A contractor has outstanding invoices totaling $45,000 from work completed 30 days ago. The client is requesting additional work worth $15,000 but hasn't paid the previous invoices. What is the best accounts receivable management practice?
Correct Answer
C) Require payment of outstanding invoices before starting new work
Best practice in accounts receivable management is to collect outstanding payments before extending additional credit. This protects cash flow and reduces the risk of larger losses.
Why This Is the Correct Answer
Option B represents sound accounts receivable management by requiring payment of outstanding invoices before starting new work. This practice protects the contractor's cash flow and prevents the accumulation of larger unpaid balances. It establishes clear payment expectations and reduces the risk of total loss if the client becomes unable or unwilling to pay. This approach maintains professional boundaries while protecting the business's financial health.
Why the Other Options Are Wrong
Option B: Complete the new work immediately to maintain client relationships
Accepting partial payment still leaves a significant portion of the original debt unpaid while adding new work to the account. This approach doesn't fully address the underlying payment issue and continues to expose the contractor to increased financial risk.
Option D: Offer a discount on new work to encourage payment
Offering discounts on new work to encourage payment of old invoices reduces profit margins and doesn't guarantee collection of outstanding amounts. This practice can set a precedent for clients to delay payments expecting future discounts, ultimately harming the business's profitability.
Memory Technique
Think 'No Pay, No Play' - just like requiring payment before services in other industries, contractors should collect outstanding debts before taking on additional work risk
Reference Hint
Business and Finance chapter - Accounts Receivable Management section
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