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prompt payment

prompt payment. cash flow and interest income effects of paying local authority suppliers within 10 days with various methods of payment. Mike Griffiths. Background. CIPFA report commissioned by Visa Europe ‘10 day payment promise’

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prompt payment

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  1. prompt payment cash flow and interest income effects of paying local authority suppliers within 10 days with various methods of payment Mike Griffiths

  2. Background • CIPFA report commissioned by Visa Europe • ‘10 day payment promise’ • Report highlights advantages and disadvantages of a range of modern payment methods: • Cash • Cheque • BACS • GPC • Potential impact of different methods on cashflow and interest income are compared assuming adoption of 10 day payment instead of typical month end BACS cycle (average time to payment 15 days plus 2 days to clear = 17 days)

  3. Cash payments • Quick for suppliers • As movement of funds is instant reduces payment time by 7 days (17 – 10 = 7) • Need to maintain higher cash balances • Just-in-time cash management resource intensive • Labour and security intensive – for banks as well as local authorities and suppliers • Impact on interest income of shifting £100000 to this method per 1% incremental variation in interest rates = minus £19.18

  4. Cheque payments • Processing procedure resource intensive • Relatively long clearing periods (4-6 days) • Supplier can withdraw funds after 14 days compared to current average of 17 days • Local authorities stop earning interest income on funds two days after payment • Many suppliers (in retail sector especially) do not (or are reluctant to) accept cheques due to cost • Impact on interest income of shifting £100000 to this method per 1% incremental variation in interest rates = minus £13.70

  5. BACS payments • Most commonly used method: • Less labour intensive than cash/cheques • Cheaper than traditional payment methods • Funds are cleared and stop paying interest income 2 days after payment • Supplier receives funds 2 days after payment – so 12 days compared to current 17 day average • Most local authorities have a BACS approved software solution in place • Impact on interest income of shifting £100000 to 10 day BACS method per 1% incremental variation in interest rates = minus £13.70

  6. GPC • Can reduce some of the administrative elements of processing large amounts of small value payments • Payments to suppliers are prompt (2-4 days) – so exceeds 10 day payment requirement • AS GPC works with deferred payment, if payments cleared daily interest income can accrue on authority’s funds for up to 44 days after payment (Avg 22 days if cleared every 44 days; Avg 15 days if cleared monthly) • No fees for buyer and no need for purchase orders • Need for specialist software which most LAs do not own • Merchant fees for supplier • Supplier needs terminal to accept GPC payments

  7. GPC • Impact on interest income of shifting £100000 to this method per 1% incremental variation in interest rates = • + £73.97 (daily clearing) • + £13.70 (clearing every 44 days) • - £5.48 (monthly clearing)

  8. Conclusions • Certain payment methods enable rapid payments to be made whilst not losing interest income, such as the GPC • However, important to consider all factors in assessing whether or not a payment option is suitable eg • For LA - level of total local authority transactions, software and other costs • For supplier - cost associated with fees for using the GPC method

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