A general contractor is preparing a cash flow projection and notices that large receivables are due in 60 days while major supplier payments are due in 30 days. What is the best strategy to address this timing mismatch?
Correct Answer
B) Arrange a line of credit or factor receivables to bridge the gap
A line of credit provides temporary financing to bridge timing gaps between receivables and payables. Factoring receivables converts them to immediate cash. These are proper cash flow management tools that maintain business relationships.
Why This Is the Correct Answer
Option B provides proper cash flow management solutions that maintain business operations and relationships. A line of credit offers flexible, short-term financing to cover the 30-day gap between supplier payments and receivable collection. Factoring receivables converts future payments into immediate cash, solving the timing mismatch without damaging supplier relationships or project quality. These are standard financial tools specifically designed for managing cash flow timing differences in construction businesses.
Why the Other Options Are Wrong
Option A: Delay all supplier payments until receivables are collected
Delaying supplier payments damages business relationships and credit standing, potentially leading to supply chain disruptions, late fees, and loss of favorable payment terms or discounts.
Option C: Reduce material purchases for current projects
Reducing material purchases compromises project completion, quality, and timeline, potentially causing delays, cost overruns, and contract violations that could result in penalties or legal issues.
Option D: Increase markup on future projects
Increasing markup on future projects doesn't solve the immediate cash flow timing problem and may make bids uncompetitive, reducing the likelihood of winning future work.
Memory Technique
Think 'Bridge the Gap' - when there's a timing gap between money in and money out, you need a financial bridge (credit line or factoring), not operational changes.
Reference Hint
Business and Finance chapter - Cash Flow Management and Working Capital sections
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