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The Optimal Payment Policy

11. The Optimal Payment Policy. 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.

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The Optimal Payment Policy

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  1. 11 The Optimal Payment Policy

  2. 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.

  3. Tenants 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

  4. Objectives of Payment Policy • Keep money as long as possible • Pay bills at correct time • Collect money due as quickly as possible

  5. Cost of Paying Sooner Than Necessary • Opportunity cost • Cash shortages

  6. Cost of Paying Too Late • Reputation as a slow payer • Jeopardize future credit potential • Damage credit rating • Placed on COD by suppliers

  7. COST OF PAYING TOO LATE (CONT.) • Interest and penalties • Lose cash discounts • Legal problems • Poor credit risk • Lose good suppliers

  8. 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.

  9. The Mechanics of Bill Paying • Paid-outs • Invoices on account • Credit card payments • Bill-paying service

  10. Another Word About Discounts • Become intent on discounts • May interfere with payment schedule • Might stay with discounting supplier longer than should • May need to borrow to take advantage of discount • Does discount alter payment due date

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