporate or Small and Medium size Enterprises) “SMEs”, company’s exposure to international trade, financial strength, and whether the Factoring decision itself is regarded as a basic or a primary source of finance like the conventional credit obtained from the commercial banks or regarded as an alternative source of finance. To test the hypotheses, the author interviewed the senior decision makers of 15 Egyptian companies who were all offered the Factoring finance. This is a unique study which is thought to be the only one to address the Factoring as a finance option in Egypt, or at least after the revolution. Result of the study was surprising and different from our initial assumptions as it found no linear relationship between company’s decision to Factor its receivables and its financial strength despite our initial perception of Factoring as a sign of weakness. Result of the study also showed that Factoring in Egypt is also not necessary linked to SMEs it is more of a finance option available to whoever can yield a surplus profit to cover the financing costs. Study however reaffirmed our other hypotheses that Factoring is more suitable to those companies involved in the international trade and the fact that Factoring image is under exposed and its reputation as an alternative finance. Study also found a linear relation between company’s decisions to Factor its receivables and its liquidity and another relation relationship between the same decision and the cost of Factoring. The insistent need for the liquidity vs. other options available to the company has been always one very strong reason why a company decided or refused to factor its receivables despite its high cost of finance compared to the traditional bank finance.
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Table of Contents Introduction ...................................................................................................................... 5 Chapter (1) Factoring to finance the working captial………………………………...7 1.1 Introduction ………………………………………………………………………....7 1.2 Accounts receivables management and liquidity ……………………………………8 1.3 Definition of Factoring ………………………………………………………………8 1.4 Theorticial background about Factoring…………………………………………...10 1.4.1
Historical roots of Factoring............................................................................................. 10
1.4.2 Types of Factoring ........................................................................................................... 11 1.4.3
How do Factors work? The mechanism of Factoring………………………………….…14
1.5 Difference between Factoring and traditional banking practices………………….15 1.6 Understanding the relationship between Factoring and commercial banks….…....16
Chapter (2) Factoring: A sign of strength or a sign of weakness.………...….…….18 2.1 Determinant of the Factoring decision….................................................................18 2.1.1 Typical industries usually associated to Factoring business……..………………….........18 2.1.2 Common criteria affecting a firm’s decision to factor/discount its receivables.................19
2.2 Advantages of Factoring..........................................................................................21 2.3 Factoring as a finance alternative to grow the SMEs..............................................23 2.4 Factoring: A sign of strength or weakness?.............................................................23 2.5 Global trends in invoice discounting and Factoring…………………………..…..25
Chapter (3) Research methodologies………………………………………………...26 3.1 Introduction………………………...……………………………………………..26 3.2 Hypotheses………..………………...………………………………...…………..26 3.3 Sample …………………………………………………………………………...26 3.3 Interviews …………………..…………………………………………………...27
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Chapter (4) Results and Limitations………………………………………………..29 4.1 Results….………………………….…………………………..…………………29 4.2 Limitations……......…………………………………………………..……….....30
Chapter (5) Recommendation………………………………………………………32 Recommendations…………………………………………………………………...32 References……………………………………………………………………………………34 Appendix……………………………………………………………………………………..36
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Introduction Factoring is a very old business and studies about Factoring are quite old as well. This business has developed over the time and accordingly the scope and definition of factoring changed simultaneously. Back on 60s (Robuchek, Teichroew, &Jones; 1965) defined Factoring in a very simple and concise term. They defined factoring as a mean of short term financing such as trade payables. In the same year (Phelps; 1965) defined Factoring as an agreement under which the Factor “The financer” assumes the credit and collection function of its client, purchase his receivables as they arise without recourse for credit losses. Finance market is weathering a state of turbulence in Egypt and many sectors are finding it uneasy to access credit from commercial banks especially after the revolution. We therefore belief in the importance of the Factoring business and its high potential in the Egyptian market and this is why the importance of this study. This study conducts interviews with 15 CEOs, CFOs, and corporate treasurers representing a random sample of corporates working in the Egyptian market. It first presents this business to the Egyptian market and also explores the market’s view of factoring as well. It analyzes and suggests the most influential criteria which may affect debtor’s decision whether to Factor or not to Factor its accounts receivables. The results of the study showed that all the companies were mainly cost sensitive and none of them had a stronger motive to affect their finance decision. Also, all the interviewed companies defined liquidity as a common reason why they factored the accounts receivables. Companies didn’t weigh a lot on the services presented by factors to justify its high pricing. Those who refused the Factoring offer mostly refused it due to is high financing cost and those who accepted the Factoring did it only for the liquidity with less importance given to other services presented by Factors like “Credit insurance 1 ” for instance.
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It may be noted that the credit insurance is not very popular in Egypt and not widely applicable in the domestic market unless to
insure the commercial debt extended to multinational companies which actually doesn’t add a lot to the suppliers whose already accepting this reasonable risk and would need it only for less quality commercial credit. Credit insurance “Without recourse
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The research concludes that factoring companies are having a lot of challenges including the high financing cost, complicated legislations, and market culture and immaturity in Egypt where this business is relatively new. Most of the sample viewed the Factoring as an alternative finance option although some of them looked at Factoring simply as a different or a specialized type of finance not necessary an alternative finance. Study finds Factoring as a valid way to finance the international trade and both importers and exporters whom can take a full advantage of all the services rendered by Factoring companies. One other finding of the study was the fact that most of the CFOs viewed Factoring service as equally important and suitable to both the SMEs and large corporates which came in line with their consensus that Factoring is not a sign of weakness unlike our initial hypothesis. The study suggests that Factoring is very important method of finance; it is however, according to the study, needs to be better positioned in the Egyptian market. It also needs more innovative ways to reduce its cost to enhance its competitiveness. Study also suggests that Factors can align themselves more to the commercial banks as to assist in the non-performing and low credit scoring accounts in line with Factors acceptance of higher credit risks.
Factoring” however is offered to the exporters to secure their overseas commercial credit. That will be understood and reflected in the feedback of CFOs as will show on a later section.
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Chapter (1) Factoring to finance the Working capital 1.1 Introduction Businesses rely on many sources of fund to finance their working capital, the current assets. Those sources are either provided internally through owner's equity (Irwin; 2006), or externally through trade creditors (Mian& Smith; 1992) or typically provided by different lenders and financers including the scope of our study being the “Factors”. It is therefore a very important decision of any management to identify the best finance source considering the pros and cons of each of the decisions. While trade credit (Commercial credit from suppliers) entails the company to many benefits, it also bears it to other types of costs such as, opportunity cost of losing the cash discount, tax benefits against deductibility of interest paid to lenders, and exposes the buyer (trade debtor) to price discrimination in addition to other practices of bargaining power of the supplier. Hence, the finance from the shareholders (Equity) while being considered the safest financing option it is efficiently regarded as the most costly option for finance for any efficient business. The last option therefore is the external finance and herein we consider the factoring/receivable discounting as the scope of our study. Accounts receivable and their collectability are very important for the survival and growth of business, they account for "Substantial fraction of corporate asset" therefore implies potential consequences on firm's value" (Mian, Smith; 1992). Smart management of accounts receivable accordingly can give the company an advantage to achieve a higher returns on its assets. Financially distressed companies on the other hand are having a trade off whilst managing of those receivables, a manifested conflict between transaction profitability vs. liquidity meaning that a financial distressed company has to choose between liquidity and losing a market share and granting a cash discount, thus accepting a lesser transaction profitability, or to sell more with a higher price and giving up its already distressed liquidity.
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1.2 Accounts receivable management and the liquidity ARM is defined as "Alternate assignment of some or all of the activities/functions associated to the commercial debt finance decision, a result of which would be the creation of accounts receivable as an asset in books of the seller”. As shown above the decision to finance a company’s working capital has been very important and a key factor influencing company’s profitability and survival sometimes. Distressed companies normally having only one way to survive which is to increase sales. Liquidity yet comes as a challenge facing distressed companies to achieve this target. A company’s decision to factor its receivables is therefore sometimes critical for business survival.
Likewise, fast growing corporate are investing a sizeable part of its assets in
the trade receivables which also creates a negative operating cash flow that can also hinder its sustainable growth. Receivable management is one way to help distressed companies going out of its financial distress and to help fast growing ones to expedite its growth. However, receivable discounting business is arguably still quite unknown to Egyptian market which, for decades, had been overwhelmed by traditional banking services and classic lending types. Securitization, Forfaiting, Invoice discounting, and Factoring come amongst most common receivable discounting techniques. This research focuses on the Factoring and the invoice discounting and introduces both receivable discounting techniques as reliable alternatives to provide the cash flow needed for the companies to fuel its growth and to overcome liquidity distress. 1.3 Definition of Factoring: Over the years, Factoring has grown and its scope also extended and evolved. Likewise definition of Factoring developed and kind of changed over the years. (Kerr; 1981) extended the scope of Factoring to cover activities presented by Factors other than lending. He defined Factoring as buying of client's accounts receivable either through advancing him money against the collection or paying him out of the collection; which he named a "maturity factoring".
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(Mian; 1992) suggested a simple definition of Factoring being company's sale of its accounts receivables to a financial institution other than its captive one. (Sopranzetti; 1999) defined Factoring through the eyes of service providers, the Factors, being a financial institution that are in the business of buying and managing other firm's accounts receivables whereas through a typical Factoring contract the Factor bears credit risk and the responsibility to monitor the credit quality of the outstanding accounts receivable. (Rober, Carl; 2000) defined Factoring as a process where the lender, the Factor, underwrites the extension of credits by purchasing accounts and notes receivables of a given company, consequently, customers of this company are notified about the transfer of debt from the seller to the Factor. This very detailed explanation of the transaction itself as to define the Factoring is elaborated later and presented as “Notification Factoring”. (Soufiani; 2002) who is an important and seasoned finance scholar who specialized in Factoring didn’t go quite far from the very old definition of (Kerr; 1981) and thus defined Factoring as an economic decision whereby a specialized firm undertakes the responsibility for the administration and control of a company's debtor portfolio enabling the company to sell their accounts receivables at a discount in exchange for cash. (Weisel, Harm, & Bradley; 2003) in a very innovative definition resembled the Factoring of receivables to the use of credit card, whereas a company sells product to customer against credit guaranteed, collected and hence paid by issuing bank without recourse on the seller on the event of credit default by the buyer whose payment is assigned to the issuing bank of the credit card. In another word, the company sells the receivable to the host bank which collects and guarantees the full amount and repays it minus small percentage. Reduced credit risk, and faster cash flow for the company, is hence the primary motivation. (Krishna; 2005) analyzed the financial sector market in India and previewed Factoring only as traditional fund-based financial service.
