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Are you only interested in profitability and working capital

Are you only interested in profitability and working capital for financial ratios? If not, what other ones should be reviewed? If you agree, how do these two items give you a complete financial picture?

Our main consideration when conducting a supplier evaluation will be the supplier's current financial condition. This has to be our top priority. If a supplier does not have sufficient working capital, our operations will be affected because we will not be able to get the goods that we need when we need them. One of the most convenient and quickest ways to analyze working capital is to evaluate the supplier's balance sheet. If the supplier is a publicly traded company, the information is easy to obtain. If the supplier is a private company, companies like Dunn & Bradstreet offer specialized supplier evaluation services (see here: A supplier that does not have sufficient working capital should never be considered for the company.

Aside from working capital, we would want to take net income into consideration. The main question to address would simply be, is our supplier turning a profit? If they are not, further analysis is required to determine why the supplier has been unprofitable. In some cases, it may be because the supplier is relatively new, and in most cases, new businesses need anywhere from one to five years before they become profitable.

There are other considerations. Let's say our supplier is a new company. We need to determine if the supplier has the resources, connections, and ability to deliver what we need and to respond to our needs in a timely, effective manner. Many new businesses don't have resources and other factors yet established. This would be a major consideration. The supplier's reviews and reputation would be another major consideration. If we learn from reading online reviews or information obtained by research from Dunn & Bradstreet or another similar company that the supplier continually delivers late or is slow to perform basic operations, this would be a major concern. Likewise, if our research shows that the supplier has been in business for many years and there are virtually no complaints or issues, we would want to consider this, also.

The financial and non-financial considerations are both important because these are the factors that affect our basic operations. While financial factors remain a key, we also need to know that the company is reliable, efficient, and resourceful. We may be able to get an idea of these issues from studying their financial information, but we'd need to look at all factors to really gain a comprehensive understanding, which would allow us to prepare a thorough supplier evaluation.

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I wouldn't say that they are the only financial ratios that should be used to assess the supplier, but I would say that they are the two most important groups of ratios when evaluating suppliers. We could really use financial ratios from any category in our evaluation. No information or ratio would really be useless, it would all be useful in some regard. However, when we evaluate a supplier, we would likely want to narrow down our ratios to the ones that are likely the most useful for our purposes. If we don't, the process itself of analyzing, evaluating, and selecting a supplier could become so time ...

Solution Summary

Are you only interested in profitability and working capital for financial ratios?