3 Frequent Mistakes Regarding Vendor Financials

Podcast Transcript

Hi – this is Ramin Zacharia with Venminder.

In this podcast, we’re going to learn about three mistakes we see professionals make when reviewing a vendor’s financial statements.

Here at Venminder, we have a team of industry experts, such as certified public accountants, or CPAs who understand how to look beyond the surface level of financial information and can accurately assess the overall financial health of a vendor.

We know reviewing a vendor’s financial health is an important activity that helps determine whether the vendor can support your organization over the long term. Vendors with poor financial health can lead to downstream risks on your organization, such as declining service levels.

Now let’s dive into three mistakes we see happening when reviewing a vendor financials:

1. The first mistake is assuming that the vendor’s income statement provides all the answers. While an income statement can give you a broad understanding of the vendor’s financial performance, it’s only one piece of the puzzle. Adding quantitative statements, such as a balance sheet and cash flow statement, along with qualitative commentary from management about the vendor’s performance is important as well.
2. A second mistake is jumping to the conclusion that declining revenue or profitability is always a red flag. While declining financial performance is a typical sign of poor financial health, there may be reasons why it may be happening, such as an intentional strategy or result by a vendor to divest non-core assets to improve its liquidity and cash position.
3. And, finally, a third mistake often seen is thinking that profit margins are consistent across every industry. For example, a 30% gross profit margin may be standard, or a positive sign in the food industry for a vendor. However, that same gross margin would be a red flag for a software or technology vendor.

Vendor financial health includes numerous factors that your organization should be cognizant of and review accordingly. Avoiding these three mistakes that we mentioned above can help your team ensure that there is comparability and consistency across your vendor financial reviews.

Hope you found this podcast insightful. Thank you for tuning in and catch you next time!