When a business uses factoring, they improve their A - HSC - SSCE Business Studies - Question 18 - 2021 - Paper 1

When a business utilizes factoring, it sells its accounts receivable to improve cash flow immediately. This process allows businesses to get cash upfront instead of waiting for customers to pay their invoices, thereby enhancing liquidity.

However, while factoring can improve cash flow, it typically involves fees or discount rates which can negatively impact profitability. The cost of factoring decreases the overall profit margin since the business is receiving less than the face value of its receivables. Thus, the statement that businesses enhance their cash flow but can reduce profitability is accurate.