What Is A Creditors And Purchasing Policy?


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Ray Hueston answered
A creditor's  and purchasing policy is really all about getting goods and services for you organisation in an efficient manner that is in the best interests of your own organisation and the people who are selling you those goods and services.  So a well thought-out creditors and purchasing policy will be a vital part of building strong and trusting relationships with your suppliers and people to whom you owe money - the creditors of the organisation.  Without this, there might be a number of operational difficulties with cash leaving the business faster than it is coming in, making it very difficult to continue trading.  Many businesses go bankrupt because they run out of cash, even though they have excellent products to sell and are trading profitably.  For every purchase decision, make sure you know what our purchasing objectives are.  Why is this purchase needed and how will it be done in terms of documentation and a process. The main priority is usually reliability, followed by quality, price and then when does the invoice have to be paid.  If there is more than one supplier, make sure you know what these choices are.  Get more than one quote about price, the delivery schedule, payment terms and information on the supplier's reputation.  Once you have all this data, make sure a decision is made that the whole of your organisation can agree with - as an example - agree these objectives with your accounts department, and train them in how to treat your creditors. If you agree one things, and they do something different, the trusting relationship you want to develop will not be achieved.  Document the process as a formal Company policy and make sure  your suppliers understand your payment terms and you understand theirs.  Once you have written down your terms of trade, ask any new supplier to agree them by signing and returning them. If the supplier's terms of trade conflict with yours, come to a (written) agreement before you order.  For example, your supplier might want paying in 14 days, but you want to pay within 30 days of receipt of invoice. Here an agreement will need to be reached as to what will happen.  If you generate cash, you might be able to pay quickly in return for price or settlement discounts, but if you make things that take a long time, and it takes even longer to sell the finished good, and get paid, you have to find a way to bridge this gap.  Make sure your policy is flexible.  Be prepared to trade off credit in return for other concessions (or vice versa) from your suppliers.  You might get cheaper prices paying on a cash-up-front basis.  Make sure you communicate all the time showing the benefits to your suppliers of doing business with you, so they support you in the future.  If you pay promptly, your suppliers should expect to do you a favour in return when you need one.  If you negotiate extra credit, show the suppliers what they get in return. Last, review your terms regularly. Make sure you are doing the right thing to build the strong, trusting relationship needed to be successful.

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