A general contractor's cash flow projection shows negative cash flow for the next two months due to delayed client payments. What is the most appropriate immediate action?
Correct Answer
B) Arrange a line of credit or short-term financing
A line of credit provides flexible short-term financing to bridge temporary cash flow gaps without disrupting operations. This is the most practical solution for temporary cash flow issues caused by delayed receivables.
Why This Is the Correct Answer
A line of credit is specifically designed for temporary cash flow issues and provides flexible access to funds when needed. It allows the contractor to maintain normal operations while waiting for delayed payments without making permanent changes to the business. This solution directly addresses the root cause (timing mismatch between receivables and payables) without creating additional operational problems. Lines of credit are standard financial tools that successful contractors use to manage cash flow fluctuations.
Why the Other Options Are Wrong
Option A: Delay all accounts payable payments indefinitely
Selling equipment is a permanent solution to a temporary problem and could impair the company's ability to complete current and future projects. Equipment sales also typically don't generate immediate cash and may result in losses.
Option C: Sell company equipment to generate cash
Reducing project budgets arbitrarily could compromise quality, safety, or project completion, potentially leading to contract violations or additional costs. This doesn't solve the cash flow timing issue and could damage client relationships and company reputation.
Memory Technique
Think 'LINE up credit for cash flow LINES' - when cash flow dips below the line, use a line of credit to bridge the gap temporarily.
Reference Hint
Business and Finance chapter - Cash Flow Management and Working Capital sections
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