A contractor's monthly cash flow projection shows receipts of $125,000 and disbursements of $145,000. The beginning cash balance is $35,000. What action should be taken?
Correct Answer
B) Arrange for additional financing or delay payments to avoid cash shortage
The ending cash balance would be $35,000 + $125,000 - $145,000 = $15,000, which is dangerously low. The contractor should arrange financing or manage payment timing to maintain adequate cash reserves.
Why This Is the Correct Answer
Option B is correct because while the ending cash balance of $15,000 is technically positive, it represents a dangerously low cash reserve for a construction business. Construction companies need adequate cash flow cushions to handle unexpected expenses, payment delays from clients, and operational contingencies. Proactive financial management requires arranging additional financing or negotiating payment terms before reaching a critical cash shortage situation.
Why the Other Options Are Wrong
Option C: Increase project pricing immediately
Option D is wrong because reducing overhead expenses by 50% is an extreme measure that may not be immediately achievable and could harm business operations. Additionally, even a 50% overhead reduction might not generate enough immediate cash flow improvement to address the shortage.
Option D: Reduce overhead expenses by 50%
Option C is wrong because increasing project pricing immediately is not a viable short-term solution for an immediate cash flow problem. Pricing changes typically affect future contracts and won't resolve the current month's cash shortage, and existing contracts cannot have prices changed unilaterally.
Memory Technique
Use the '20% Rule' - if ending cash is less than 20% of monthly disbursements, take corrective action immediately. Think 'Cash Cushion = Contractor Confidence.'
Reference Hint
Business and Finance for Contractors - Chapter on Cash Flow Management and Working Capital Requirements
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?