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Citing Factors' traditional orientation and consideration to Small and Medium Size Enterprises (Whale, Trevor; 2004) described the Factoring as a method of commercial finance while (Hubbard; 1987) and (Asselbergh; 2002) described Factoring as an alternative mean of finance. (Miller; 2009) previewed Factoring as a type of accounts receivable finance and defined its business scope, in line with previous definition, as a secondary market that is alternative to bank finance. FCI is “Factors Chain International” presents itself as “A global network of leading Factoring companies, whose common aim is to facilitate international trade through Factoring and related financial services. FCI network counts 263 Factors in 72 countries, actively engaged in more than 80% of the world's cross-border Factoring volume”. It covered the range of services provided by Factors in its definition defining Factor as “A complete financial package that combines working capital financing, credit risk protection, accounts receivable bookkeeping and collection services. It is offered under an agreement between the Factor and a seller. Under the agreement, the Factor purchases seller's accounts receivable, normally without recourse, and assumes the responsibility for the debtor's financial ability to pay. If the debtor goes bankrupt or is unable to pay its debts for credit reasons, the Factor will pay the seller. When the seller and the buyer are located in different countries the service is called international Factoring”. 1.4 Theoretical background about Factoring 1.4.1 Historical roots of the Factoring business Factoring is known as far back as the 14th century (Zinner; 1947) while its roots go back to the Norman quest in connection to the wool industry (Hillyer; 1939). The word "Factor" is derived from the Latin word "Facere" to make or to do- i.e. to get things done (Palia & Sopranzetti; 2004). (Silverman; 1949) explained the start of Factoring when "Factors" were merchant in colonies who had used to assume the risk of credit losses and perform the function of collection to the account of the European merchants during Fifteenth and sixteenth centuries, Factoring scope had since progressed and undergone a structural change and focused the business only on Financial, credit, and collection service without 10 | P a g e
merchandising and storage functions Factors had used to carry on before 1930. He hence defined Factors as financial institutions which principal purpose if the make credit available to industry through purchase of accounts receivables. Despite UK and US have been the major forces in Factoring and discounting business, of which Europe accounts for two thirds of world Factoring business most of which is being done in UK and Italy (Deacon & Whale, 2004), Factoring image however is still underexposed and controversial there (Hubbard, 1987). 1.4.2 Types of Factoring Academicians and professionals have got different classifications for Factoring which is reflected on their respective definitions of Factoring and influenced by the development of this centuries old business. Whilst most of them insist that a typical Factoring implies a notification clause to the debtor issuer and thus with no recourse on the seller, the recent applications involved a non notification Factoring and also a Factoring with recourse causing different classifications to evolve. Industry veterans insist that “Non-notification Factoring” is not a standard Factoring, rather, it is an “Invoice discounting” and some of professionals are calling this type of Factoring it a “silent factoring” In line with the very old presence of the Factoring, it had gone through different phases and limitations. For instance during the thirties of the twentieth century (Dalton; 1936) tacked Factoring as it ideally require a debt assignment notification with the relationship with the Factor. (Zinner; 1947) and (Byrd; 1958) classified Factoring into notification Factoring and non-notification Factoring after arise in the demand not to notify the buyers (Debt issuers) about the Factoring relationship. They classified Factoring products on notification basis i.e. whether debtors are notified with the sale of the receivable or not. (Byrd; 1958) had a different classification for the Factoring based on the Factor’s right to recourse; He classified Factoring accordingly into a recourse Factoring and nonrecourse Factoring where the different from his perspective was simply a difference between selling, in the case of nonrecourse Factoring, and borrowing in the case of recourse Factoring. 11 | P a g e
After quite some time, (Wooller; 1981) suggested that in a typical Factoring a debtor is notified that debt is assigned to the Factor thus the payment shall be made to the Factor to discharge debt, while in the case when the debtor is unaware of the assignment such as the case of non notification Factoring it is considered to be an invoice discounting not a typical Factoring. In another word he believed that Factoring has to be on notification basis otherwise it is not a standard Factoring. Recently, (Soufani; 2002) and (Deacon& Whale; 2004) linked the two classifications of Factoring (Notification and right of Factor to Recourse), they argued that "despite its early foundation, Factoring has been ignored as a source of corporate finance this why some companies may not favor to Factor its receivables to avoid notifying its customer2. This is in our hypothesis is tested whether the Factor is seen by the companies as a sign of strength or weakness. Overcoming this obstacle, the notification and the negative reputation of the factoring, encouraged a subsequent development of invoice discounting on a non-notification basis, against ledger of sales, so-called "Non-notification-Factoring". They explained the mechanism of non-notification Factoring through making advance only on the security of receivables, as the seller checks his own credit and bears probably credit losses and thus do his own collection and ledgering then turn on the proceeds in their original form to the lender. It may be noted that the flaws (in the eyes of lender) behind this kind of credit “Nonnotification Factoring” is the risk fraud, mainly assignment of factious accounts, failure to make delivery, a fraudulent and forged delivery receipt and failure to turn over the proceeds of collection presented. The high risk associated to non-notification Factoring created a need to change the genuine structure and business model in which Factors had used to operate for centuries. That came up with a real need to claim against company's customer in the event of default of its buyer, the debtor, this practice is known as ”recourse".
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This point synchronizes with our hypothesis that large corporates avoid to notify the debtors about the Factoring which comes in line with our hypothesis that Factoring is a sigh of weakness.
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Recourse Factoring is a typical asset based lending “ABL” where assets are used as a collateral for the loan while title and risk remains with the seller unlike nonrecourse Factoring whereby assets are sold to the Factor as that title and risk passed to him (Weisel, Harm& Bradley; 2003). The disadvantage of recourse Factoring actually offset all the accounting benefits gained from selling the receivables on nonrecourse basis, which enhances the cash flow and treated as off-balance sheet finance whereas recourse Factoring is a standard asset based lending such as commercial banking practices (Marti, Duchac & Lindley; 2001). In conclusion, recourse Factoring entails Factors to claim the money from the "borrower" in the event of default of payment from their customers, while nonrecourse Factoring doesn’t give the Factor the right to claim the money in the event of default, Factors thereby become a purchaser of debt and their client's status becomes a seller of debt rather than being a borrower (Soufani; 2002). (Levy; 2007) denied any link between the need for nonrecourse Factoring and the financial strength of the seller (Borrower) as it only considers the status and credit worthiness and financial strength of the debt issuer debtor (seller's customer). It may be noted that that at any case the nonpayment because of performance related issues or dispute because of defects, quality, product description,…,etc is however still charged back by Factors to the seller (Mian& Smith;1992). A completely different classification of Factoring was added by (Hubbard; 1987) considering the credit protection function rendered by Factors. In addition to the regular classification on notification basis, he classified Factoring into a "maturity factoring" and "discounting Factoring". In maturity Factoring the customer only expects to receive the full payment of the invoice in maturity date capitalizing on the credit protection given by Factor whereas in discounting Factoring he receive a sight payment, as a discount, against assignment of the invoice to the Factor. Hubbard hence added a so-called "Overadvance Factoring" which implies financing of customer's inventory (purchases) in anticipation of a assigning of future receivable will be created after sale of this inventory. This practice ideally suits business with seasonal purchases/sales. 13 | P a g e
From the above definitions and classifications in the previous literatures, it is obvious that previous research suggested the following: 1) Factoring scope is mainly oriented to the finance function despite its extended range of services. 2) Factoring is more suitable to SMEs rather than to the large corporates. 3) Factoring is a sign of weakness and therefore seen by CFOs as an alternative finance option. 1.4.3 How do Factors work? The mechanism of Factoring Workflow in Factoring companies seems to be of a very old culture and standardized amongst the industry. (Dalton; 1936), (Silverman; 1949), (Soufani; 2002), and (Levy; 2007). Summarized the mechanism of invoice Factoring as explained hereunder: 1) The beneficiary receives sales order then supplies goods and issues the invoice. 2) Supplying firm (beneficiary) request financing and provide the debtor (Buyer) book "Sales ledger". 3) Factor advance cash against invoice. 4) Buyer (Debtor of Factor's Customer) is expected to make payment to the Factoring firm within the pre-specified period of time, as written on the invoice. 5) Factoring company charges fees and interest to its customer. 6) Shall customer's firm default on payment, Factors shall not claim against its customer, ideally in the event of nonrecourse Factoring. (Ittleson;1978) hence wrote about the structure which links Factors together, being the legislative body organizing the international trade and facilitate communication between member Factors around the world, Factoring Chain International (FCI). As explained above, it coordinates and organizes the communication between different member Factors worldwide. Each member company (Factor) is hence required to have a reliable financial backing through bank, insurance company or other financial institution. 14 | P a g e
To promote competitiveness in the industry, FCI encourages the presence of more than one Factor in each country. Foreign Credit Insurance Association (FCIA) is another administrative body; it is a private organization of insurance underwriters affiliated with US export-Import Bank and provides insurance against commercial and political credit risks for companies involved in foreign trade. 1.5 Difference between Factoring and traditional banking practices Factoring technical scope and criteria of doing business is marginally different from the way traditional banking is being done. (Dalton; 1936) verified Factors from banks on acceptance of deposit basis, as Factors ideally do not accept deposits; alternatively, they secure finance through commercial banks. Factors thereby guarantee to commercial banks financing a broad class of companies which banks can be not prepared or equipped to finance. Furthermore, commercial banks do not guarantee credit, unlike Factors which credit guarantee is one of the core functions. (Silverman; 1949) stated that difference between Factoring and banks lies only in both the notification as banks do not notify debtors unlike Factors thus banks usually take recourse against its customers in event of default while Factors ideally do not. Furthermore, unlike commercial banks, Factors do not stipulate customer to leave fund on deposit as a provision, usually known as margin. Obviously this difference was since influenced by the scope of Factoring and its historical limitations which no longer exist in today’s world and recent applications of Factoring. (Byrd; 1958) Found that banks often have stricter credit standards than those of Factors, this is of course is reflected in lesser pricing usually offered by commercial banks. (Rea, Chilton, Crandall, Fagerberg, Goldberg, Greene, et al.; 1980) referred to Factors' practice in US to accept of payment of interest to customers who leave the fund beyond the maturity date i.e. after collection of receivables, this practice proven to help in reducing Factor's weighted average cost of fund as it may pay interest to credit customers more it usually pays to other sources of fund, mainly lenders like commercial banks.
