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A business uses factoring to pay creditors - HSC - SSCE Business Studies - Question 3 - 2009 - Paper 1
Question 3
A business uses factoring to pay creditors. Which financial objective is the business trying to achieve? (A) Efficiency (B) Liquidity (C) Profitability (D) S... show full transcript
Worked Solution & Example Answer:A business uses factoring to pay creditors - HSC - SSCE Business Studies - Question 3 - 2009 - Paper 1
Step 1
Which financial objective is the business trying to achieve?
Answer
When a business uses factoring, it sells its receivables (invoices) to a third party to obtain immediate cash. This strategic move primarily addresses the issue of cash flow.
The financial objective being aimed for here is Liquidity. Liquidity refers to the ability of a business to meet its short-term obligations. By utilizing factoring, the business can rapidly convert its accounts receivable into cash, thus improving its liquidity position.
While efficiency, profitability, and solvency are important financial objectives, they do not directly relate to the immediate cash access provided by factoring.