You as a Used Car Purchaser Whether you read the Uniform Commercial Code or consult a lawyer, you will find that factoring accounts receivable is neither illegal nor unethical. You contract to make the monthly payments most likely includes a clause to pay whoever owns the receivable. Article 9 of the Uniform Commercial Code provides the legal requirements for the sale of accounts receivables to a third party. The ethics of the situation may depend on what customers were promised when they made purchases on account. At a minimum, a letter should be sent to all customers explaining that the receivables have been sold and will now be collected by a collection agency. Many customers do not like their accounts receivable to be sold to a third party. Thus, using factoring as a short-term solution to a cash flow problem may cause long-term problems with lost customers and ultimately lost revenues.

You as a Credit Manager Shown below are accounts receivable turnover rates and average-days-outstanding figures for the past four years. Note: Days outstanding were computed by dividing 365 days by the turnover rate.

2007 2006 2005 2004

Sales $17,000 $14,580 $9,600 $9,000

Divided by:

Average accounts receivable 1,700 1,620 1,600 1,800

Turnover rate 10 times 9 times 6 times 5 times

Days outstanding 37 days 41 days 61 days 73 days

Based on these data, it appears that the new credit policy was successful in two ways. First, over the four-year period, it resulted in the doubling of the company's accounts receivable turnover rate (and thereby reduced its average collection period from 73 days to 37 days). Furthermore, the new policy successfully improved the quality of accounts receivable without adversely affecting sales growth.