A contractor is analyzing cash flow and discovers that collections consistently lag disbursements by 45 days. What is the most effective strategy to address this issue?
Correct Answer
C) Implement progress billing and faster collection procedures
Implementing progress billing and faster collection procedures directly addresses the timing mismatch between collections and disbursements by accelerating cash inflows.
Why This Is the Correct Answer
Option C directly addresses the root cause of the cash flow problem by accelerating the inflow of cash through progress billing and faster collection procedures. Progress billing allows contractors to receive payments throughout the project rather than waiting until completion, while improved collection procedures reduce the time between billing and payment receipt. This strategy specifically targets the 45-day lag by getting money in the door faster, which is the most direct solution to the timing mismatch between collections and disbursements.
Why the Other Options Are Wrong
Option A: Increase markup on all future projects
Reducing workforce to lower payroll costs addresses the disbursement side but doesn't solve the collection timing problem. This could also negatively impact project completion times and quality, potentially making collection issues worse, and doesn't address the core issue of the 45-day collection lag.
Option D: Negotiate longer payment terms with suppliers
Increasing markup on future projects doesn't solve the timing issue of the 45-day lag between collections and disbursements. While higher markup might improve profitability, it doesn't address when the money actually comes in, and the cash flow timing problem would persist on all projects.
Memory Technique
Think 'CASH IN FAST' - Collections And Speed Help Income Now, Focus on Accelerating Supplier Terms won't fix timing issues.
Reference Hint
Business and Finance for Contractors chapter on Cash Flow Management and Project Billing Procedures
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