September 26, 2017

The Importance of Financially Vetting Your Suppliers

[3.5 Minute Read]

Do you know the right questions to ask?

Business and project managers spend a lot of an organization’s money on long-term contracts with suppliers. Successful companies embrace their suppliers and vendors, viewing them as partners in helping to grow their businesses. Making sure that this is a mutually beneficial partnership will impact the quality of service you get in the future.

It is important to work with vendors that are strong financially and can complete the required work. While it is great to save by working down the price with vendors, there is also the problem of a vendor failing to deliver key products or services to an organization due to undisclosed financial issues.

The consequences of failing to review suppliers

Just as there are concrete benefits to assessing and monitoring supplier risk, there are tangible and undesirable results for ineffectively managing risk, which also threatens business profitability and sustainability.

  • Financial loss
  • Violated contracts and damaged credit
  • Reputation impact

The top ten ways to evaluate and verify a vendor’s financial stability

1. Research the company’s credit history. 

The simplest way to assess a potential partner is getting its Dun & Bradstreet number and running a credit report. Credit reports are not always black-and-white, but they do provide insight into the supplier and enable a company to ask relevant questions.

2. Call references. 

Don’t just ask for references — take the time to speak to someone. It’s not enough to just send an information sheet. You will get more details from a personal phone call.

3. Request and review a financial statement. 

When you look at a supplier’s financials, you are also looking into the competence and the integrity of the management team of the business. So knowing the reputation and the history of a business can be just as important as an audit. Some things to look for are:

  • Calculate the Supplier’s Profitability Ratios: If a company is not profitable, it likely will not stay in business for long.
  • Calculate the Supplier’s Liquidity Ratios: Liquidity ratios provide a measure of the supplier’s ability to meet short-term obligations and therefore the supplier’s sustainability.
  • Calculate the Supplier’s Activity Ratios: Activity ratios look at a supplier’s ability to convert balance sheet accounts into cash or revenue.

4. Ask relevant questions. 

Does the supplier have credit holds? Is the vendor set up to remit sales/use taxes to the appropriate state and local taxing authorities?

5. Verify bank information. 

Get the provider’s bank information, and find out how long it has had the account. Using several banks and switching frequently is not a good sign.

6. Find out if the provider has a revolving line of credit. 

If the provider’s bank has extended a line of credit, that could affirm its credit worthiness.

7. Inquire about the provider’s federal tax ID number. 

Determine how long the company has had the number. A short time in business or switching its corporate make-up frequently are red flags.

8. Review the company’s insurance coverage. 

Minimal coverage or lack of coverage (no umbrella or employee theft coverage, for example) could indicate a financial concern.

9. Assess the impact your business volume will have on the vendor. 

Thoroughly review the provider’s current business. Will your volume help grow the company—or stretch it too far?

10. Understand the provider’s business growth plan. 

Partner with a company that continues to invest in its business.

Developing long-term and stable business partnerships depends on the selection of financially viable suppliers. By gathering key supplier financial information such as revenue, financial references, continuity plans, and third-party ratings – and, just as importantly, continuously updating the supplier risk profiles – organizations can ensure they minimize the threats introduced to the business when partnering with a third-party firm.

At ASD, we encourage you to verify our financial stability. It’s one of the reasons we are upfront about the subject on our website.

We are also proud of our solid reputation and we work hard on every project for all our clients to earn their loyalty and repeat business. We welcome the opportunity to learn more about your workplace technology needs and earn your business too.

The Importance of Financially Vetting Your Suppliers eBook

About the author 

Joseph Pivirotto

Joseph serves as Chief Financial Officer of ASD®. He joined the company in October 2016 and is responsible for the finance, accounting and human resource functions for ASD®. He has over 25 years of extensive finance, accounting, and mergers and acquisition experience.

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