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1.6 Understanding the relationship between Factoring and commercial banks There is actually a sort of overlapping relation between banks and Factors, banks may get into Factoring business for several reasons: 1) Relatively stable business
2) Higher return than this of commercial banking business due to higher associated risk.
3) Factored accounts receivable provide source for future customers either for loan or deposit business.
4) Banking entry to Factoring business entails them to gain a portion of the industry, though indirectly.
5) Banks thereby also get men skilled in acquisition, supervision, and collection of highrisk commercial accounts into bank managerial ranks, men who can handle these types of exposure. This skilled labor may well provide the know-how for a subsequent extension of lending to customers who were previously only able to access credit from finance companies.
6) Banks are also indirectly involved in financing high-risk and small companies through financing of Factors which may accept to lend such kind of customers upon fulfilling of Factoring criteria.
7) Shall not banks keep up with the dynamically changing business environment; they will obviously get out of business. The telecommunication giant Ericsson transferred its Chinese business from Chinese banks to Citibank (China) in March 2002, mainly because of lacking of Factoring by Chinese banks. Financial innovation is very essential to accommodate high quality international accounts and to keep up with the increasing completion in the banking business at the wake of liberalizing financial services sector in most of the countries all over the globe (Bin, Locke& Willette; 2003). 16 | P a g e
Few Factors are still independently owned (Nearly 7%). Bank owned ones are larger in terms of turnover and employees. They now account for more than 93% of total market turnover. Most of UK banking institutions are currently providing Factoring service (Soufani; 2002). Large Factoring companies, supported by banks, enjoy economies of scale and cost advantage in accessing information therefore they can engage in larger exposure and get more diverse client base. Banks thereby have superficially taken over the Factoring business due to their wide, though indirect, control over the Factoring now (Kerr; 1981). Banks on the other hand are ideally still reluctant to finance SMEs (Irwin; 2006) or to extend self liquidating line of credit to submarginal application of those of no credit history, poor earnings, or weak financial ratios (Shay& Greer; 1968) It is estimated that banks finance only 8% of working capital requirements and just 6% of new investment requirements of SMEs, whereas the most effective method to finance their need is the "formation of dedicated channels for this activity". Importance of Factoring to banks has hence evolved, some leading banks ventured into Factoring, mainly by acquisition. It may be noted herein that (Irwin; 2006) reinforces our hypothesis that Factoring is more linked to finance the SMEs than banks. It also comes to refers to an implicit linkage between the factoring and the low credit rating which also suggests that factoring is a sign of weakness and an alternative finance to those having a restricted access to bank credit.
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Chapter (2) Factoring: A sign of strength or a sign of weakness 2.1 Determinant of the Factoring decision 2.1.1 Typical industries usually associated to Factoring business. In an attempt to find a linkage between the company’s business/industry and its decision to factor its receivables (Zinner; 1947) identified textile industry as the main industry associated to any Factor while (Silverman; 1949) added furniture, appliances and equipment industries to textile as a major interplaying partner to Factors and further extended the scope to cover businesses with seasonal sales such as summer and winter sportswear, bathing suit, and rubber as typical industries inclining to Factor their receivables. (Byrd; 1958) found that Factoring is relevant to any industry which structure consists of many manufacturers selling to many retailers and with significant overlapping of those retail customers between the producers (That entails Factors to cost advantage to investigate credit worthiness of the main issuers of trade debts-retailers- in this industry). Over the time Factors have developed their traditional scope of Factoring and added new lines of businesses in addition to textile and allied fields as furniture, shoes, toys, lumber, and metal products became valid segments with which Factors started to intimate with (Shay& Greer; 1968). In line with the technological reform in late seventies (Ittleson; 1978) added hardware, plastics, and other consumer goods to the segment industries fit to scope of Factoring. During the practitioner forum, Rea, Chilton, Crandall, Fagerberg, Goldberg, Greene, et al. (1980) reaffirmed that Factoring was traditionally a mean of financing certain industries, such as textile, apparel and furniture, and carpet, houseware, marine products, paints hardware, plastics, metal products, toys, and sport goods, while defined typical business fits to Factoring as manufacturers, converters, assemblers, material fabrication, and finished products producers. (Kerr; 1981) Scoped anything sold in retail and service businesses as Factorable ones. Also (Hubbard; 1987) and FCI added consumer electronics to the list of industries associated to Factoring while textiles, clothing and electronics have remained to be the most popular industries, however manufacturers of industrial and farm equipment, office equipment and processed food are
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increasingly turning to Factoring. Finally (Levy; 2007) has further suggested security firms as typical customer for Factoring.
2.1.2 Common criteria affecting a firm’s decision to factor/discount its receivables Many Factors are common amongst the companies which decided to Factor its receivables. It is important to understand why a company would resort to the Factoring option which will also be taken as evidence whether the Factoring is a sign of weakness or strength. According to the literature, the below criteria are key determinants to better group and also understand the motives behind a company decision whether or not to Factor/discount its receivables. 1) Company size (turnover, number of employees, capital) as the Factoring in large, according to the literature, is suitable to SMEs. 2) Company’s sector. 3) Management’s professionalism and ownership structure. 4) Seasonality of sales 5) Other supplier's cash flow (Sufficiency of trade credit). 6) Financial healthiness, growth rate. 7) Compliance to certain covenants and financial reporting, 8) Distressed companies which need a quick fix. 9) Access to bank credit client’s years in the market (Hillyer; 1939) had suggested that SMEs makes up the major market for Factors while (Zinner; 1947) reiterated this argument and confirmed that Factoring business is devoted largely to serving SMEs. He further added that Factoring decision, as taken by the Factors being the supply side, is highly correlated to set of criteria being turnover,
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product, sector, age, customer (Debtor), management, operational sustainability, profitability, collectability, credit instrument underlying the debt (Credit notes for instance), and less correlated to other determinants, though still being considered, such as company's size (No of employees), and the financial statements ( Byrd; 1958) stated that Factor are evidenced to be mainly used by SMEs, while Factors hence claim to be the ideal finance solution to those firms characterized by being new, fast growing and capital intensive or innovative ones and those which face sales seasonality. He mentioned that covenants usually accepted by Factors as a sort of comfort are authorization to inspect borrower's book upon demand, supporting documents such as original invoices, or signed receipt from shipping company or the buyer may be also needed. Through his study, he overcame the limitation of Factors a in case of a firm selling to small outlets and retailers it will usually have a huge number of invoices with small dollar value. This situation soar the finance burden cost significantly up because of increasing administrative costs. During the practitioner forum (Rea, Chilton, Crandall, Fagerberg, Goldberg, Greene, et al; 1980) concurred the fact that while Factors would opt to bank with companies with reasonable working capital, sound financials, experienced management with "growth potential". (Smith& Schnunker; 1994) dissented any significant correlation between seasonality of sales, firm size, and other supplier's cash flow, and firm's decision whether to Factor or not. They only linked Factoring likelihood to transaction cost variables (Including cost of information) and other variable describing distribution channel. In contrast (Soufani; 2000) found that firm's size, age, sector, and ownership structure company are amongst the determinants positively correlated the decision to Factor company's receivables. The obvious contradict between Smith and Schnuker's conclusion, and Soufani's one is that the earlier examined the determinants affect the Factoring decision from company's point of view, the demand side, whereas the later investigated this decision from the Factors' perspective, being the supply side. (Asselbergh; 2002) solved this debate and concluded that Factoring will be sought by those SMEs which are new, facing huge 20 | P a g e
capital expenditure, and seasonality of sales. As a matter of fact this debate is mainly the core of our research. (Levy; 2007) demonstrated more sophisticated model to understand the motives behind company's decision to resort to Factoring being those companies having one of the following criteria 1) Companies need to expedite its cash flow to finance its growth or to comply with certain covenants and financial reporting. 2) Distressed companies which need a quick fix. 3) New firms no yet established may be under bargain power from both suppliers (Short or no trade credit), and buyers (extended trade debt) bearing in mind the limited resources, mainly working capital, ideally available to new companies, together with the difficult access to bank credit, Factoring receivables will be a feasible and ideal solution to weather this standstill.
