A contractor's cash flow projection shows receipts of $85,000 and disbursements of $92,000 for next month. The current cash balance is $15,000. What action should the contractor take?
Correct Answer
C) Arrange for additional financing or delay payments
Net cash flow = $85,000 - $92,000 = -$7,000. Ending cash balance would be $15,000 - $7,000 = $8,000, which may be insufficient. The contractor should arrange financing or delay non-critical payments to maintain adequate cash flow.
Why This Is the Correct Answer
Option B is correct because the contractor faces a negative cash flow situation that requires immediate action. With receipts of $85,000 and disbursements of $92,000, there's a $7,000 shortfall that will reduce the cash balance from $15,000 to only $8,000. This low ending balance creates cash flow risk and may not provide adequate working capital for unexpected expenses or operational needs. Arranging additional financing or strategically delaying non-critical payments helps maintain healthy cash flow and business operations.
Why the Other Options Are Wrong
Option A: Increase project spending to use excess cash
Option C is incorrect because increasing spending when already facing negative cash flow would worsen the financial situation. The contractor needs to preserve cash, not spend more, especially when disbursements already exceed receipts.
Option B: Proceed as planned since cash flow is positive
Option D is incorrect because reducing collection efforts would decrease cash receipts, making the negative cash flow situation even worse. The contractor should actually increase collection efforts to improve cash inflow, not reduce them.
Memory Technique
Remember 'RED FLAG RULE': When Receipts are less than Disbursements, you need Financing or payment Delays to avoid Going broke.
Reference Hint
Business and Finance chapter, specifically sections on cash flow management and working capital requirements
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