A vendor’s financial status can impact your organization significantly. Things such as a decline in service levels, the vendor sunsetting their products and rapid staff turnover can all be a result of poor financials. Therefore, as part of your ongoing due diligence, it’s important to periodically evaluate vendor financial stability.
Evaluating Your Vendor’s Financial Stability in 5 Steps
Here are the five steps that I recommend taking to evaluate your vendor’s financial stability:
- Locate the financial report: Find the report online if the company is public or request it from the vendor if the company is private. (e.g., Form 10-K, audited financial statement)
- Utilize SMEs: Have a subject matter expert, such as a CPA, review the report so that you’re receiving an expert opinion on the vendor’s financial stability.
- Ask yourself the right questions: Pay attention to and understand the following:
- Is the vendor making money and/or do they have sufficient capital to support their ongoing operations? This is a HUGE driver of financial health.
- What is the vendor’s debt-to-worth? It’s more challenging to nail down but it’s critical.
- What is their tangible net worth?
- Can the vendor continue operations at the current cash level?
- Prepare an analysis: In the analysis, include the balance sheet, income statement, cash flow, ratio and a conclusion. The analyst/SME should always supply a conclusion in the analysis.
- Establish a financial stability rating: Financial health ratings don’t have to be complex. I recommend 4 buckets – adequate, moderate, need monitoring and intense monitoring. It’s simple to understand and provides more consistency in results.
Understanding your vendor’s financial stability is crucial. By taking these steps you’re on track to stay as informed as possible regarding their financial health.
A vendor's financial health is crucial to your organization. Learn more and download this eBook.