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Zero Cost Support for Local Economy

Zero Cost Support for Local Economy

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Published by Ian Makgill
This paper aims to introduce simple measures you can implement to support your local economy without spending any money.
This paper aims to introduce simple measures you can implement to support your local economy without spending any money.

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Published by: Ian Makgill on Dec 15, 2008
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06/17/2009

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Savings from CorporateTransactions
A zero cost approachto supporting your localeconomy
Photo: René Ehrhardt
 
A zero cost approachto supporting your local economy
Introduction
The current economic situation presentssignificant risk to small to medium sized enter-prises (SMEs) in your local area. This paper aims to introduce simple measures you canimplement to support your local economy with-out spending any money.
The Economic Problem
Government is responsible for the purchasingof goods and services worth approximately£175bn
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per annum which represents approxi-mately 13% of UK Gross Domestic Product.Local Government spends over £38bn per year on goods and services. Approximately50% of Local Government spend is with SMEsuppliers.40% of SMEs interviewed in a recent surveyby the UK Business Forum
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believed that be-ing paid within twenty days for goods and ser-vices would be their preferred option for help-ing them to cope with the economic downturn.According to research commissioned byBacs
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, the average amount owed to an SMEat any one time is approximately £30,000.Almost a third of SMEs in the same surveyclaimed they could no longer trade if facedwith overdue invoices of up to £20,000.In August of 2008, the Government set a newtarget for central government to pay SMEswithin ten days. Hazel Blears, the Secretary of State for Communities and Local Government,has asked that local government does thesame. However, Councils are wary of intro-ducing initiatives that will reduce the incomethey recover from interest payments. Under-standably Councils have been reluctant to es-tablish large early settlement initiatives.
The Real Cost of Poor Cash flow
However, Councils that are uncertain aboutproviding support to their local economyshould consider the likely impact of local busi-ness failures on their own finances, as well astheir local area. SMEs employ 59% of the pri-vate sector workforce
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. The failure of local1SMEs can have a significant impact on financialand social costs for local councils. The mostimmediate effect is reduced revenues frombusiness rates. Unemployment from businessfailures create costs for local councils, includingincreased applications for housing benefit,council tax relief and free school meals.Rising unemployment is likely to have a great-est effect on young people looking for jobs. Acontracting employment market will force moreexperienced workers to look for lower paid rolesin order to gain work. This gives employers theoption to hire better skilled, experienced staff instead of school leavers and recent graduates.Higher unemployment has also been linked tohigher crime and increased social deprivation
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.
Can Councils make a difference?
Councils can make a real difference. The Fed-eration for Small Businesses (FSB) has estab-lished a ‘Trade Local’ campaign to help Coun-cils understand what they can do to improve thebusiness environment for local businesses(google “Keep Trade Local”). The FSB cam-paign makes the case for Councils to consider local businesses when they are deliveringservices, highlighting the effect that planning,procurement and parking regulations can haveon local business.Supporting local businesses during a downturnis a matter of ensuring that money is flowinginto the local economy wherever possible. SoCouncils need to make sure that local businessare competing for Council contracts and thatpayments to those suppliers are made asquickly as possible. Overleaf we outline threeno-cost steps that a Council can take that willdo just this.
The Zero Cost Solution in 3 steps
Step 1: Get procurement to focus onlocal businesses
Contracts that are tendered under the EU pro-curement regulations state that a Council can-not award business to a supplier on the basis of a supplier’s location, but there are still a range
1. http://www.hm-treasury.gov.uk/d/pbr08_economicengine_2390.pdf 2. http://www.ukbusinessforums.co.uk/3. http://www.bacs.co.uk4. http://www.hm-treasury.gov.uk/d/pbr08_economicengine_2390.pdf 5. 55% of offenders completing community sentences are unemployed at thetime they start their community sentence.(source www.crimeinfo.org.uk)
 
of actions that a procurement department cantake to support local businesses.The greatest barrier to winning public sector business is the challenge of responding totender opportunities. Procurement depart-ments can help local suppliers to overcomethis challenge in two ways, firstly they can en-sure that their tenders are available to viewonline. (Councils can use Supply2gov
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topublish any tender opportunity.) Secondly,Councils can amend their standing orders toincrease tender thresholds. Higher thresholdsmeans that more business can be awarded onthe basis of competitive quotes rather thanhaving to complete a full tender, somethingthat will favour SME suppliers.Procurement departments can also requirelarge suppliers that bid for Council business todemonstrate how they will support the localeconomy. Any tender can include a require-ment to detail how a supplier will push busi-ness into a local economy either through sub-contracting to local suppliers, or through pro-viding jobs for local citizens.
Step 2: Get invoices flowing into theaccounts payable department
If a Council is awarding business to localsuppliers and then paying them in 90 days,they will be doing more harm than good. Sup-pliers have to finance their cost of supply untila payment is made. Late payments willreduce supplier’s cash flow, which can exposesuppliers to increased debt and a poor credithistory. Given the current restrictions on creditit is feasible that late payments could close abusiness.Therefore, prompt settlement of invoices tolocal suppliers must be the minimum standardfor Councils that wish to support their localeconomies. (In Step 3 we outline how aCouncil can make early payments to supplierswithout costs).Despite BVPI18 prompt payment target,significant bottlenecks remain in Council pay-ment processes
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. These bottlenecks arelargely caused by the failure of staff to followbasic purchasing procedures, such as quotingan order number at the time of purchase. Whensuppliers are forced to reissue invoices, newinvoices are frequently set for payment at 30days after the approval of the new invoice. Thismeans that delays caused by procedural fail-ures in the Council are frequently passed on tothe supplier and aren’t recorded as late pay-ments. 80% of a Council’s suppliers will beSMEs, so it is likely that SMEs will bear thebrunt of late payments.Prompt payment and good purchasing practicebenefits the Council and the supplier, it reducescosts for both parties and provides effectiveaudit trails for spend activities. In most casesthe challenge of securing prompt payments re-lies on the Council having an efficient paymentprocess within the accounts payable depart-ment and in departments. Frequently bottle-necks are caused by staff failing to completeprocedures at the time of order or once an in-voice has been receipted. Staff need to under-stand that invoices must be approved immedi-ately and moved into the accounts payable de-partment promptly.
Step 3: Purchase card payments
Suppliers have shown that they prefer earlysettlement to extended credit, therefore allCouncils should consider how they can extendearly settlement to their suppliers. We believethat the most effective way to do this is to offer to pay suppliers using purchase cards. Our ownresearch into over 60,000 suppliers, shows thatup to 40% of an organisation’s suppliers areable to accept payments by Visa cards. Usingcards will provide funds to suppliers within 2-4working days, without affecting the Council’srevenues from interest payments.Suppliers that accept card payments haveweighed up the benefit of receiving early pay-ment against the extra cost of accepting cardpayments. So purchase cards can be used as atool for pushing liquidity into the economy with-out affecting a Council’s bottom line. Cards canalso increase the efficiency processes in theCouncil. So a well structured card programme2
A zero cost approachto supporting your local economy
6. http://www.supply2.gov.uk7. The average percentage of invoices paid within thirty days for CountyCouncils when the indicator ceased to be measured was 90.79%.

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