Due Diligence and Ongoing Monitoring

  • 1.  Vendor Financial Health

    This message was posted by a user wishing to remain anonymous
    Posted 06-25-2021 02:12 PM
    This message was posted by a user wishing to remain anonymous

    Happy Friday Everyone!

    Have some questions regarding vendor financial health that I am hoping the community can help with some feedback.

    We currently utilize a third party tool to provide feedback on vendor financial health.


    There is a knowledge gap internally and at the vendor level to understand/interpret what this tool is telling us.


      1. What metrics do you use to determine a vendor's financial health?
      2. How do you obtain and analyze them?
      3. If a risk is identified, how do you communicate that finding to the vendor?
    Thank you and have a good weekend!

  • 2.  RE: Vendor Financial Health

    Posted 07-06-2021 04:08 PM

    Hi there and thank you for your questions!

    Metrics and information you should pay attention to and assess include the following:

    • Balance Sheet – including cash, accounts receivable, total current assets, total goodwill and intangible assets, total assets, total debt (current and long-term), total liabilities, total retained earnings, net worth, and tangible net worth
    • Income Statement – including total revenue (and segment revenue when available), total gross profit and margin, total operating income (or losses), total net income, total comprehensive income; helps you understand the company's revenue and profitability profile
    • Cash Flow Statement – including cash flow from operations, investing, and financing, as well as beginning and ending cash balances. This helps understand how the vendor is funding their operations and the liquidity it has
    • Ratios – including current ratio (current assets divided by current liabilities), accounts receivable days, goodwill, and intangible assets as a percent of total assets, total debt / liabilities as a percent of total and tangible net worth
    • Overall qualitative notes: any one-time events, restructuring, risks identified, or commentary provided by management that is relevant to understanding the vendor's financial health; be sure to maintain a section with a few sentences or summaries highlighted here as support for the quantitative data and metrics

    For public companies, a Form 10-K or 10-Q (available from the SEC) is sufficient for review. Similarly, for international public companies companies, annual reports should be used. On the other hand, to obtain documentation from a private company, you will need to add these requests into your third-party risk management program and diligence questionnaires. You should always start with asking for audited financial information. If that is not provided, company prepared financial information (such as an income statement, balance sheet, and/or cash flow statement), a financial letter speaking to the company's financial performance and health (typically signed off by a CFO or auditor / reviewer of the financials) or IRS tax returns are sufficient for reviews.

    Once reviews are complete or set, reach out to the vendor to discuss any findings and next steps; include questionnaires and diligence request lists that include asks on the information highlighted here or findings that your team may find necessary. If there are additional risks that are identified, then your team should discuss the findings internally and begin to find alternative vendors that provide the same service in case the specific vendor you have assessed has issues with its financial health that cause service level disruptions. Using specific items in the contract, such as an early termination clause / opt-out clause or even minimum service level agreement levels, can help your team remedy issues with a vendor that is having financial health issues that are causing interruptions or problems with product / service delivery.

    We welcome any other members in our Third Party ThinkTank to weigh in on other methods or workflows that they have found helpful when reviewing, documenting, and addressing vendor financial health!

  • 3.  RE: Vendor Financial Health

    This message was posted by a user wishing to remain anonymous
    Posted 07-07-2021 08:01 AM
    This message was posted by a user wishing to remain anonymous

    Worth asking this question: Are you (should you be) concerned about EVERY vendor's health? Example: Cleaning services. There likely are many in your area; should be easy to find/replace them fairly quickly. Their financial health likely is not of concern to your firm, or worth your time. 

    As to your actual question regarding metrics: If you have a credit function at your firm, perhaps consult with them about metrics and systems already in place at your firm that you could leverage. If not.....think about what metrics do in this instance. A cloud provider probably wouldn't have financial statements similar to the aforementioned cleaning vendor.....would the metrics be useful across a disparate range of vendor types?

  • 4.  RE: Vendor Financial Health

    Posted 07-07-2021 08:39 AM

    I would actually say that the financial health of a cleaning company is still important.  If the company has unobserved access to your facility, including the probable notes left on desks and password lists and books in and around folks desks.


    If the company is financially troubled, then that data could become rather tempting. Granted it's unlikely, but while a full deep dive review isn't necessary,  it still might be worth a financial health check, even a superficial one, given the unmonitored physical access cleaners have to the building, up to and including the not-emptied shred bins, info left on a desk overnight, etc.






    David Howe

    Chief Information Officer




  • 5.  RE: Vendor Financial Health

    Posted 07-07-2021 08:53 AM
    We have created a series of metrics to review financial health of vendors and ensure consistency in review and evaluation.  Depending on the vendor and how they file/format of their financials we might not have all metrics but its a good starting place.  It also allows us to compare financial health year to year for the same vendor and for vendors in similar spaces.  The metrics we use are:

    Current Assets Current Liabilities Total Debt/Liabilities Total Assets Total Shareholders Equity (Total Equity) Total Revenue Gross Profit Operating Profit(Income)/Loss Net Cash Flow from Operations

    We also use the data to calculate some ratios/margins for a deeper dive
    Liquidity Ratio (current) Debt to Equity Ratio Debt to Asset Ratio Gross Profit Margin Operating Profit Margin Operating Cash Flow Ratio

    Also, if you use DNBi for any reviews, publicly traded company's have some key metrics calculated in the DNBi report which is also nice.


    Shelly Chase
    Senior Risk Analyst Officer