Financial Risk Evaluation of Supplier

Every business faces financial risks which seem to affect the company’s financial performance in both the short and long run. One of the financial risks is working with an inadequate supplier, or a supplier whose financial performance is poor. If a supplier’s financial performance is poor, the supplier may go bankrupt leaving the company with no materials to work with. Even though a company may find a different supplier or may decide to manufacture certain products in the house if one of its current suppliers goes bankrupt, making the right decision or looking for a different supplier is time consuming and may cost the company a fortune. In order to avoid financial risk when dealing with supplier, every company needs to evaluate the financial risk of their suppliers. There are steps that need to be taken when evaluating a supplier: 1) Develop a critical supplier list; 2) Collect a supplier’s financial data; 3) Make projections from ratio analysis; 4) Develop a suppliers watch list; and 5) Continue closely monitoring the supplier. Evaluating the financial risk of every supplier is time consuming; therefore, companies may use their own finance or accounting departments or outsource these services to third parties. In either case, evaluating a supplier provides financial security for the company in the long run and insure its business runs smoothly and its customers are satisfied.