This model reiterates our hypothesis and reaffirms the
prevailing perception of Factoring being a sign of weaknesses or at least to only intimate to smaller size and not credit worthy customers (Miller; 2009) concluded that client with less than two years in the market or with low credit scoring are typical customers for Factors, that was based on the assumption that the basis while assessing customer's from Factoring perspective is only customer's ability to pay unlike banks which have more sophisticated considerations while doing the credit assessment. He referred to the fact that Factors don’t lend money, they buy a portion of small business's assets that is the accounts receivables. 2.2 Advantage of Factoring: 1) One of the greatest problems facing exporters is the increasing insistence by importers that trade be conducted on open account terms (Shay& Greer; 1968). This often means that payment is received many weeks or even months after delivery (FCI website). 2) Through the export Factoring, which is to sell the overseas sale invoices; Factors (Ittleson; 1978) facilitates exporting on open account basis (Import Factoring allow 21 | P a g e
importers to import on open account basis too), it protects customer from foreign trade risks, mainly currency devaluation, and default/ delayed payments risks, it contribute to expand company's overall business in terms of turnover and customer base, it also enhances company's cash flow and credit investigation costs. 3) Factoring shall also free company's management to focus more on basic areas of business such as production and marketing through outsourcing the credit investigation and collection tasks to Factors. 4) One more advantage is realizing that customer's company has a Factor's support help its credit standing with suppliers. Additionally, Factorability of company's receivables adds some sort of financial stability to which the company may resort during tough time. This is seen by some CFOs to as one valid reason to deny that factoring is a sign of weakness. 5) Many customers look to Factors for more than financing services. Due to their deeply rooted experience in certain industries, Factors are oftenly called by customers to offer counseling on both financial and managerial problems, including acquisition, capital raise, and internal reorganization. Besides, such as Forfaiting, Nonrecourse Factoring could also eliminate the credit concentration with one buyer (Krahmer; 1990). 6) A rather new advantage of Factoring is its validity as a solution to those firms facing underinvestment problems while being under restrictions, like those of covenant agreements, to extend their borrowing, for instance, those companies under an agreement which ceils their debt-to-equity ratio or a company under a financial distress. 7) Factoring can also provide a collateral for loan which may not otherwise be available to the company in addition to its positive correlation to the volume of sales as that increasing financing needs at the wake of increasing sales can be fulfilled through financing the resulting AR (Ulrich; 1978).
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2.3 Factoring as a finance alternative to grow the SMEs SMEs are very important and widely deemed to be the backbone behind a sustainable and invulnerable economic growth (Irwin; 2006). In developed nations, it accounts for 99% or more of all firms. They are characterized by being flexible, innovative and responsive. They incline to be more productive. Furthermore, creation of more SMEs enables nations to grow a firm middle class. Despite SMEs' renown essence and role to enhance the competition to the economy, job creation, boost company-wide efficiency, growth, innovation and poverty alleviation (World bank website), SMEs are still suffering from lack of finance. Factors hence evolved to bridge this gap; they mainly segment SMEs (FCI website). As a matter of fact SMEs of turnover less than GPB 3M are the major segment behind growth of the Factoring business in UK. (Soufani;1999). Commercial banks are usually reluctant to finance SMEs. It is estimated that banks finance only 8% of working capital requirements and just 6% of new investment requirements of SMEs. (Pino; 2004) suggested that the most effective method to finance the needs of SMEs is the "formation of dedicated channels for this activity". Banks have been hence indirectly engaged in financing those companies through financing of Factors which may accept to lend such kind of customers upon fulfilling of other criteria. In another word, while banks are ideally hesitant to extend self liquidating line of credit to sub marginal application of small size (Shay& Greer; 1968), no credit history, poor earnings, or weak financial ratios they do it through Factors, most of UK banking institutions are currently providing Factoring service (Soufani; 2002). 2.4 Factoring: A sign of strength or weakness? Banking with Factors has been always a controversial decision. Some companies do not even know what Factoring is all about. Most of the researchers and industry veterans, in our opinion, already agreed upon the weakness status of companies which use to bank with Factors under the impression and reputation of Factoring being an alternative finance or the last resort to get the finance. This is not a new understanding or conclusion it is an old perception. We however will still test it in our study.
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For instance: (Silverman;1949). Affirmed that many businessmen perceive Factoring as a sign of weakness, whereas (Rea, Chilton, Crandall, Fagerberg, Goldberg, Green, et al.;1980) assured the perception of Factoring being the last resort for client's financing needs. (Robichek, Teichroew & Jones; 1965) clearly stated that Factoring is a sign of weakness and did not consider it amongst efficient sources of short term finance as it is usually less desirable; they added that it is not used in practice unless it is the only available alternative. To investigate this argument (Hubbard, K. ;1987) found that only 3% of companies which sales range between USD 5-200 Million were using Factoring in a survey done on US market, whilst 80% of the respondents did not even know what Factoring was. He attributed this finding to communication problems or marketing inefficiency. For instance, Factors can market themselves as a cheaper alternative to costly bookkeeping, collection, and credit costs. (Soufani; 2002) found that company’s deciding to resort to Factoring are those facing difficulties to obtain finance through traditional banking services while companies with cost advantage and market power are less likely to use Factoring. Likewise, (Deacon& Whale; 2004) translated the ignorance of Factoring as a source of corporate finance, despite its early foundation, into being a sign of weakness. Whereas some companies may not favor to Factor its receivables to avoid notifying its customer (Factors oftenly require a debt assignment notification) with the relationship with the Factor. This encouraged the subsequent development of invoice discounting on non-notification basis (Against ledger of sales). Against these arguments; (Ittleson;1978) stood reluctant to that consensus belief about Factoring and hence stated that- in contrast- many customers look to Factors for more than financing services. Due to Factors' deeply rooted experience in certain industries, they are oftenly called by customers to offer counseling on both financial and managerial problems, including acquisition, capital raising, and internal reorganization. (Asselbergh; 2002) also denied that signal of weakness; he stated that Factoring is not a sign of weakness despite companies which Factor their receivables are usually less profitable and denied its perception as the last resort for finance. (Weisel, Harm& Bradley; 2003) insisted that Factors get themselves allied to growth companies unlike the traditional perception about Factoring to be associated to companies expected to go out of business. 24 | P a g e
2.5 Global trends in invoice discounting and Factoring Modern applications of invoice discounting and factoring are Forfaiting and Securitization. To explain the difference between securitization and Factoring (Palia& Sopranzetti; 2004) underlined the described a typical Factoring when the company sells the invoice to Factors, while in securitization the firm may only sell a portion of the receivable. Furthermore, securitization arrangement commonly does not have the facility to perform on-going monitoring of underlying receivables, this task is ideally being done by the borrower, in contrast to the Factoring who is undertaking this function and can even outperform the company in so doing due to its specialized credit management department and expertise. One other modern application of Factoring is the Forfaiting (Krahmer; 1990) which is commonly used to finance exports worldwide which advantage, such like Factoring, can also minimize the credit concentration with one buyer. However, it is more of long-term finance which has more focus on financing of capital assets.
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Chapter (3) RESEARCH METHODOLOGIES 3.1 Introduction There is no sufficient material or data in the Egyptian Market to quantitatively test our hypothesis where the factoring business has been recently introduced, so the research used the qualitative content analysis, inductive approach, to better understand and test our hypothesis (Elo S. & Kyngas H ; 2008). We favored this method as a valid mean to provide a new presentation and a thorough view of the Factoring business in Egypt and to test apply the theoretical framework collected and concluded from our literature review. Results and conclusions thereby are categorized and grouped according to our own modeling and conceptual mapping in accordance to our understanding of the theories and literature. We converted the results of the interview into a written text in accordance to the usual data preparation step commonly followed in the qualitative content analysis (Zhang Y. & Wildemuth B. M.; 2009).
3.2 Hypotheses The research is based and interviews thus made to test the following hypothesis: H1: Factoring is having an unfavorable image by CFOs and seen as a sign of weakness. i.e. there is a linear relationship between company’s financial strength and its decision whether or not to factor its receivables. H2: Factoring is an alternative finance sought by companies having a restricted access to bank finance. H3: Factoring is geared to serve the SMEs more than the corporate clients. H4: Factoring is more suited to those companies involved in the international trade. 3.2 Sample and population The managers responsible for the finance decision making of 15 firms which were offered the Factoring/Invoice discounting credit were interviewed. The firms were
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randomly selected out of Egypt Factors records (The only licensed Factoring Company in Egypt) meeting the following criteria. 1) Continued relationship with the client as to accept to dedicate nearly 90 minutes for an interview and to divulge some confidential information. Some of the CFOs/CEOs refused to cooperate noting that all of them had refused the Factoring offer for different reasons. 2) Selected companies were approved and contacted at the first place according to Egypt Factors criteria (Sales more than EGP20M, 3 years in business, reasonable credit profile and good reputation in the respective market) Accordingly, the population is limited to those companies which were offered the Factoring not all the companies which may have needed the Factoring (There is still a probability that some companies needed the Factoring but did not meet Egypt Factors above set criteria). 3) The interviewer has a good experience with the business of those companies which is noted in his feedback/comments, against managers’ feedback, as to validate the response of the CFOs against his personal understanding. It may be noted that Egypt Factors data base contains 231 companies of which only 39 companies accepted to cooperate. The selected companies (15 companies) were those companies representing the most possible diversified backgrounds (Size, business, export, financial position, its decision to factor/not to factor,…,etc) plus the fact that only those companies agreed to divulge their financial figures and publish the results of their interviews. Accordingly the sampling method is the convenient sampling which has some limitations to generalize its conclusions.
3.4 Interviews Companies were asked different questions and preplanned discussions were opened with the managers while questioning the below points: General Data a. Company size (Sales, No. of employees, legal entity, capital). b. Management knowledge (Education, experience, company’s length in business). 27 | P a g e
c. Type of business. d. Managers’ understanding of banking and non banking financial institutions in general and Factors in specific. Management a. Familiarity of Factoring and types of Factoring Notification vs. Non notification, or recourse vs. without recourse. b. Identification of the relationship between the Factors and commercial banks. c. Understanding the difference between the Factors and types of receivable discounting (Credit insurance, Forfaiting, securitization, invoice discounting).
Liquidity a. Direct question about company’s liquidity position. b. Accessibility to bank finance. c. Percentage of utilization of available bank credit. d. Commercial credit granted from suppliers, as a significant cause of operating cash inflow. e. Growth rate, commercial credit granted to customers, inventory levels, as a significant cause of operating cash out flow.
Factoring a. The reason why the company agreed/refused to Factor its receivables (With recourse or without recourse). b. Factoring image; a sign of weakness or a sign of strength and why? c. Factoring is more suitable to SMEs or large corporates (Sales more than EGP180M). d. Factoring is more suited to international trade or domestic business. e. Whether the company prefers notification factoring or non-notification factoring. f. Whether Factoring is a primary source of finance or a secondary source of finance.
