A contractor receives a $50,000 progress payment but owes $28,000 to subcontractors for that same work phase. The payment terms with subs require payment within 10 days. How should this be managed in accounts payable?
Correct Answer
C) Schedule payments to meet the 10-day terms while maintaining working capital
Proper accounts payable management requires honoring agreed payment terms to maintain good vendor relationships while strategically timing payments to optimize cash flow and maintain adequate working capital.
Why This Is the Correct Answer
Option C represents proper accounts payable management by balancing contractual obligations with business needs. The contractor must honor the agreed 10-day payment terms to maintain good relationships with subcontractors and avoid potential legal issues. However, they should strategically schedule these payments within the allowed timeframe to maintain adequate working capital for ongoing operations and unexpected expenses.
Why the Other Options Are Wrong
Option A: Hold payment for 30 days to improve cash flow
While paying immediately shows good faith, it's not financially prudent as it doesn't optimize cash flow management. The contractor has 10 days to pay, so immediate payment upon receipt wastes the opportunity to maintain working capital for other business needs during that period.
Option B: Negotiate extended payment terms with all subcontractors
Attempting to negotiate extended terms after work is completed and payment is due is unprofessional and may damage relationships. Payment terms should be negotiated before work begins, not when payment is due.
Option D: Pay all subcontractors immediately upon receipt of payment
Holding payment for 30 days violates the agreed 10-day payment terms, which could damage vendor relationships, result in late fees, potential legal action, and may violate Florida construction payment laws that protect subcontractors.
Memory Technique
Remember 'HONOR & OPTIMIZE' - Honor your payment terms but Optimize your cash flow timing within those terms
Reference Hint
Florida Construction Industry Licensing Board study materials, Chapter on Business and Finance, Accounts Payable Management section
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