1. © 2011 John Wiley and Sons, Inc. All Rights Reserved Selection and Procurement for the Hospitality Industry Purchasing ANDREW HALE FEINSTEIN AND JOHN M. STEFANELLI E i g h t h E d i t i o n

2. © 2011 John Wiley and Sons, Inc. All Rights Reserved CHAPTER The Optimal Payment Policy 11

3. © 2011 John Wiley and Sons, Inc. All Rights Reserved YOU SHOULD BE ABLE TO: Describe and differentiate the tenets of cash management. Identify the major objective of a payment policy. Critique the costs of paying sooner than necessary and of paying too late. Compare and contract the bill-paying procedures that can be employed by hospitality operators.

4. © 2011 John Wiley and Sons, Inc. All Rights Reserved PAYMENT POLICIES Buyers rarely influence the company’s payment procedures unless they are the owner and write the checks Buyers must maintain relations with the suppliers Buyers need to know payment policies to determine if they can take advantage of discounts or opportunity buys.

5. © 2011 John Wiley and Sons, Inc. All Rights Reserved OBJECTIVES OF PAYMENT The tenets of cash management Keep your money as long as possible Pay your bills at the correct time Collect monies due as fast as you can

6. © 2011 John Wiley and Sons, Inc. All Rights Reserved COST OF PAYING TO SOON Loss of account interest or investment Removing funds from an account early lowers the income on investment/interest Cash shortages Using funds to pay off all bills may leave you short should something happen

7. © 2011 John Wiley and Sons, Inc. All Rights Reserved COST OF PAYING TOO LATE Get a reputation as a slow payer May limit which vendors will work with you Jeopardize future credit potential Get bad credit references Damage credit rating May affect future loans or credit Placed on COD by suppliers Cash on Delivery

8. © 2011 John Wiley and Sons, Inc. All Rights Reserved COST OF PAYING TOO LATE (CONT.) Interest and penalties Know your credit terms or else pay a fee Lose cash discounts Higher AP Prices Legal problems Poor credit risk Lose good suppliers

9. © 2011 John Wiley and Sons, Inc. All Rights Reserved WHAT IS THE BEST PAYMENT POLICY? The best policy is one that allows you to keep your money as long as possible, unless you have a favorable incentive to pay early.

10. © 2011 John Wiley and Sons, Inc. All Rights Reserved BILL PAYING PROCEDURES There are four main ways in which a hospitality operation will pay bills: 1.Paid-outs Using money from the cash drawer to pay 2.Invoices on Account Invoice received with delivery reconciled with credit slips and original order then paid

11. © 2011 John Wiley and Sons, Inc. All Rights Reserved BILL PAYING PROCEDURES (CONT.) There are four main ways in which a hospitality operation will pay bills: 3.Credit card payments Use of credit card to pay, however, suppliers pay a merchant fee 4.Bill-paying service Hire and pay outside firm to handle bills

12. © 2011 John Wiley and Sons, Inc. All Rights Reserved DISCOUNT CONSIDERATIONS Avoid becoming too intent on getting discounts and forget real costs Discounts may interfere with normal payment schedules Buyer may stay with discounting supplier and overlook their flaws

13. © 2011 John Wiley and Sons, Inc. All Rights Reserved DISCOUNT CONSIDERATIONS (CONT.) May need to borrow funds to take advantage of discount and must determine the added costs (interest) Does the discount alter payment due date based on when good delivery is accepted

14. © 2011 John Wiley and Sons, Inc. All Rights Reserved IN SUMMARY… Keep your money as long as possible Pay your bills at the correct time Collect monies due as fast as you can