A construction company's cash flow projection shows receipts of $450,000 and disbursements of $520,000 for the month. The beginning cash balance was $95,000. What action should management prioritize?
Correct Answer
D) Arrange for additional financing or delay payments
Net cash flow = $450,000 - $520,000 = -$70,000. Ending balance = $95,000 - $70,000 = $25,000. The negative cash flow indicates potential liquidity issues requiring financing or payment delays
Why This Is the Correct Answer
With receipts of $450,000 and disbursements of $520,000, the company faces a negative cash flow of $70,000. This reduces the cash balance from $95,000 to only $25,000, creating a dangerously low liquidity position. Management must prioritize securing additional financing or negotiating payment delays to maintain adequate cash flow and avoid potential insolvency or inability to meet obligations.
Why the Other Options Are Wrong
Option A: Increase project overhead allocations
Increasing project overhead allocations would worsen the cash flow situation by adding more costs and disbursements. This action would further strain the company's already negative cash position rather than addressing the immediate liquidity crisis.
Option B: Invest excess cash in long-term securities
Investing in long-term securities is inappropriate when facing negative cash flow and low cash balances. The company needs immediate liquidity, not tied-up investments that cannot be quickly accessed to meet current obligations.
Option C: Accelerate equipment purchases
Accelerating equipment purchases would increase disbursements and worsen the negative cash flow situation. This action would further deplete the already low cash balance and exacerbate the liquidity problem.
Memory Technique
Remember 'CASH CRISIS = CREDIT or DELAY': When Cash flow is negative and balances are low, seek Credit (financing) or Delay payments to survive.
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