Certified Financial Management Specialist Practice Exam

What does a strong accounts receivable balance imply for a company?

1. High cash flow from operations

2. Good operational efficiency

3. Strong sales performance and customer demand

4. Increased capital expenditures

The correct answer is: Strong sales performance and customer demand

A strong accounts receivable balance typically indicates that a company has successfully made sales and that there is a high level of customer demand for its products or services. This situation often arises when customers are purchasing on credit, which is common in many industries. When a company has a robust accounts receivable balance, it reflects that a significant amount of revenue has been recognized from sales that are yet to be collected in cash. This scenario suggests that the company is effectively attracting customers who are willing to purchase and possibly also highlights the effectiveness of its sales strategies. Additionally, strong sales performance can lead to increased customer loyalty and repeat business. However, it is essential for the company to actively manage its accounts receivable to ensure that these amounts are collected efficiently, as high receivables without cash flow management can lead to liquidity issues. Other options refer to different aspects; for example, high cash flow from operations relates more to cash management, which is not directly indicated by a strong accounts receivable balance alone. Good operational efficiency typically pertains to how well a company converts inputs into outputs, which is not solely represented by accounts receivable. Lastly, increased capital expenditures relate to spending on long-term assets, which is a different area of financial management that does not connect directly to