A contractor receives a $500,000 progress payment but has outstanding subcontractor invoices totaling $320,000 due within 30 days. What should be the priority in accounts payable management?
Correct Answer
D) Prioritize critical suppliers and those with early payment discounts
Effective accounts payable management involves prioritizing payments to maintain good relationships with critical suppliers and taking advantage of early payment discounts when cash flow allows, while managing overall cash position strategically.
Why This Is the Correct Answer
Option C represents sound business practice for accounts payable management. Critical suppliers are essential for project continuity and maintaining good relationships ensures reliable service and materials delivery. Early payment discounts provide immediate cost savings that improve project profitability. Strategic payment prioritization balances cash flow management with operational needs, which is crucial for successful project completion.
Why the Other Options Are Wrong
Option A: Hold all payments until the next progress payment
Holding all payments until the next progress payment damages supplier relationships and may result in work stoppages or material delivery delays. This approach also misses early payment discount opportunities and can harm the contractor's credit rating and reputation in the industry.
Option B: Pay only the largest invoices first
Paying only the largest invoices first ignores the strategic importance of suppliers and potential cost savings. Large invoices may not be from critical path suppliers, and this approach could delay payments to key subcontractors whose work is essential for project progress.
Option C: Pay all invoices immediately regardless of terms
Paying all invoices immediately ignores payment terms and wastes cash flow opportunities. This approach doesn't consider that some suppliers may offer net 30 terms, and immediate payment provides no benefit while reducing available working capital for other project needs.
Memory Technique
Think 'CED' - Critical suppliers first, Early payment discounts second, then manage the Difference strategically based on cash flow needs.
Reference Hint
Business and Finance for Contractors - Chapter on Cash Flow Management and Accounts Payable
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