Minimising risk when doing business with counties
Thursday, January 30th, 2020
“If it is not in writing it does not exist.” This is audit speak premised on the belief that if an auditor does not see documented evidence of something, then the assumption is it did not take place.
Documentary evidence, used when auditors are reviewing accounts, is the basis on which they raise queries as well as classify expenditure as disallowed.
It is, therefore, critical to have your order in writing to manage the risk of non-payment or incurring ineligible expenditure as is happening to various businesses working with counties.
According to the recent report from the Office of Auditor General, counties owed businesses Sh30 billion in the form of pending bills as at last December.
Pending bills are invoices that have not been paid during the financial year that the expenditure was incurred.
The counties with the highest pending bills include Nairobi (Sh3.77 billion), Wajir (Sh1.94 billion) and Mombasa (Sh1.57 billion).
Those with less debt include Laikipia (Sh78 million), Makueni (Sh33 million) and Baringo (Sh24 million).
The report further states that out of the Sh30 billion owed, Sh1.7 billion is ineligible expenditure.
The government constituted an ineligible pending bills resolution committee to resolve the issues of pending bills which confirmed the Sh1.7 billion bills were ineligible.
Ineligible pending bills are those with no records or supporting documents.
They could also be irregular, meaning they lack a three-way matching of the invoice, quotation or tender and delivery note, assuming this is what they used based on best practice.
The issue of pending bills has been a stumbling block to both business and economic growth.
Technically, there are business reporting sales of Sh30 billion, but there is no money to show for it.
There are businesses out there reporting profits which cannot be distributed as the cash is uncollected.
What’s more, it could mean some businesses may be taking loans to finance government activities.
Critical questions abound; what does it cost to do business with counties? Do the delayed payment affect the pricing of the goods and services supplied to counties?
Out of the Sh30 billion bills, Sh4.8 billion is VAT which is payable on or before the 20th of the following month after VATable goods or services were received.
This means businesses owed are expected to pay VAT even before counties pay them.
Failure to remit VAT attracts a penalty of Sh10,000 or 5 per cent of the tax due and an additional tax of 2 per cent compounded per month, whichever is higher.
How does any business stay profitable with these challenges one would ask? Going forward, businesses my need to put in place measures to mitigate risks even as they comply with the tax regime under harsh circumstances?
It is not a secret that from the foregoing, doing business with counties is high risk. To mitigate this risk, businesses should consider the auditors’ mantra— it is all written down.
In line with the tendering process, they should also be issued with a notification of award of contract, and issued with a Local Purchase Order or contract, which indicates the terms of the contract and the amount payable to you.
Upon delivery of goods, they should be inspected and a certificate of completion or goods received note issued. It is equally important to know that what you are supplying should be in the budget since government only pays for items budgeted for.
Being in business requires that you learn the dynamics of your client, how they operate and how best to serve them without sinking the business.
Even profitable businesses have closed down because they are unable to pay operational costs. This is because their monies are held up in receivables or in some cases, they incur ineligible bills.
The business owner should maintain all the correspondences and documentation with the county government. The evidence you have is what will make your payment eligible or ineligible.
Best practice in business is that you only commence the supply or goods and or services based on a valid contract or an LPO local purchase order—these are legally binding documents that you can rely on when asking for payment or to defend your case in a court of law. — The writer is an International Certified Risk Expert at First Idea Consulting — [email protected]