A contractor notices that accounts receivable have increased from 45 days to 75 days over the past year. This trend most likely indicates:
Correct Answer
A) Collection problems or slower-paying customers
An increase in days outstanding for accounts receivable typically indicates that customers are taking longer to pay, suggesting collection problems or changes in customer payment behavior that need attention.
Why This Is the Correct Answer
CORRECT_ANSWER - Days Sales Outstanding (DSO) measures how long it takes to collect receivables after a sale. An increase from 45 to 75 days (a 67% increase) clearly indicates customers are taking significantly longer to pay their invoices. This trend signals potential collection issues, changes in customer payment behavior, or possibly extending credit to less creditworthy clients. Such deterioration in collection efficiency requires immediate management attention to prevent cash flow problems.
Why the Other Options Are Wrong
Option C: Better project management
Increased project profitability relates to profit margins and cost control, not collection timing. Higher profits don't cause customers to pay slower, and the receivable metric doesn't measure profitability.
Option D: Increased project profitability
Improved customer relationships would typically result in faster payments and better communication, leading to decreased days outstanding, not an increase from 45 to 75 days.
Memory Technique
Use 'AR UP = TROUBLE UP' - when Accounts Receivable days go UP, your collection TROUBLES go UP too.
Reference Hint
Florida Construction Business Practices manual, Chapter on Financial Management and Cash Flow Analysis, or Accounting/Bookkeeping section covering Accounts Receivable management.
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