Pay better – why payment practices matter

When I read the Chartered IIA’s guidance on Internal Audit and the Prompt Payment Code (PPC), issued in February, my heart soared. Here was a respected organisation affirming my own thinking since taking over the role of UK small business commissioner on 1 July last year. The guidance says the PPC (a voluntary code through which signatories commit to paying 95 per cent of all invoices within 60 days, and at least 95 per cent of invoices from small firms within 30 days) links to the environmental, social and governance (ESG) agenda, and that this will be increasingly important in all sectors. It also points out that firms adopting the PPC benefit from treating suppliers fairly in that it improves supplier goodwill and performance.

I’ll come back to the pros and cons of the PPC later, but the question uppermost in my mind as I read the Chartered IIA’s document was: how much do chairs and non-executive directors (NEDs) know about the payment practices of their organisations?

I feel that small but vital suppliers are being treated fairly if they are being paid fast without onerous payment terms being imposed or invoices delayed. I want to see effective communication between bigger customers and smaller suppliers about how and when they’ll be paid. I’d love to believe there was real understanding on each side about the challenges faced by the other. At the heart of all this is the issue of whether bigger customers and their smaller suppliers are working well together and understand the impact it would have on their businesses if the other didn’t survive.

Small firms, as we are constantly told, are the bedrock and lifeblood of the UK economy. This fact is touted in every world economy and no one, to my knowledge, ever disagrees with the basic premise. Why then is it often the case that bigger firms use their smaller suppliers as banks, withholding or delaying payments for work done for long enough to use that money for other purposes? There are always competing challenges for restricted finances, but surely the lifeblood and bedrock should take priority.

Without your suppliers where do your supplies come from? What do you sell to your customers if your suppliers are bust and unproductive? New suppliers can be hard and expensive to find and if you have a reputation for delaying payments new suppliers may be brave enough to refuse to work with you. Small businesses (and I mean freelancers, sole traders, micro and small businesses) are the talent that helps to drive your bigger business to success and they deserve respect and to be treated fairly. They also deserve to be known and understood by their customers. Do you, as internal auditors, know what’s happening to the small suppliers that serve your organisations and are you keeping your boards appraised?

My thesis is that payment practices are an excellent measure of how ethical a business is. These days, investors increasingly want to invest in ethical firms, with good reputations, that work in partnership with their suppliers to the benefit of all. Well-qualified and bright young people want to work in those kinds of organisations too, with purpose and good reputations that treat their people well. What better question to ask at interview, to assess how ethical your would-be employer is, than “how well do you treat your small suppliers?”.

Ethics and reputation are governance issues. Payment practices are a good measure of that. They aren’t simply, as I keep being told, an operational issue. This is strategic and sits on the board agenda, the G in ESG.

I also argue that payment performance is a good measure of the S in ESG too. Your smaller suppliers are probably closer than you are to their local communities, understand the make-up and needs of those communities, can work in and with those communities to achieve skills and goals, and can lead on the levelling-up agenda. 

A lot of work has already been done on the E. Small suppliers need to reach net zero emissions. They can’t or won’t invest if they don’t have certainty around cashflow. Paying fast and fair is the way to support the small firms you do business with to reach net zero.

The cost-of-living crisis threatens to derail attempts by many small firms to invest in digitisation, skills, upskilling, job creation and net zero commitments. Take the construction sector. If small firms go bust that’s a real threat to the health and safety of the sector. Small firms deliver a lot of the training, including health and safety training. Do managers and board members in the firms you work with understand the risks and advantages of being a poor payer or a good payer?

I arrived in this job with a warning ringing in my ears: big firms deliberately delay payments to smaller suppliers to make their books look better.

That may be true in some cases, where there’s a need to keep the bankers, investors and boards happy about the state of the finances. However, I don’t believe that’s the main reason for poor payment practices. In many of the examples I’ve come across it’s a matter of out-of-date, old-fashioned payment systems that mean payments can’t be made quicker, or that when someone goes on holiday for three weeks payments must wait until they get back. Sometimes there is a complete lack of understanding of the needs of smaller firms that need small invoices paid fast.

What is your organisation’s payment process? Do the people making the payments understand that £300 held back for three weeks could be the straw that breaks the camel’s back? Are suppliers privy to all the information they need to get paid from the moment they become one of your suppliers? Do they have an induction pack and a person to contact to check the money will be in the bank when they expect it to arrive? Are your systems fit for purpose and if, as looks increasingly likely in future, they come under additional scrutiny through ESG or internal or external audit requirements, will you be ready?

At the most cynical level, there’s a great PR opportunity here. You can talk about your lightbulb moment, how you became a good payer and how that has benefited your business with a better skilled, qualified workforce that wants to stay with you because you treat everyone fairly, from the newest starter to the longest serving supplier and everyone else in between. When push comes to shove, the best talent will want to work with you rather than your rivals. There’s a great opportunity here to attract the best talent to work with you before skills shortages bite even deeper. Be an ethical fast and fair payer, and it will pay you as well as your small suppliers.

Coming back to the PPC, as the Chartered IIA guidance says, failure to adopt the code may make an organisation appear uncaring or uninterested in its supply chain and could result in the loss of competitive advantage. #PayDontDelay. It makes sense all the way to the bottom line. 

This article was first published in July 2022.