As you review your vendor’s financial health, here are six tips to an accurate vendor financial performance assessment.
6 Vendor Financial Performance Assessment Tips
Follow these six tips:
1. Ensure your vendor is making money.
This is the biggest driver of financial performance – if your vendor isn’t making any money then how will they have the resources to not only improve their product, but also keep staffing and service levels high to deliver good customer service?
2. Research the net worth – it can mislead you.
This is an important area; however, in some large publicly traded companies, it could be declining as they’re buying back their treasury shares. So, remember, it may not actually be a negative reflection on their performance! For that reason, do your research.
3. Be sure to review cash, especially the current ratio.
Does your vendor show that there’s enough cash to sustain operations at the current levels?
4. Look at their debt-to-worth.
Look at how outside rating agencies rated your vendor's debt obligations. Be sure to note if the ratings have either been upgraded or downgraded in the past 12 months. Use third-party reviews like Moody’s and Standard and Poors together with the Altman Z-Score.
5. Check to see if they’re involved in any legal proceedings or lawsuits.
If they are, you’ll want to understand the estimate of the anticipated settlement charges and when to expect that to happen.
6. Always prepare an analysis that covers your review in more detail.
Ensure an expert like a CPA is the one who drafts the analysis and includes the balance sheet, income statement, cash flow, ration and a conclusion.
Reviewing a vendor’s financial performance can lead to discovering more than just what is apparent by the numbers. It helps you determine if there are underlying issues at the vendor that you need to be aware of or concerned about. If there’s pending litigation or lawsuits, a ton of changes in executive leadership or even slow pay problems, identifying poor financials can give you the forewarning that it’s time to investigate further.
Look for these consequences if your vendor's financial performance declines. Download the infographic.