Hi,
This is a struggle as many private companies do not want to provide their audited, unaudited financials or even financial statements. I have looked into the D&B tool which appears to be the best in the industry to help decision a suppliers financial solvency when they do not provide financials or in addition too. Additionally, if they will not provide the financials we will request the following:
We take a look at different financial ratios and KPIs but overall the main factor is operational profitability.
Moreover, below is a list of ratios that we usually use when evaluating a company's solvency:
1. Current Ratio = Current Assets / Current Liabilities
2. Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
3. Debt-to-Equity Ratio = Total Debt / Total Equity
4. Debt-to-Asset Ratio = Total Debt / Total Assets
5. Interest Coverage Ratio = EBIT / Interest Expenses
6. Net Profit Margin = (Net Income / Revenue) * 100
7. Gross Profit Margin = [(Net Sales – Cost of Goods Sold) / Net Sales] * 100
8. Return on Equity = Net Income / Total Equity
When audited financial statements are provided, we also take a look at their footnotes. There is not a magic number to determine a company's solvency, we need to analyze different ratios/KPIs/footnotes all together. If a company has received equity/debt funding in the past to run their operations, it does not guarantee that they will continue receiving it in the future. At this point, it is a management decision to believe that this company will continue receiving funding to provide services in the near future (since clearly their operations does not generate positive cash flows and they could not continue providing services without it).
I have also requested that our CFO send out a communication (tone from the top) to our sales team and divisions to level set with potential suppliers and even some clients & partners that they will be expected to provide their financials when onboarding or we partner with on B2B agreements, such as Referral Agreements. We fully vet them to mitigate reputational risk along with many other types of risks. We are taking a harder stance, if they don't provide, we will not do business with them.
Best regards,
Mollie Schiffman, C3PRMP, CSMP, CTPRP
SWBC Contract & Supplier Management,
Third Party Risk, Manager
Original Message:
Sent: 11/8/2023 12:46:00 PM
From: Anonymous Member
Subject: RE: Assessing a Vendor's Financial Health without a CPA or 3rd Party.
This message was posted by a user wishing to remain anonymous
Venminder had a good webinar about reading financial statements - you may be able to find the slide deck in resources - that had a lot of good ideas. Also, Investopedia is your friend.
We created an Excel template with financial ratios that ae meaningful to us (debt ratio, current ratio, profit margin, free cash flow/debt, etc.) - just enter information from financial statements and the ratios calculate automatically.
We also look at trends, and like to have three years of financials to see the trends (note that right now, three years ago was during the pandemic so depending on the vendor, we go back to 2019 to see how the vendor has recovered). "Notes to Financial Statements" are where you can find the stories behind the numbers you see, and provide insight about the company's strategy. Reading financials without reading the Notes only gives you part of the story.
We have many vendors that have merged and/or purchased products from each other so we also look at intangible assets (tip from the Venminder webinar). We look at cash flow, and for our technology vendors, we look for spending on research & development.
Original Message:
Sent: 11-08-2023 10:33 AM
From: Anonymous Member
Subject: Assessing a Vendor's Financial Health without a CPA or 3rd Party.
This message was posted by a user wishing to remain anonymous
Hello,
I'm new to assessing vendors. I'm interested in best practices around assessing a vendor's financial health without having access to a CPA. We are able to obtain audited financials and a Experian BusinessIQ report for the vendor. I'm curious what items in the financial audit and the BusinessIQ report are sufficient to determine how well a vendor is performing.
From the audited financials we are currently using revenue, net loss, and working capital as indicators. From the BusinessIQ, we are using the days beyond term and the tradeline balances.
Any help is appreciated.