Financial Management for Project Managers Accounts Payable/Receivable 5 — Questions and Answers
Question 1: A project's largest customer consistently pays 45 days late. What is the best long-term solution?
- Write off the receivable each quarter
- Renegotiate contract payment terms or add late payment penalties (Correct answer)
- Stop invoicing the customer until they pay
- Transfer the account to a collection agency immediately
Correct answer: Renegotiate contract payment terms or add late payment penalties
Renegotiating terms or adding contractual late fees creates a financial incentive for the customer to pay on time.
Question 2: In project financial management, what is a retainage clause in accounts receivable?
- A penalty for early contract termination
- A percentage of each payment withheld until project completion as a performance guarantee (Correct answer)
- A fee charged for storing project deliverables
- A discount offered for early payment
Correct answer: A percentage of each payment withheld until project completion as a performance guarantee
Retainage is a portion (typically 5-10%) of each progress payment held back by the client until the project is satisfactorily completed.
Question 3: Which approach best helps a project manager reduce the risk of bad debts in accounts receivable?
- Extending credit to all customers without review
- Conducting credit checks before extending credit to new clients (Correct answer)
- Invoicing customers only after full project completion
- Recording all revenue as cash immediately
Correct answer: Conducting credit checks before extending credit to new clients
Credit checks assess a client's ability to pay before credit is extended, reducing the likelihood of future bad debts.
Question 4: A project manager discovers that the same vendor invoice was paid twice. Which internal control failure most likely allowed this?
- Lack of a three-way match process (Correct answer)
- Insufficient vendor diversification
- Absence of a project charter
- No segregation of budget and schedule duties
Correct answer: Lack of a three-way match process
A three-way match between the PO, receiving report, and invoice would have flagged the duplicate before the second payment was processed.
Question 5: When a project uses milestone-based billing, how does this affect accounts receivable timing?
- Revenue is invoiced continuously as work is performed daily
- Invoices are issued only when defined project milestones are achieved (Correct answer)
- The client pays the full contract amount upfront
- Invoicing occurs monthly regardless of project progress
Correct answer: Invoices are issued only when defined project milestones are achieved
Milestone billing ties invoice generation to the completion of specific deliverables, meaning AR is created only at those defined points.
Question 6: A project manager is calculating working capital. Which of the following correctly describes the relationship between AP and working capital?
- Increasing AP increases working capital
- Increasing AP decreases working capital because it raises current liabilities (Correct answer)
- AP has no effect on working capital
- Decreasing AP increases working capital
Correct answer: Increasing AP decreases working capital because it raises current liabilities
Working capital = current assets − current liabilities; higher AP raises current liabilities, which reduces working capital.
Question 7: Which of the following is the most effective way to accelerate cash collection from accounts receivable on a project?
- Send invoices only at project completion
- Offer early payment discounts and send invoices promptly after milestones (Correct answer)
- Allow customers to set their own payment schedules
- Reduce the number of invoices issued per quarter
Correct answer: Offer early payment discounts and send invoices promptly after milestones
Prompt invoicing combined with early payment incentives motivates clients to pay sooner, improving project cash flow.
Financial Management for Project Managers Accounts Payable/Receivable 5
A project's largest customer consistently pays 45 days late.
What is the best long-term solution?