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Chapter (4) Results and Limitations 4.1 Results Result of the study shows the following: 1) Most of the companies (14 out of 15) had the liquidity squeeze amongst the first driver of its decision to discount its receivables, either with recourse or without recourse.
2) All the companies, with no exception, criticized the high factoring costs compared to the cost of the traditional bank lending. The high cost of Factoring, according to our study, is a key reason why the company accepts or refuses the factoring offer. We conclude that the Egyptian market mainly considers the finance function on the top of the other services offered by Factors (Debt protection, collection, …,etc). As a matter of fact this finding comes with the consensus definition of factoring according to the literature.
3) There is no clear answer whether the factoring is a sign of weakness or a sign of strength. CFOs had different views of Factoring. Despite none of them denied the negative perception of Factoring as a sign of weakness by the market itself they however found no linear relationship between company’s decision of Factoring and its financial strength. According to the study, the reason why the company seeks the factoring is the indication of its strength or weakness therefore there is no direct relationship between the factoring decision and the strength or weakness.
For
instance, liquidity is always the reason for external finance. If the liquidity is sought for a better asset-liability-management or to enhance the return to shareholder or if the liquidity issue is because of the accelerated growth it would be considered a sign of strength also in case the company factors the receivables because its investments in the inventory (To start a new business cycle) is more profitable than investments in the accounts receivable that can be considered a sign of strength. i.e. the cost of finance is less than the gross margin. But, in case a company factors the receivables 30 | P a g e
and accepts a higher than average costs of finance, as the case in the factoring, because it has no other source that will be a sign of weakness according to the study.
4) Factoring is an alternative finance in the eyes of the Egyptian companies. However, some of the companies looked at factoring simply as a new style of finance not necessary an alternative to the traditional banking finance.
5) Factoring is a smart finance solution to SMEs it is however equally relevant to both large corporates and SMEs. It is all a matter of company’s ability to make a sufficient profit to cover the high finance cost of factoring.
6) Factoring is better geared to serve the companies with exposure to the international trade as they can take the most out of its different services, mainly the credit insurance/debt protection.
4.2 Limitation of the research 1) The usual limitations of the qualitative research as the data analysis was based on the understanding and judgment of the interviewer, myself, which still does not completely eliminate the personal bias or unintentional direction of the information to serve a certain conclusion. However, on the other hands, the wide number of the companies and diversified backgrounds and the results of the research itself proved otherwise where tow out of four hypothesis were rejected.
2) Interviewed companies are all fall under Egypt Factors criteria which certainly excludes another segment out of the population which feedback or needs may change the overall conclusion.
3) Debt protection is restricted in the local market due the absence of information and credit insurers. It is therefore only presented to exporters in large. This fact can be a reason why the interviewed companies didn’t highly value this option as they were
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never offered in the domestic market (Unless for Multinationals which usually needed it for financial compliance only). 4) The research didn’t properly consider all the important independent variables which can yet overlap and influence company’s decision to factor or not its receivables like the degree of awareness, type of industry, proper marketing of the service. 5) This research gives didn’t pay enough attention to the other factors affect the decision from the supply side “The factors”. For instance some companies may have needed the factoring but refused at first place by the factors themselves.
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Chapter (5) Recommendations 1) Banks are usually hesitant to lend those firms achieving losses because of producing below breakeven point even those achieving highly decent profit margin. This attitude can borne banks to a deadlock situation when one of those firms is amongst its existing borrowers. Factors as ABL (Asset Backed Lender) can bridge this gap and intimate with commercial banks, especially with the non-performing loans divisions, to assist in floating (Financing) the customers which potential business model and positive contribution margin. This can be done on a transaction-by-transaction basis and comes in line with Factors interest in the performance of the beneficiary and buying of quality receivables. On due course, resultant profit (Contribution margin), can be transferred to lending banks, after recovering of Factor's fees and direct costs of the producer (borrower). This practice can open up new routes for commercial banks to outsource part of its recovery process to Factoring companies in a win-win basis and duly establish a business niche for Factors to operate and integrate with commercial banks.
2) Another integral business could be the collection service rendered by Factors; a known practice of commercial banks is to request routing borrower’s receivables through its channels as a covenant for financing of working capital. Factors have the advantage and resources of both collection services, client management of borrower's customers. They additionally have the expertise and convenience to check borrower’s ledgers unlike commercial banks which use other less efficient ways to verify customer's compliance because of lack of appropriate resources to check their sales ledgers.
3) Factoring can cooperate with commercial banks to provide collateral for loans and thus manage the borrower’s receivable portfolio to the account of the lending bank. For instance, banks traditionally keep their eyes away from certain type businesses and services. They do not usually finance high risk industries such as movies, 33 | P a g e
advertisement; startup business is also unlikely to get an easy finance approval from a commercial bank. This is due to banks' interest in overall borrower's performance as a going concern whilst risks associated with those types of business might borne customers to business risks above bank's risk tolerance. Factors can underwrite the finance of this business upon presence of existing demand over the products regardless the other risks may escort the business, they are simple receivables financers. Conclusively, banks can outsource such type of finance to Factors which will bear the systematic risk associated with the business while banks can indirectly finance this business through financing the Factor itself.
4) Factors hence need to adapt more to the changing market environment and business needs. They need to be more innovative and responsive. Product development has also need to be reconsidered by Factors. For instance, Islamic finance area areas which Factors may need to develop, adapt, and eventually adopt. Also, the documentation needed from the borrower need to ease by the factors. Factors also need to develop smart ways to reduce its cost of fund to be more competitive.
5) Factors need to work hard to reduce its costs and issue letters of guarantees as to extend its scope of trade finance. That will need a legislative bodies to sponsor this practice and thus to switch the Factors to be more of trade fiancé houses or a full fledge commercial financers which will ultimately boost the local economic activities. 6) Factor can also present the risk rating services to foreign suppliers and domestic banks especially to the SMEs segment which commercial banks are hesitant to penetrate.
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References: Asselbergh, G. (2002). Financing firms with restricted access to financial markets: the use of trade credit and Factoring in Belgium. European Journal of Finance, 8(1), 2-20. Bin, J., Locke, P., & Willette, W. (2003). Picking up the gauntlet: Bank competition in China after World Trade Organization entry. Journal of International Banking Regulation, 4(3), 247. Dalton, J. (1936). Factoring. Harvard Business Review, 14(2), 186-199. Deacon, T., & Whale, M. (2004). When is Invoice Discounting not Invoice Discounting?. Credit Control, 25(7), 29-31 Elo S. & Kyngas H. (2008). The qualitative content analysis process. Journal of advanced nursing 62(1), 107-115. Hillyer, W. (1939). Four centuries of Factoring. Quarterly Journal of Economics, 53(2), 305-311. Hubbard, K. (1987). Factors' image: underexposed. ABA Banking Journal, 79(11), 72. Irwin, D. (2006). Chapter 1: Financing entrepreneurship at the regional and local level in South East Europe. OECD Papers, 6(12), 14-42. Ittleson, H. (1978). Factoring: Opening new routes in international trade. Management Review, 67(9), 48. Krahmer, E. (1990). Forfaiting: The European Edge in Trade Finance. International Executive, 31(4), 17-18. Levy, E. (2007). Shining a Light on a Niche Area of Financing in the Current Credit Market. Secured Lender, 63(6), 50-62. Mian, S., & Smith Jr., C. (1992). Accounts Receivable Management Policy: Theory and Evidence. Journal of Finance, 47(1), 169-200. Miller, C. (2009). Factoring can be a option when traditional financing isn't. Hudson Valley Business Journal, 19(13), 2. Palia, D., & Sopranzetti, B. (2004). Securitizing Accounts Receivable. Review of Quantitative Finance & Accounting, 22(1), 29-38.
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Rea, R., Chilton, J., Crandall, A., Fagerberg, J., Goldberg, D., Greene, G., et al. (1980). Practitioners Forum. Journal of Accountancy, 150(6), 22-34. Robichek, A., Teichroew, D., & Jones, J. (1965). Optimal short term financing decision. Management Science, 12(1), 1-36. Silverman, H. (1949). Factoring as a financing device. Harvard Business Review, 27(5), 594-611. Shay, R., & Greer, C. (1968). Banks move into high-risk commercial financing. Harvard Business Review, 46(6), 149-161. Soufani, K. (2002). The Decision to Finance Accounts Receivable: The Factoring Option. Managerial & Decision Economics, 23(1), 21-32. Ulrich, T. (1978). Financing via accounts receivable. Journal of Small Business Management, 16(2), 10-13. V., K. (2005). Metamorphosis of marketing financial services in India. Journal of Services Research, 5(1), 155-169. Weisel, J., Harm, N., & Bradley, C. (2003). The Cash Factor. Strategic Finance, 85(3), 29-33. Zhang, Y. , & Wildemuth, B. M. (2009). Qualitative analysis of content. In B. Wildemuth (Ed.), Applications of Social Research Methods to Questions in Information and Library Science (pp.308-319). Zinner, S. (1947). The Contribution Of Commercial Receivable Companies And Factors To Financing Small- And Medium-Sized Business. Journal of Finance, 2(1), 7690. (1981). Factoring changes slowly--but it is changing. ABA Banking Journal, 73(12), 92.
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Appendix The interviews We used the below bands in the table 3-1 to code the variables of the interviews as shown below. Codes (Table 3-1) Band Growth
Governance
Liquidity
Cash Cycle
International trade
Less than 30days More than 70%
Degree of Awareness of Factoring Professional
1 2
More than 20% Corporate-MNC 5%-20% Corporate-National
High
Moderate 30-60
50%-70%
Advanced
3
Less than 5%
MID Cap-Domestic
Marginal
60-120
30%-50%
Modern
4
Static
Family run corp.
