A general contractor is experiencing cash flow problems due to slow-paying customers. Which strategy would be most effective for improving accounts receivable management?
Correct Answer
A) Implementing progress billing and requiring deposits
Progress billing ensures regular cash flow throughout the project, and deposits provide upfront cash. This reduces the contractor's financial exposure and improves cash flow timing compared to waiting for final payment.
Why This Is the Correct Answer
Progress billing allows contractors to invoice and collect payment at regular intervals throughout the project (typically monthly or at completion milestones), rather than waiting until project completion. Requiring deposits provides immediate cash flow at project start, reducing the contractor's initial cash outlay for materials and labor. This strategy directly addresses cash flow problems by accelerating payment collection and reducing the time between work performed and payment received. It also reduces financial risk by ensuring the contractor isn't financing the entire project until completion.
Why the Other Options Are Wrong
Option C: Extending payment terms to 60 days
Increasing material inventory levels would tie up more cash in inventory and worsen cash flow problems rather than improve accounts receivable collection timing.
Option D: Increasing material inventory levels
Reducing project supervision costs is a cost-cutting measure that doesn't address the core issue of slow-paying customers or improve the timing of cash receipts from accounts receivable.
Memory Technique
Think 'Progress = Process money faster' - progress billing processes payments throughout the project rather than waiting for the end.
Reference Hint
Business and Finance for Contractors chapter on Cash Flow Management and Accounts Receivable
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