Debt factoring and failure

Question 1

What is debt factoring ?

Answer 1

The selling of debtors (money owed to the business) to a third party, this generates cash.It guarantees the firm a percentage of money owed to it. But will reduce income and profit margin made on sales.Cost involved in factoring can be high.

Question 2

What are the causes of cash flow problems ?

Answer 2

• Inaccurate cash flow management, poor research or lack of
• Unforeseen costs, not accounted for in the CFF
• Poor credit control, not chasing debts and ensuring customers pay on time
• Overtrading
• Allowing too much credit to customers.

Question 3

Internal causes of business failure

Answer 3

• Poor planning, leads to important factors not being addressed, this may be the root of other problems like cash flow
• Lack of skills, this may include technical skills, financial management and leadership capacity
• If owners/managers do not understand the needs of the customers

Question 4

External causes of business failure

Answer 4

• Competition, new competitor/ overcrowded market = shortages of demand and falling sales
• Legislation, new legislation can lead to increased costs
• Market conditions, changes in consumer tastes
• Economic factors