5
Declining
120-180 More than 180
10%-30% Less than 10%
Basic Nothing
Low One man show style Distress
Table 3-2 below describes the classification of each of the interviewed companies against the independent variables. Results of the interview (Table 3-2) Company
Governance SMEs/Corporate (1-5)
Liquidity
Growth
Cash Cycle
Present finance
International trade 4 4 3 4
Nourmidas Enjoy Egyplast Olympic group
4* 2 3 1
SMEs Corporate SMEs Corporate
3 5 2 1
4 5 1 2
5 2 3 3
ASEC
3
Corporate
4
5
3
Subsea Maritime
4
SMEs
3
2
1
TransAfrica
4
SMEs
5
2
2
Equity Past dues Banks Equity/ Suppliers Equity/ Banks Equity/ Banks Past dues
Albaddar Packing PPT
3 3
Corporate SMEs
5 4
4 1
3 4
Past dues Banks
4 3
SAPESCO
2
Corporate
4
2
5
4
Dytex
2
Corporate
4
2
4
Alkan group Alamriya casting
2
Corporate
4
1
4
Banks/ Suppliers Equity/ Banks Suppliers/Banks
2
Corporate
5
4
3
Past dues
4
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4 1 1
1 2
Alzhour
5
SMEs
4
1
5
Factoring
4
MAC carpets
2
Corporate
2
2
4
Banks/ Factoring
2
Table 3-3 summarizes the results of the interviews against the dependent variables. Table (3-3) Company
Degree of Awareness
Reason for Factoring
For domestic or int. trade
To finance SMEs or Corporate
Alternative finance
Sign of strength or weakness
Of Factoring Nourmidas
3
Liquidity
International
No relation
Yes
Depending
Enjoy
2
Liquidity
Domestic
No relation
Yes
Weakness
Egyplast
3
Liquidity
International
SMEs
Yes
Weakness
Olympic group
2
-Protection
International
SMEs
No
Strength
-Compliance ASEC
3
Refused for higher cost
Domestic
No relation
No
No relation
Subsea Maritime
2
-Liquidity
International
SMEs
Yes
Depending
-Cash mgmt TransAfrica
4
Liquidity
International
SMEs
Yes
Weakness
Baddar Packing
3
Liquidity
International
Corporate
Yes
Depending
PPT
3
Liquidity
No relation
No relation
Depending
Strength
SAPESCO
4
Liquidity
International
No relation
Yes
Weakness
Dytex
2
-Liquidity
No relation
No relation
Depending
Weakness
-Protection Alkan group
3
Liquidity
International
SMEs
Depending
No relation
Alamriya casting
3
Liquidity
No relation
No relation
Yes
No relation
Alzhour
4
Liquidity
Domestic
No relation
Depending
Strength
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MAC carpets
1
- Liquidity Protection
International
No relation
Yes
No relation
-Compliance
Table 3-4 details the results of each of the interviews. Table 3-4 Company
Important company
Nourmidas
-
-
-
-
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comments
from
the
Important researcher
comments
from
the
After the downgrading of Egypt’s sovereign risk, the Factors are having a better chance to growth the business mainly to guarantee the local buyers to the foreign suppliers as the foreign suppliers are now more reluctant to grant credit to Egyptian customers.
-
Company has a one-man-show management style and ownership.
-
Company has annual sales of nearly USD40M with a very high level of inventory and very low financial leverage (Company is, in large, self financed).
Generally, Factoring is not attractive in Egypt where the banks are preferred due to its flexible business model and less involvement in operations.
-
Company imports all of the raw material and exports nearly 50% of the sales.
-
Company depends on its long relationship with suppliers and high level of equity to finance its working capital.
-
Company never urged or inclined to utilize its approved Factoring facilities which, in our opinion, due to the high cost and sophisticated procedures. Also, company’s conservative management style is still unwilling to try a new finance option other than the traditional banking business.
Factoring is simply a new source of finance which can increase sales through extending a more favorable credit terms to the customers after finding who can cash the resultant receivables “The Factor”. Factoring can be a sign of weakness only if you seek it for liquidity due to restricted access to bank finance otherwise it can be a sign of weakness. There is no linear relation as it is simply another style of finance.
-
Enjoy
-
-
Liquidity is the only reason why the company factored its receivables.
-
One advantage of Factoring is its specialization in receivables unlike banks which are overlooking the details.
-
Egyplast
Factoring is a sign of weakness of course considering its high cost. Factoring is for both corporate and SMEs despite SMEs will only need finance unlike the corporates which may avail the full service package.
-
Factoring has a bad image in the market as a sign of weakness this why the company prefers the nonnotification factoring.
-
Factoring is an alternative finance. Factoring is an alternative finance and the cost is the first driver for company’s decision to factor its receivables.
-
Factoring may be relevant to those companies with restricted access to bank finance.
-
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Factoring is not related to the size of the company but more to the nature of business itself. Company would not opt to finance its operations through Factoring if it has traditional bank finance. The reason is the high cost of Factoring.
-
The company is a subsidiary of Citadel group (One of the largest private equity funds in Middle East).
-
The company used to have a huge market share which has shrunk over the years due to management and financial problems.
-
Company is having a difficulty to get bank finance due low credit rating.
-
Company’s recent management is qualified and specialized in corporate restructuring and re-engineering. Company has a critical liquidity issue as the major suppliers stipulate an advance payment due to low credit rating of the company.
-
-
Company is presently financing its operations through the past dues to banks and local suppliers.
-
Company is a member of a conglomerate which annual sales is nearly USD50M. The group has been achieving 2-digit growth during the few years despite the slowdown in the economy.
-
Company has a qualified management and a reasonable level of corporate governance.
-
Company refused to utilize its approved factoring facility referring the reason to the higher cost.
Liquidity is company’s only motive to consider the Factoring option.
-
Factoring companies accept a higher risk this is why it is a valid option to those with restricted access to bank finance.
-
Factoring is a sign of weakness. It
is more relevant to SMEs. Olympic group
-
-
-
-
-
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Generally Factoring can work where commercial banks hesitate to play. Liquidity is always an issue but the company has enough sources of finance. Supplier credit is not enough to finance working capital needs considering the nature of the industry. Factoring advantage is being an off balance sheet finance and a valid mean to support the suppliers through securing or discounting their dues. Factoring is indirect bank finance after all. Factoring is a facility to reinforce the credit which is not offered by the supplier as it encourage to supplier to extend the credit with no risk on its books. Factoring is an important mean for finance but it is mainly for protection “Without recourse”, otherwise, the banking is the place for finance.
-
Factoring is a good mean to open new markets especially its specialization in the open account trade unlike banks.
-
Cost of Factoring is higher than commercial banks which hinder its growth.
-
Factoring is a sign of strength as it simply reflects company’s preference to shorten the credit tenor. Meaning that the cost of finance thereby is the less than the gross margin. Otherwise the company would prefer to wait to
-
Company is a lead producer of home appliances and a subsidiary of one of the largest groups in the word. It is listed in the stock market.
-
Company refused to utilize its approved factoring facility without referring to the reason. However, it is believed that the company had problems with the required guarantees from the lender and some issues with the Factoring image.
-
Company has nearly USD100M total banking limits and it only utilizes 10% of which.
-
Company’s annual sales exceeding EGP 1Billion and a bottom line profitability of EGP18M. The company employees nearly 6000 employee and owning 18 factories. Company’s head of trade finance is PHD in Finance.
-
-
From the company’s feedback it is obvious, as a large group with easy access to bank finance and high bargaining power, that the company look at the Factoring more as the option to finance suppliers or to secure their dues for the same purpose but doesn’t consider the option for itself as a seller.
collect its dues.
ASEC
-
Factoring is more relevant to finance SMEs as corporate can find it easier to get bank finance.
-
Factoring is more suitable to international trade as it only justifies the higher cost of Factoring. Only international trade can utilize the services rendered by Factors to the maximum.
-
Company is indifferent to notify or not to notify its buyers if it goes for Factoring.
-
Factoring is not an alternative finance; it is simply a very specialized type of finance. Company refused the Factoring due to the cost compared to what is offered by other banks.
-
-
-
-
-
42 | P a g e
No relation between the choice of Factoring and company’s strength. It is simple one style of finance and the only criteria are opportunity cost and return of sales. No relation between the Factoring decision and company size. The decision however may be more linked to the culture and management style as the Factoring is relatively new and unknown to the market and the CFOs. Factoring is more relevant to the domestic market where the larger part of the investments in the Accounts Receivables is. Factoring is not an alternative finance, there is no relationship. It is simply a different type of finance.
-
Company is specialized in the manufacturing of casted products used by domestic and international cement factories.
-
Company exports nearly 50% of its production.
-
Company has a cash cow business with no foreseen opportunity for business growth which makes the cash flow stable and constant which is easier for financial planning and forecast.
-
Company is a subsidiary of the Citadel group, management however, in my opinion is not judged to be perfectly efficient or qualified
-
Company’s annual sales figure is around USD30M and total banking facilities is around USD10M.
-
Company hasn’t utilized the approved Factoring facilities due to the pricing as they reported.
Subsea Maritime -
Company has a liquidity issue due to the fast growth with no enough internal sources to finance the growth.
-
Cost is the most important determinant of the Factoring decision. Cost-benefit analysis is thereby the only way to judge the factoring.
-
Liquidity is the only reason for Factoring.
-
Factoring can be a sign of strength if it is used, amongst other facilities, as a cash flow management mechanism. If it is used purely and only for finance as an alternative to the bank it will be logically as a sign of weakness. So there is no clear relation.
-
-
-
TransAfrica
Factoring is more suitable to SMEs as the large corporates are having different and wider range of finance options. Company prefers notification factoring as to put some sort of pressure on the buyer and to benefit from the collection option to manage the debt. Factoring is quite unknown amongst local business circles.
-
Factoring is not an alternative finance it is just a different type of finance.
-
Factoring is a sign of weakness, it is inflexible, costly and company only decided to factor the receivables because it has some difficulties to get enough bank finance.
-
Company is indirectly involved in the oil business as it rents out vessels to off shore oil companies to accommodate their needs and operations in the sea/ocean located oil fields.
-
Company has a fleet of 8 vessels of which 3 are state-of-art technology and equipped with the latest navigations machines while the other 5 are operating locally due to its outdated technology (Already fully depreciated) and accordingly turned to be unproductive assets and cost drivers (Expenses of maintenance, port, royalties, …,etc) and now offered for sale at a residual cost.
