A contractor is analyzing cash flow and notices that collections from customers are taking longer while supplier payment terms remain the same. This situation will most likely result in:
Correct Answer
A) Increased need for short-term financing
When collections slow down but payment obligations remain the same, cash flow becomes strained. The contractor may need short-term financing to bridge the gap between paying suppliers and collecting from customers.
Why This Is the Correct Answer
When customer collections slow down while supplier payment terms remain unchanged, a cash flow timing mismatch occurs. The contractor must continue paying suppliers on schedule but receives customer payments later than expected. This creates a cash shortage gap that typically requires short-term financing solutions like lines of credit or working capital loans to maintain operations and meet payment obligations.
Why the Other Options Are Wrong
Option B: Improved working capital
Accounts payable balances would likely remain the same or potentially increase if the contractor delays payments due to cash constraints, not decrease as suggested in this option.
Option C: Reduced cash flow problems
Cash flow problems actually increase rather than decrease because there's less cash coming in from customers while cash going out to suppliers remains on the same schedule, creating liquidity stress.
Memory Technique
Think 'Slow IN, Same OUT = Need SHORT-term help' - when collections slow down but payments stay the same, short-term financing fills the gap.
Reference Hint
Business and Finance chapter covering cash flow management and working capital concepts
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