A construction company's cash flow projection shows negative cash flow for the next two months due to delayed payments from clients. What is the best immediate action?
Correct Answer
C) Arrange a line of credit or short-term financing
Arranging short-term financing or a line of credit provides the necessary cash flow to maintain operations while waiting for receivables to be collected, avoiding disruption to ongoing projects and employee relations.
Why This Is the Correct Answer
Arranging a line of credit or short-term financing is the most prudent business decision as it maintains operational continuity while addressing the temporary cash flow shortage. This approach preserves valuable business relationships with employees, subcontractors, and suppliers while keeping projects on schedule. It treats the cash flow issue as what it is - a temporary timing problem rather than a fundamental business failure. This solution maintains the company's reputation and ability to complete contracted work, which is essential for long-term success.
Why the Other Options Are Wrong
Option A: Reduce all employee wages temporarily
Selling company equipment would impair the company's ability to complete current and future projects, potentially creating a worse long-term problem. Equipment is typically worth less when sold quickly, and replacing it later would be more expensive than short-term financing costs.
Option D: Sell company equipment to generate cash
Reducing employee wages could violate labor laws and employment contracts, damage employee morale, and lead to key personnel leaving the company. This approach could also result in legal issues and would harm the company's ability to retain skilled workers.
Memory Technique
Think 'BRIDGE the gap' - use financing as a bridge over temporary cash flow problems rather than burning bridges with clients, employees, or operational capacity.
Reference Hint
Florida Construction Industry Licensing Board study materials - Business and Finance section, Cash Flow Management chapter
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