March 18, 2011
by Purchasingb2b Staff
PURCHASINGB2B MAGAZINE, JANUARY/FEBRUARY 2011:
The health of a supplier is always a concern, but even more so during tough economic times. Next Level Purchasing’s white paper, entitled The Procurement Professionals’ Introduction to Finance: A 7-Page Primer, includes tips for procurement professionals to help ensure they’re dealing with a financially health supply base.
For example, the white paper suggests using income statements to compare a supplier’s profitability (by comparing net incomes of two or more companies) with other suppliers or the industry average.
Another way of evaluating a supplier’s financial health is through a trend analysis, which involves looking at comparative income statements. These show a company’s income statements from several years on one page and allow purchasers to look for profitability trends over time.
The white paper also suggests using a ratio analysis to take the financial temperature of a company. One ratio to look at is the current ratio, which measures an organization’s ability to meet short-term financial obligations by dividing its current assets by its current liabilities. The current ratio can then be compared against the industry average.
Yet another method the white paper provides is through the Altman Z-Score. This method uses several numbers from financial statement to arrive at a final number, which is then compared with three ranges of values. The analysis is designed to show how likely a supplier is to go bankrupt.
There are three variations of the Altman Z-Score, the white paper notes: one for publicly held manufacturers, another for privately held manufacturers and a third for non-manufacturing companies.