-
Company has a one man show style management and ownership. It is employing 620 employees with a paid in capital of USD 26.5M and generating sales of USD12M annually.
-
Management qualified.
-
According to our knowledge of the company, the reason for the liquidity unease was not the growth but more of an operating cash flow due to low level of operations.
-
Company is not an aggressively utilizing of the approved factoring facilities, in our opinion, due to a smooth flow of collection from overseas operations and the sufficient short term banking facilities. Company is a freezone establishment and amongst largest 50 exporter in Egypt. It presently factors its receivables with CITIBank USA.
-
-
43 | P a g e
Factoring has an unfavorable image,
is
experienced
and
Company is exporting 100% of its production to leading international
it is an alternative finance and company would prefer of course to get banking facilities if it has no troubles with lenders.
Baddar Packing
-
Factoring is a sign of weakness.
-
Factoring is more relevant to SMEs.
-
Factoring is more relevant to international trade of course as it is provides good services for this purpose like credit investigation about the buyer and the protection as well the finance of course.
-
Factoring is unknown in the market.
-
Factoring is an alternative finance.
-
Company has a basic management structure and style. It has been weathering tough times and accordingly has had troubles with lenders before it came to settle it later. Total sales figure of the company is USD20M and employing 2000 employee.
-
Company has a liquidity issue mainly to settle the suppliers which demand their dues in advance. It utilizes 100% of its available bank finance which is not sufficient to its working capital needs.
-
Company cannot change the suppliers as they are all named by the final customer due to quality issues. That fact caused the profit margin to squeeze with a high bargaining power of both suppliers and customers.
-
Company hasn’t utilized the approved Factoring facilities due to the disagreement on the guarantee and pricing.
-
Factoring accepts higher credit risk and company approached the Factoring only for liquidity.
-
Company is a supplier of the cartoon to many manufacturers and the fresh food exporters.
-
Factoring is not an alternative to commercial banks, it is a different style of financing and it should be always there next to bank facilities but yet it is still can be an alternative finance or a second resort as it accepts credit risks more than commercial banks.
-
Company has 500 employees and owners equity of EGP30M with annual sales of EGP140M.
-
Company underwent financial troubles and has some difficulties to access the bank credit.
-
Company has credit from suppliers which is not enough to cover its working capital needs.
-
Company utilizes 100% available banking credit.
-
44 | P a g e
brands e.g. Levis, JV, Gertex,…,etc)
No linear relation between a company’s strength and its decision to factor the accounts receivables. It is on a case-by-case basis.
of
its
-
PPT
-
Factoring is more relevant to companies involved in the international trade as they would thereby utilize the full package. In another word, without recourse will be more needed on a foreign client with no direct relation so the company will need to insure the debt while in the local market the company can better assess its buyers and accepts their risks.
-
Company prefers the nonnotification factoring which comes in line with the bad image associated to factoring as a sign of insolvency. Company achieved 100% growth over the last 3 years causing a liquidity issue due to the accelerated growth quicker than its sustainable or growth capability.
-
-
45 | P a g e
Factoring is more suitable to multinational companies than domestic a local firms considering the corporate sophistication and know-how of the multinationals which can better utilize the different services and packages offered by the Factors.
Suppliers used to support the working capital before the revolution but now they collect the price in cash or sometimes even in advance causing a stress on the liquidity which can hinder the growth.
-
If the company has enough banking limits it will still factor its receivables the higher the leverage the higher the assets the higher the profit and ultimately the return to shareholders.
-
Factors integrate with banks, it is all
-
Company needs working capital finance to finance its strategic inventory levels.
-
-
Medium Size Company and a part of a larger conglomerate.
-
Company’s annual sales is nearly USD 14M and employing around 350 employee.
-
Company has banking facilities of nearly USD4M and utilizes more than 90% of which.
-
All company’s sales are to the local market.
-
Company has a reasonable level of corporate governance and qualified management.
bank’s money as a integration to finance segment. -
-
SAPESCO
Without assignment and notification it is not a Factoring it is an invoice discounting. Factoring decision like any other finance decision. Cost Vs. return. This is the right view to judge especially for companies with growth potential.
-
Factoring is a sign of strength due to above considerations and also having the company approved credit facility is a certificate of due diligence to other creditors.
-
Cost the worst thing in Factoring.
-
Factoring has no relation to the size of the company either SMEs or corporate. However, it has a negative image in the company as a sign of poor liquidity.
-
Factoring is a secondary source of finance and can be a main for SMEs. Liquidity is now an issue and banks are reluctant to support this is why there is now unprecedented chance for Factors to grow in Egypt.
-
-
-
-
46 | P a g e
forward a new
The Factoring has a lot of operational hassle unlike banks causing it to be a secondary source of finance. Factoring has an associated image of weakness and unknown amongst influential business circles. Being SMEs or corporate has nothing to do with the company’s decision to Factor its receivables or not. It is all the liquidity regardless
-
A leading service provider to Oil companies with a regional presence, decent level of corporate governance and annual turnover exceeding USD60M.
-
Company deals with largest commercial banks in Egypt as well as the leading off shore banks specialized in the Oil finance.
-
Oil sector is facing a noticeable delay of payment from the Government, the main buyer and market maker in the field, causing the average receivable days outstanding to exceed 270 days sometime. On turn, unusual financing needs and liquidity squeeze is
the size of the company. -
Dytex
-
Factoring is costly but liquidity is a survival no comparison.
-
Factoring is more relevant to international trade especially the option of the without recourse finance.
-
Factoring is an alternative finance. Advantage of Factoring is that it accepts a higher risk.
-
Presence of the receivables itself in the books of a company is a sort of weakness since a company of a higher bargaining power would be able to negotiate a better credit terms.
-
47 | P a g e
SAPESCO prefers silent (Without notification Factoring) over notification Factoring due to market unawareness of the business causing the buyers to refuse to sign/accept the assignment clause.
Factoring is important to Corporates and SMEs alike since both are having their own credit needs.
-
Non notification factoring is not a factoring. Factoring has to go with the notification clause.
-
Factoring is very costly and if I have another finance offer with cheaper terms I would definitely go for it. Cost is my first motivation.
-
If Factoring is sought only for liquidity it can’t be any indication but a sign of weakness, otherwise why would a company go for Factoring.
overwhelming the sector in Egypt after the revolution. -
SAPESCO has the bargaining power to pass the high factoring cost to suppliers and buyers.
-
SAPESCO employees more than 100 employee and it is 35 years length in business.
-
Company’s previously requested nonrecourse factoring which was not approved due to pricing disagreement.
-
A textile producer with a decent level of corporate governance. Company’s turnover is nearly USD25M p.a.
-
Company owns 3 factories employing 3,500 workers.
-
Company is granted credit lines from 3 commercial banks with total limit of EGP40M and utilization is exceeding 85% most of the time.
-
Factoring business and different services offered are perfectly clear to the client.
and
-
Alkan group
-
-
-
Factoring finance. It financing. Factoring finance. It financing.
is not a secondary is simply one type of is not a secondary is simply one type of
Company seeks Factoring only for finance as the demand and growth is higher than company’s ability to fulfill.
Company is capable to absorb any given bank finance and if an additional bank finance is available Factoring will be still regarded as a valid option as long as the cost of Factoring is less than the return on sales. Of course, this is subject to high growth rate and availability of demand. If no demand is available so the less costly option will of course be preferred.
-
One more benefit of Factoring is being an off balance sheet finance which replenish company’s financial statements in the eyes of suppliers and other lenders.
-
Factoring for the company is only a source of liquidity to finance growth, nothing else.
Alamriya casting -
Factoring is more suitable to SMEs. Supplier finance used to be sufficient unless the decision to use all the operating cash inflow to finance a capital expansion causing a negative working capital and
48 | P a g e
-
Group of companies which annual sales is reported to exceed USD1Bi. They are the sole agent and distributor of many international brands (Kia, Renault, Yamaha,…,etc).
-
Company has a high level of corporate governance.
-
Company has 2 digit growth and most of the time they seek finance to attend the demand over its products which is higher than company’s financial (Including banks) capabilities.
-
Company’s management style is aggressive either toward growth targets or financing.
-
Company has banking facilities of USD100M and utilizes more than 98% of which.
-
Company has annual sales of nearly USD10M and reporting operating losses due to production below the breakeven point.
ongoing state of illiquidity which is expected to last for years.
-
Due to cumulated losses, company is having a negative equity.
-
Company has no facilities from the commercial banks.
-
-
Cost is the only factor to affect company’s decision to factor its receivables or not. If bank finance is available company will only refer to the comparative cost.
The company has a professional management specialized in the corporate restructure and reengineering.
-
Company is a subsidiary of Citadel group.
-
Company exports nearly 40% of its production.
-
Company has no access to bank finance and having low credit rating.
-
-
Factoring is a very costly finance option it is however an acceptable cost to pay for the liquidity which is essential for operations to continue.
-
No relation between Factoring and company’s strength, however, the market doesn’t think the same way. Market considers the Factoring as an indication for a bankruptcy, Factoring company need to build a favorable image for its business especially in Egypt.
-
Factoring has no relation to the size of the company. It is however more related to the nature of business. Factoring, like any other financial institution, can facilitate the international trade.
-
-
49 | P a g e
Factors are only middleman between the bank, which is the main lender, and low risk rating borrowers.
Company prefers the nonnotification factoring considering the unfavorable image of Factoring as a sign of weakness in the market.
Alzhour
-
-
-
50 | P a g e
Factoring is an alternative finance. Company sees Factoring as a main source of bank finance. It sees factoring as more flexible, risk taker, and supporting. Nonetheless, considering the business model of the company it finds it a disadvantage of factoring as it doesn’t submit letters of guarantee.
-
Alzhoor is doing business for over 13 years. The company is an assembler, supplier, importer, and producer of the valves of the main water and sewage pipes which is consumed mainly by the government or main contractors and real estate developers.
Company sees Factoring only as a mean of finance and has no other consideration for any other type of business.
Alzhoor has been using the factoring as the main source of finance since nearly 3 years.
