It is important to perform a financial appraisal of suppliers at an early stage of the procurement sourcing process. Undertaking a contract with a financially unstable supplier could result in issues such as interrupted supply, or decreased quality of the product if the supplier must cut costs in order to make profit or survive. Or worse, that the supplier business could fail.

Key Financial Indicators for Sourcing Procurement

Profits – The profits made by the supplier over the last 3 years should give you an indication of how the business is performing. If profits are declining or remain at a considerably low level with no obvious reasons for this (such as profits being re-invested into the company to promote growth) then the likelihood is the business is struggling to keep afloat.

Cashflow Issues – If the timing of money coming in and going out of the business is not right and the business is struggling to pay off short term expenses and debts, this could be a sign the company is not financially stable at present.

High Loan Capital – If the loan capital (money borrowed from lenders) exceeds the amount of share capital (investor funds), this means the company has a large amount of loan payments that they are obligated to pay. This can have a negative impact on cashflow and profit margins, putting the business in an unstable financial position until the debts are reduced or cleared.

Potential for Takeover/Merger – If a takeover or merger deal is in the pipeline or is likely in the near future, then it has to be considered how this might impact the continued ability to supply. If the company were to split into different smaller branches, this could mean they were no longer able to meet your demands.

Level of Dependency on Clients – Many companies have a small number of large-scale clients whose orders fuel their profits. If just one of these clients were to move their business, would the supplier find themselves in financial difficulty? If the answer is yes, then you should consider how this may impact the suppliers ability to deliver.

How to Conduct a Financial Appraisal of Suppliers

The opposite of the above mentioned information (high or increasing profits, steady cashflow and low loan capital, low level of dependency on individual clients) are indicators of financially strong suppliers. This information can be discovered about a supplier through the following means:

  • Published financial statements
  • Secondary data on markets and suppliers
  • Credit rating companies
  • Networking with current clients of the supplier
  • Invitation to the financial director of the company to make a presentation on it’s current and predicted financial position.

If you are interested in learning more about the procurement and supply sourcing process, you may be interested in the Diploma in Procurement and Supply. The Diploma addresses planning and forecasting for future demand, forward planning for contract development, negotiating volumes, margins and standards, creating and controlling specifications, and contract management. It also covers the supply market and chain, negotiating with suppliers, conflict resolution and performance review. For more information about the course, contact us on 01865 515 255 or email enquiries@oxfordpeg.com.