Workflow | Allen Powell | November 30, 2016
Company financial stability was ranked as the most important consideration when making a vendor change or vendor consolidation by those responding to the recent EBSCO Library Budgeting and Trends Survey. Allen Powell, executive vice president of operations and finance, EBSCO Information Services, recommends five research tactics that can be helpful to evaluate vendors.
1. Obtain a copy of the Audited Financial Statements (AFS) with the auditor’s opinion letter, of the vendor, including those of its ultimate parent company
A company’s most current AFS tells the full financial story of the company. Non-public companies should be willing to provide their AFS if the customer signs a non-disclosure agreement (NDA). In many countries these are also available at the official company registry and can be either requested or viewed online. The AFS provides information to aid the customer in determining the financial health of the vendor. A customer will be able to see key indicators such as sales trends, profit and profit trends, debt and net worth. Customers will also be better able to judge the vendor’s financial capability relative to the customer. For instance, a customer would be able to see if a vendor’s net worth (net equity) is less than the value of the customer’s contract, which would help in assessing relative risk of working with the vendor.
2. Focus on key financial ratios of the vendor and the vendor’s ultimate parent company
Financial leverage ratios measure the ability of a company to meet its financial obligations both in the short and long term. For instance, the current ratio measures a company’s current assets vs. its current liabilities. This measure focuses on the short term (within one year). While certainly a measure to watch, much more important leverage ratios focus on the long term debt of the company relative to the ability to pay off that debt. Ratios such as debt to equity and debt to net assets are key measures that provide insight into whether the vendor may be “over leveraged,” which could lead to financial problems in the future.
3. Get professional assistance to interpret financial data
If those charged with evaluating vendors do not have the expertise and experience needed to properly evaluate vendor financial statements, they should seek out assistance from qualified individuals. For example, university and college customers often have business schools that are part of their institution. Seeking assistance from experts within the business school is one way to obtain help in evaluating the financial health of vendors.
4. Consult commercial credit resources like Dun & Bradstreet (D&B)
You can think of the D&B rating as a coded guide to the risk associated with doing business with a specific company. The D&B Rating consists of two parts: Financial Strength Indicator and the Condition Code or Risk Indicator. The Financial Strength Indicator is calculated using either the net worth or issued capital of the company. If both figures are available, then the net worth is always used to calculate the Financial Strength. The Condition Code or Risk Indicator is calculated by taking into account key items within the Business Information report, which are used to predict the likelihood of a business failure. D&B is a trusted source – over 90 percent of the Business Week Global 1000 rely on D&B as a trusted partner to make confident business decisions.
5. Schedule a periodical review with your vendor
Consider asking your vendor for a meeting to review your financial risk and discuss the vendor’s performance and development. You should discuss key elements of the AFS, financial ratios, company structure, technology investments and service standards. This will give you the opportunity to gain additional insights and get more practical feedback as to the mid-term and long-term stability and financial health of your vendors.
Allen Powell is the Executive Vice President of Operations and Finance at EBSCO Information Services (EIS). Mr. Powell manages the operational and financial units for the Subscription Services Division, GOBI Library Services Division, and he also oversees the operational and financial functions for EBSCO’s worldwide network of regional offices. The offices support all business lines including database, discovery, and eBook products and books, subscriptions and ePackage services.
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