A contractor's cash flow projection shows negative cash flow for the next two months. Which strategy would be most appropriate for immediate cash flow improvement?
Correct Answer
B) Accelerate accounts receivable collection
Accelerating accounts receivable collection brings in cash faster without additional expenses. This is the most direct way to improve immediate cash flow when facing temporary shortfalls.
Why This Is the Correct Answer
Accelerating accounts receivable collection is the most effective immediate cash flow solution because it converts existing earned revenue into actual cash without requiring additional expenditures. This strategy involves collecting money already owed to the company faster through methods like offering early payment discounts, improving billing processes, or following up more aggressively on outstanding invoices. It directly addresses the cash shortage by bringing in funds that are already earned but not yet collected, providing immediate relief without increasing costs or financial obligations.
Why the Other Options Are Wrong
Option A: Increase marketing budget
Purchasing new equipment requires significant cash outlay, which would further strain the already negative cash flow situation. While equipment might improve long-term efficiency, it worsens immediate cash flow problems.
Option C: Purchase new equipment
Expanding workforce increases immediate payroll expenses and cash outflow, which would worsen the negative cash flow situation rather than improve it. Additional labor costs would compound the existing cash flow problem.
Memory Technique
Think 'A.R. = Immediate Relief' - Accounts Receivable collection provides immediate cash relief without spending money, while all other options require cash outlay first.
Reference Hint
Florida Business and Finance for Contractors - Chapter on Cash Flow Management and Working Capital
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