How Not to Do Financial Analysis of Business Partners

The Resilient Enterprise | The riskmethods Blog
financial-analysis

May 21, 2019

There are a lot of ways you can think you’re doing financial analysis of your business partners, but not really be doing financial analysis of your business partners. What do I mean? Let me put it another way: There are a lot of ways to do business partner financial analysis wrong, and only a few ways to do it right.

by Eric Evans, RapidRatings

So what red flags should you be looking for to make sure your company isn’t falling into one of the common traps of inaccurate business partner financial analysis? Read on to learn 3 of the common mistakes that companies often make.

#1: Don’t Settle for Less Information on Private Companies than Public Companies

I can see why people often make this mistake. A public company is required to disclose its financial data, which is then subject to analyst scrutiny, shareholder scrutiny and public scrutiny. It’s easier to obtain data for public companies, so people assume they need to fly blind when they have a private business partner. This isn’t true! Raising your expectations and communicating with your private companies on why this information helps you build a better partnership will help you obtain their financials.

#2: Don’t Do Financial Analysis Just Upon Onboarding

It’s not uncommon that organizations will do a thorough financial analysis of a business partner—especially a supplier—in advance of the onboarding process. This is good and should be done.

Unfortunately, it’s all too common that the financial analysis of business partners simply stops there. Don’t do this! Everyone gets an inspection when they’re buying a house to make sure it’s in good shape. But then it requires regular maintenance and monitoring to make sure new issues don’t come up. If you skip the regular maintenance and monitoring, such as for the efficiency of your furnace, that’s a sure way to risk that it may break down on a 0⁰ Saturday night when it will be most difficult to find someone to come replace it.

It’s crucial to make sure that financial analysis of your business partners is an ongoing process, not a “set it and forget it” process.

#3: Don’t Use Payment History and Call It Financial Analysis

Here’s a big tip: Just because a company has paid its bills on time does not mean it is financially stable. Sure, missed payments are certainly an indicator of financial trouble, and shouldn’t be ignored. But to check the mental box “Financial analysis complete!” just because you’ve checked that a business partner has paid its bills is definitely not a good idea. Many companies continue to pay their bills on time right into bankruptcy, some want to stock up on inventory pre-bankruptcy and some use bankruptcy as a corporate finance tool or to escape litigation. If these companies have stable, or sometimes even improving payment scores, you’ll be tragically mislead. Payment history isn’t the whole story, and you shouldn’t make decisions as if it is.

RapidRatings is proud to be a partner of riskmethods, enabling their customers to incorporate the financial health analysis of public and private partners into an overall risk scorecard to get the full picture of their risk exposure. You can learn more about our partnership here.

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profil-erci-evans

Eric Evans

Managing Director, Business Development RapidRatings

Eric is Managing Director of Business Development at RapidRatings. For more information about riskmethods and its partnership with RapidRatings, drop us a line at om@riskmethods.net.

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