Final answer:
Receivables are commonly sold to generate cash quickly, particularly for immediate liquidity needs or for reinvestment in the business. Factoring receivables is an effective way to finance growth or manage cash flow, especially when interest rates in the economy have fallen.
Step-by-step explanation:
Receivables might be sold to generate cash quickly. Companies often sell their receivables to finance companies at a discount from their face value to obtain immediate liquidity rather than waiting for the credit terms to expire, which can take several days or months. This practice, known as factoring, can be used to manage cash flow, reinvest in the business, or meet immediate cash needs.
For instance, if a company needs funds to reinvest in its operations, such as upgrading its facilities or hiring new staff, selling receivables can be an effective way to gain the necessary capital. Furthermore, in a scenario where the interest rates in the economy have fallen, the value of receivables increases, making it a more attractive option for companies to sell receivables to avoid interest rate risks associated with holding them until maturity.
It is important to note that selling receivables at an amount greater than their cash realizable value may not be feasible as buyers typically seek to purchase them at a discount to offset the risk of non-payment. Additionally, this action does not lengthen the cash-to-cash operating cycle but rather shortens it by converting receivables into cash more rapidly.