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Late payments are the missing piece of ESG measurements

An issue that greatly impacts small businesses, late payments should be added as an ESG metric to help protect the businesses that are the backbone of many economies.

late payments

ESG reporting has become a significant focus for businesses of all sizes, encompassing a responsibility to our environment and the broader society. But what about responsibility to fellow businesses?

Despite larger companies working with suppliers big and small, ethical payment practices seem to have escaped the current parameters of ESG.

Late payments are an issue that particularly impacts small businesses, the backbone of many economies. When they are paid late, it limits the ability of these businesses to invest, grow and employ – before you even consider the crossover between small business owners’ business and personal finances.

Tackling this problem is not straightforward, but the damage done points to flaws in how businesses that pay their suppliers late are governed.

This economic impact directly translates into a social one. Small businesses sit at the heart of communities, a crucial provider of jobs and support networks for the local populations around them. As a result, the severity of the impact of late payments on large businesses’ suppliers demands greater recognition and immediate action.

Tackling this problem is not straightforward, but the damage done points to flaws in how businesses that pay their suppliers late are governed.

As companies are increasingly required to gather information and report on their ESG impact, adding late payments metrics could help shift attitudes in corporate financial behavior.

While ESG reporting increasingly includes the treatment of the supply chain, with investors demanding those organizations be given the same protections as core employees, it rarely considers the specific issue of late payments.

Adding it to ESG reporting requirements would not only be a proportionate and reasonable step, but offer several benefits to offenders and victims alike.

Raise the profile of a damaging issue

late payments

Too often, late payments are hidden or overlooked in traditional financial reporting, leading to a lack of transparency and accountability. Business leaders need to confront the reality of their company’s payment practices and address any inefficiencies or delays.

Our research found that more than half (55 percent) of large organizations in the United Kingdom admitted to paying their small business suppliers later than the agreed payment terms.

It becomes much more challenging for large businesses to ignore or downplay the significance of late payments when it is clearly presented in their performance metrics and reports.

This increased visibility would exert pressure on businesses to eliminate late payments. The spotlight on companies that deliberately hoard suppliers’ money under the guise of ‘prudential cash flow management’ would become even more intense, forcing them to adopt fairer payment practices.

Improved governance

Another benefit of including late payments in ESG reporting is that it significantly enhances governance by providing a comprehensive view for executives of the late payment problem within their organization.

Access to this information empowers those responsible to address the issue proactively.

With a better understanding of the scope and impact of late payments, governance bodies can assess the associated risks of the company more accurately.

For example, late payments can lead to strained supplier relationships, reduced trust and diminished supplier performance, ultimately affecting the company’s own operations and reputation.

Integrating late payments into governance practices would also encourage transparency and communication within the business. It fosters a culture of openness and accountability, where leaders are expected to address and resolve late payment issues promptly.

Regular monitoring and reporting of late payment data can facilitate ongoing discussions and enable management to identify patterns or systemic problems that need attention.

Empower all stakeholders with transparency

External and internal stakeholders also benefit from the inclusion of late payments in a company’s ESG reporting, as they receive valuable insights to assess the firm’s risk profile more accurately.

For example, investors rely on accurate risk assessments to make informed investment decisions. If they have visibility of late payment data, investors gain visibility into the financial health and operational efficiency of a company.

In a world where consumers are making purchasing decisions based on ethics more than ever, transparent late payment reporting sheds light on a company’s commitment to fair practices.

Conscious consumers increasingly prioritize brands that demonstrate responsible conduct throughout their supply chains – timely payments can absolutely be another metric to help them make informed choices and align purchasing decisions with their values.

Internally, timely payments are fundamental to fostering trust among employees.

Reporting on late payments would allow staff to assess their employer’s commitment to ethical practices, its financial stability and its willingness to prioritize employee wellbeing.

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It’s time to harness the power of ESG

Being paid on time for the work you have done shouldn’t be a big ask. Yet, for small businesses, it all too often is.

At the same time, ESG has become about much more than ‘doing the right thing’; it’s also about opportunities and risks that make a material difference to a business. As such, it has become a critical boardroom topic.

The inclusion of late payments as part of this discussion drives accountability and creates impetus for businesses to end the damaging practice of withholding money that they owe suppliers.

By holding companies accountable for their payment practices by including it in ESG reporting, we can create a fairer and more sustainable business landscape that benefits all stakeholders involved.

Appointed in 2021, Alex von Schirmeister is the Managing Director of Xero UK & EMEA. He has more than 25 years of experience, having previously worked in senior leadership roles across ecommerce, payments, telecommunications, FMCG and consultancy.

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