-
This segment sually has difficulty to access the bank finance.
Company complaints from the high cost of factoring.
-
Company’s sales increase from EGP 14 million to EGP39 millions in 3 years time attributing most of which to the incremental working capital it got from the external finance, mainly the factoring.
-
The company has 50 employees and has EGP8M utilizing 100% of which.
-
Company has no trade credit.
-
Company’s average days out standing of receivables 6-9months.
-
Factoring is more suitable to SMEs.
-
There is no relation between company’s engagement in the international trade and its factoring decision. Factoring is equally important to both domestic companies and those involved in the international trade.
-
Company prefers the non notification factoring as the notification is sometimes refuse by the customers considering the market culture.
-
Factoring is an alternative finance.
MAC carpets
51 | P a g e
-
Factoring is an alternative finance and only sought as to back the short term bank credit or else to compensate against shortage in the available bank finance.
-
Company is one of world’s largest producers of carpets. It is 30 years in the business with a paid-in capital of USD 40M and total equities of USD60M.
-
The debt protection is an important function of factoring and factoring without a debt protection is not a factoring and will lose if compared to the traditional and less costly bank finance.
-
Company’s has no business growth due to its large size and the low growth of the industry itself and achieving annual sales of nearly USD 150M.
-
Factoring is unusual sort of finance with the option to guarantee the debts and also to window dress the financial statements after getting rid of the investments in the accounts receivables.
Company has 6000 employees and enjoys a good market reputation and easy access to bank finance.
-
Company has short term credit limits of EGP550M and utilizing 90% of which.
-
Company is granted a total factoring limits of nearly USD 20M and utilizes nearly 40% of which.
-
Factoring is taking over the finance of the credit sales to strategic clients.
-
Supplier finance is company’s favorite type of finance, but not sufficient.
-
Company’s strength or weakness has nothing to do with its decision to factor the receivables. There is no linear relationship. It is simply one method of finance such like all the other available methods.
-
Factoring is more suited to companies involved in international trade.
-
Company prefers the notification factoring but some clients refuse to assign the debts to lenders.
-
The key determinant of the factoring decision is similar to any other finance decision, no difference; it is cost-benefitanalysis.
-
52 | P a g e
No relationship between company size and factoring decision it is all a cost Vs return.
1
Nourmidas
2010
2011
2012
Cash growth
-91%
104%
36%
Invetory growth
54%
33%
9%
Receivable growth
-7%
26%
4%
Cash ratio (Cash/Current liabilties)
2.24%
3.31%
4.49%
ACID test (Current Assets-Ineventory/Current Liabilities)
77.25%
77.58%
61.91%
Current ratio (Current Assets/Current Liabilties)
215.90%
211.22%
207.08%
Account receivable days outstanding
160
158
221
Enjoy
2010
2011
2012
Cash growth
21%
-33%
-53%
Invetory growth
-17%
14%
-33%
Receivable growth
-18%
61%
-40%
Cash ratio (Cash/Current liabilties)
16.40%
6.82%
2.00%
ACID test (Current Assets-Ineventory/Current Liabilities)
68.94%
60.16%
22.04%
Current ratio (Current Assets/Current Liabilties)
146.70%
115.44%
44.98%
62
69
97
Egyplast
2010
2011
2012
Cash growth
77%
-83%
6029%
Invetory growth
12%
46%
28%
Receivable growth LIQUIDITY ANALYSIS Cash ratio (Cash/Current liabilties)
-6%
31%
17%
2.01%
0.41%
17.03%
39.55% 62.98% 113 2010 0% 24% 20%
60.53% 101.72% 122 2011 -11% 34% 5%
62.78% 98.43% 112 2012 289% -40% -57%
11.96% 55.89% 106.20%
8.48% 40.44% 93.92%
46.50% 68.35% 113.54%
55
55
36
2010 NA NA NA
2011 -40% -9% -5%
2012 -48% 34% -30%
5.76%
3.49%
1.74%
LIQUIDITY ANALYSIS
2
LIQUIDITY ANALYSIS
Account receivable days outstanding 3
4
5
ACID test (Current Assets-Ineventory/Current Liabilities) Current ratio (Current Assets/Current Liabilties) Account receivable days outstanding OGFI Cash growth Invetory growth Receivable growth LIQUIDITY ANALYSIS Cash ratio (Cash/Current liabilties) ACID test (Current Assets-Ineventory/Current Liabilities) Current ratio (Current Assets/Current Liabilties) Account receivable days out standing (Accounts Receivables/SALES/365) ASEC Cash growth Invetory growth Receivable growth LIQUIDITY ANALYSIS Cash ratio (Cash/Current liabilties)
53 | P a g e
ACID test (Current Assets-Ineventory/Current Liabilities)
39.66%
37.66%
34.33%
Current ratio (Current Assets/Current Liabilties)
73.20%
68.43%
73.49%
74
62
53
2010
2011
2012
7%
-31%
-87%
-25%
30%
3%
9%
-73%
90%
Cash ratio (Cash/Current liabilties)
240.26%
115.38%
5.96%
ACID test (Current Assets-Ineventory/Current Liabilities)
590.34%
186.23%
64.56%
Current ratio (Current Assets/Current Liabilties)
628.83%
220.98%
79.14%
Account receivable days outstanding
163
94
161
TransAfrica
2010
2011
2012
Cash growth
-48%
-86%
921%
Invetory growth
-13%
-4%
-19%
Receivable growth
41%
-1%
9%
Cash ratio (Cash/Current liabilties)
1.29%
0.18%
7.70%
ACID test (Current Assets-Ineventory/Current Liabilities)
76.85%
73.09%
324.50%
Current ratio (Current Assets/Current Liabilties)
110.03%
104.77%
430.22%
Account receivable days outstanding
148
103
98
Albaddar
2010
2011
2012
Cash growth
-44%
-84%
-30%
Invetory growth
-48%
65%
-23%
Receivable growth
-8%
-27%
3%
Cash ratio (Cash/Current liabilties)
4.47%
0.53%
0.33%
ACID test (Current Assets-Ineventory/Current Liabilities)
96.92%
61.60%
54.54%
Current ratio (Current Assets/Current Liabilties)
133.95%
106.87%
84.88%
Account receivable days outstanding
151
140
115
PPT
2010
2011
2012
Cash growth
NA
1300%
-30%
Invetory growth
NA
41%
70%
Receivable growth LIQUIDITY ANALYSIS Cash ratio (Cash/Current liabilties)
NA
106%
48%
0.22%
1.25%
0.55%
85.91% 154.78% 73
79.08% 119.19% 116
78.98% 121.94% 135
2010 72% 5%
2011 -31% 10%
2012 -21% 14%
Account receivable days outstanding 6
SUBSEA Cash growth Invetory growth Receivable growth LIQUIDITY ANALYSIS
7
LIQUIDITY ANALYSIS
8
LIQUIDITY ANALYSIS
9
ACID test (Current Assets-Ineventory/Current Liabilities) Current ratio (Current Assets/Current Liabilties) Account receivable days outstanding 10
SAPESCO Cash growth Invetory growth
54 | P a g e
11
Receivable growth LIQUIDITY ANALYSIS Cash ratio (Cash/Current liabilties) ACID test (Current Assets-Ineventory/Current Liabilities)
6%
-13%
34%
16.92% 74.50%
14.60% 76.97%
10.33% 84.97%
Current ratio (Current Assets/Current Liabilties)
92.42%
101.74%
110.09%
Account receivable days outstanding
150
157
200
Dytex
2010
2011
2012
Cash growth
47%
77%
23%
Invetory growth
70%
-2%
6%
Receivable growth
33%
22%
71%
Cash ratio (Cash/Current liabilties)
3.32%
5.02%
5.03%
ACID test (Current Assets-Ineventory/Current Liabilities)
38.81%
39.16%
43.57%
Current ratio (Current Assets/Current Liabilties)
130.89%
116.06%
110.11%
41
41
56
2010
2011
2012
LIQUIDITY ANALYSIS
Account receivable days outstanding 12
ALKAN Cash growth
3%
-5%
1%
Invetory growth
35%
-18%
-12%
Receivable growth
64%
8%
11%
Cash ratio (Cash/Current liabilties)
3.20%
3.44%
3.22%
ACID test (Current Assets-Ineventory/Current Liabilities)
77.44%
83.19%
85.51%
Current ratio (Current Assets/Current Liabilties)
128.46%
130.17%
123.85%
62
98
75
Amriya
2010
2011
2012
Cash growth
-91%
-53%
180%
Invetory growth
-33%
-3%
-24%
Receivable growth
18%
-3%
9%
Cash ratio (Cash/Current liabilties)
0.90%
0.43%
1.08%
ACID test (Current Assets-Ineventory/Current Liabilities)
36.75%
38.50%
37.16%
Current ratio (Current Assets/Current Liabilties)
76.17%
77.66%
63.80%
LIQUIDITY ANALYSIS
Account receivable days outstanding 13
LIQUIDITY ANALYSIS
Account receivable days outstanding 14
99
91
138
Alzhoor
2010
2011
2012
Cash growth
-29%
30%
352%
Invetory growth
105%
-7%
42%
-8%
115%
91%
5.78%
3.08%
7.28%
ACID test (Current Assets-Ineventory/Current Liabilities)
130.48%
111.83%
101.15%
Current ratio (Current Assets/Current Liabilties)
242.01%
154.29%
132.74%
58
107
121
Receivable growth LIQUIDITY ANALYSIS Cash ratio (Cash/Current liabilties)
Account receivable days outstanding
55 | P a g e
15
MAC group
2010
2011
2012
Cash growth
414%
-35%
-27%
2%
-10%
6%
-14%
32%
21%
Cash ratio (Cash/Current liabilties)
2.88%
2.26%
1.45%
ACID test (Current Assets-Ineventory/Current Liabilities)
19.78%
29.62%
30.44%
Current ratio (Current Assets/Current Liabilties)
110.68%
128.23%
122.04%
52
67
75
Invetory growth Receivable growth LIQUIDITY ANALYSIS
Account receivable days outstanding
56 | P a g e
