A contractor needs to improve cash flow management. The company currently invoices at project completion but has 90-day payment cycles. What would be the BEST strategy to improve cash flow?
Correct Answer
D) Implement progress billing and require deposits
Progress billing allows contractors to collect payment as work progresses rather than waiting until completion, while deposits provide upfront cash. This significantly improves cash flow timing without negatively impacting relationships or operations.
Why This Is the Correct Answer
Progress billing allows contractors to invoice and collect payments at predetermined project milestones rather than waiting until completion, dramatically reducing the cash flow gap. Combined with upfront deposits, this strategy provides immediate working capital and steady cash flow throughout the project lifecycle. This approach directly addresses the core problem of long payment cycles while maintaining positive client relationships and operational efficiency.
Why the Other Options Are Wrong
Option B: Extend payment terms to suppliers
Extending payment terms to suppliers only shifts the cash flow burden to vendors and can damage supplier relationships. This strategy doesn't generate additional cash or improve the timing of receivables. It may also result in higher material costs as suppliers factor in extended payment terms into their pricing.
Option C: Reduce employee wages
Reducing employee wages is counterproductive and can lead to high turnover, reduced productivity, and quality issues. This approach doesn't address the payment timing problem and can severely damage company morale and reputation. It's also potentially illegal if wages fall below minimum wage requirements.
Memory Technique
Remember 'PB&D' - Progress Billing & Deposits - like peanut butter and jelly, they work better together to solve cash flow problems.
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