A contractor receives a progress payment of $75,000 but has outstanding supplier invoices totaling $45,000 due within 10 days. Material deliveries worth $30,000 are scheduled for next week. What should be the priority in accounts payable management?
Correct Answer
B) Pay the $45,000 in due invoices first to avoid late fees
Paying invoices that are due within 10 days should be the priority to avoid late fees, maintain good supplier relationships, and preserve credit standing. The contractor has sufficient funds to cover these obligations.
Why This Is the Correct Answer
Option B correctly prioritizes paying the $45,000 in invoices due within 10 days. This approach avoids late fees, maintains good supplier relationships, and preserves the contractor's credit standing. With $75,000 received and only $45,000 in immediate obligations, there are sufficient funds to cover these payments while maintaining cash flow for upcoming material deliveries. This demonstrates proper accounts payable management by addressing time-sensitive obligations first.
Why the Other Options Are Wrong
Option A: Pay all invoices immediately to maintain good credit
Paying all invoices immediately is unnecessarily aggressive and poor cash flow management. While the contractor has $75,000, paying everything at once would leave insufficient working capital for the upcoming $30,000 in material deliveries and other operational needs. Strategic timing of payments is more prudent than immediate payment of all obligations.
Option C: Hold all payments until the next progress payment
Holding all payments until the next progress payment is risky and unprofessional. This approach would result in late fees on the $45,000 due within 10 days, damage supplier relationships, and potentially harm credit standing. The contractor has sufficient funds to meet immediate obligations and should not delay payments unnecessarily.
Option D: Pay only the most critical suppliers to preserve cash
Paying only critical suppliers while having adequate funds to cover all due invoices is poor financial management. This selective approach could damage relationships with other suppliers and create unnecessary payment delays. With $75,000 available and only $45,000 in immediate obligations, there's no need for such restrictive payment practices.
Memory Technique
Remember 'DUE FIRST' - Always pay invoices that are Due within the shortest timeframe First to avoid late fees and maintain good credit relationships.
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