Due Diligence and Ongoing Monitoring

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  • 1.  Financial/Counterparty Vendor Risk Monitoring

    Posted 03-27-2023 11:39 AM

    Hi All,

    In the wake of the Silicon Valley Bank ("SVB") collapse, we are curious to see how others in the industry review financial/counterparty risk of their vendors as part of their vendor program (for banks or any other types of vendors). Are certain questions asked at onboarding and ongoing due diligence? What type of supporting documents are requested? Our program currently doesn't contemplate financial risk of our vendors and we are curious to see what others do in this space. Any type of insights, example questionnaires, or risk assessment thoughts would be greatly appreciated.

    Thanks everyone



  • 2.  RE: Financial/Counterparty Vendor Risk Monitoring

    Posted 04-04-2023 10:25 AM

    Hi Garrett -

    To start, you should get your organization together to identify some of the key goals and objectives within your financial reviews. This can be as prescriptive as defining specific actions and financial items to review or as general as "we would like to perform financial reviews with the goal of understanding the financial health and viability of our vendors."

    Once you have alignment on your path for performing financial reviews, you should define what part of your vendor base you would like to start with by using criticality as a measure of selecting the vendors. In an ideal world, you should perform financial reviews on all high critical and medium critical vendors.

    You should conduct these financial reviews during the vetting / onboarding process, as well as on an ongoing basis (at a minimum, on an annual cadence, but if you would like more regular touchpoints / ongoing monitoring, you can use questionnaires that you send out monthly / quarterly and ongoing monitoring tools that check high-level financial, adverse media, and credit metrics of a vendor).

    Some of the key questions to include in your onboarding due diligence include the following:

    1) Do you have audited financial statements? If so, can you please provide the last 2-3 years
    2) If you do not have audited financial statements, can you provide 2-3 years of income statement, balance sheet, and cash flow statement information for us to review?

    3) What is your current cash balance and total liquidity position?
    4) Do you have sufficient cash and liquidity to remain in operations for the next 18 months (also can ask if the vendor is a going concern for at least the next 12-18 months)
    5) Does your operating business generate profit / cash flow? If not, do you have sources of external capital (i.e., equity investors, debt) to meet your operating needs?

    For ongoing due diligence, asking more detailed questions about your financial review findings is more appropriate. These can vary depending on the vendor you are reviewing and the information available. You should focus these questions on items that your organization discovers during your financial review, such as "the trend in your total revenue has decreased year-over-year. Please provide context on the trended performance" or "your company is currently unprofitable. Do you have a path to profitability? If not, please provide details on why you are unprofitable and how you will use other sources of capital to fund your operations."

    You should also ask qualitative questions such as: "do you have any outstanding legal issues / litigation?," "are you aware of any breaches in any debt covenants?,"  "do you have any significant customer / supplier concentration?"

    These areas should help you get started on your organization's path forward with financial reviews. You may need assistance in these tasks, so look for outsourced partners or tools to utilize to help scale these processes across your vendor base, but the above provides sufficient areas / insight on where to get started.

    Here's also a helpful blog post that has additional insight and best practices you can use and pointing this to banking relationships in light of the SVB / Signature Bank situation: https://www.venminder.com/blog/insight-vendor-banking-relationships-understanding-operational-resiliency

    Thank you,
    Ramin Zacharia