A general contractor is experiencing cash flow problems with several large receivables over 60 days past due. What is the most appropriate immediate action to improve cash flow?
Correct Answer
D) Implement aggressive collection procedures and consider factoring receivables
When facing overdue receivables, immediate collection efforts and potentially factoring (selling receivables to a third party for immediate cash) are the most direct ways to improve cash flow. The other options don't address the immediate cash flow crisis.
Why This Is the Correct Answer
Option B directly addresses the root cause of the cash flow problem - overdue receivables. Aggressive collection procedures can recover money already owed, providing immediate cash relief. Factoring receivables allows the contractor to sell these outstanding invoices to a third party for immediate cash (typically 70-90% of face value), which directly solves the liquidity crisis. This approach targets the specific problem rather than attempting indirect solutions.
Why the Other Options Are Wrong
Option A: Reduce material costs on current projects
While reducing material costs might improve future project margins, it doesn't address the immediate cash flow crisis caused by overdue receivables. The contractor still needs cash now to meet current obligations, and cost reduction is a long-term strategy.
Option B: Hire additional employees to complete projects faster
Offering additional services to existing customers who are already 60+ days overdue on payments would likely worsen the cash flow problem by extending more credit to non-paying clients. This creates additional receivables without addressing the collection of existing overdue amounts.
Option C: Offer additional services to existing customers
Hiring additional employees increases immediate cash outflow through payroll expenses, worsening the cash flow problem. Even if projects are completed faster, payment collection still depends on customer payment behavior, not project completion speed.
Memory Technique
Think 'COLLECT FIRST' - when receivables are overdue, your first priority is collecting what's already owed before taking on new work or expenses.
Reference Hint
Florida Construction Industry Licensing Board Study Guide - Business and Finance section, Cash Flow Management chapter
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