Effective supplier evaluation: a look at the categories of the Financial Risk Report

In a nutshell

In this article, we take a closer look at the categories for supplier evaluation that our Financial Risk Report (FRR) considers.

The selection of suppliers is crucial to the success of a company. This is why many companies use comprehensive evaluation systems to minimise risks in supply chain management and ensure that they work with the right partners. But how exactly are suppliers evaluated? What criteria are used to make an informed decision? In this article, we take a closer look at the supplier evaluation categories analysed in the Financial Risk Report.

Categories Supplier evaluation

When evaluating suppliers, different categories are often used to make an informed decision. This is because these criteria play a decisive role in measuring the performance and reliability of suppliers. Some of the most important categories for supplier evaluation are presented below:

Analysing the performance categories

  1. Company substance: This category deals with the structure and financial health of the supplier. A solid corporate structure is an indicator of long-term stability and reliability.
  2. Cash flow and liquidity: A supplier’s liquidity is crucial for the fulfilment of short-term obligations. This is because a stable cash flow and adequate liquidity are important factors in minimising financial risks.
  3. Activity ratios: Analysing the activity relationships provides information on how efficiently a supplier uses its resources and carries out its business activities.
  4. Return on assets (DuPont analysis): This analysis makes it possible to assess the company’s profitability in relation to its assets and to uncover potential risks.
  5. Abnormal items: The consideration of abnormal items helps to identify unusual events or transactions that could have an impact on the supplier’s financial stability.

Other categories in the supplier evaluation

  • Indebtedness: A high level of indebtedness can indicate financial risks and thus impair a supplier’s ability to service its liabilities.
  • Days sales outstanding: In the Financial Risk Report (FRR), we look at the duration between the time an invoice is issued by the rated company and the actual receipt of payment by its customers. These terms provide information on the efficiency of receivables management and the liquidity situation of a company.
  • Equity capitalisation: Adequate equity capital strengthens a supplier’s financial stability and flexibility.
  • Operating results: Analysing profit and loss statements provides insights into operating results and associated risks.
  • Asset turnover efficiency: This key figure indicates how effectively the company utilises its assets to generate sales and thus shows the productivity and profitability of the company’s assets.
  • Value adjustments: Analysing valuation allowances provides information on potential impairment risks and the accuracy of accounting.
  • Provisions: Provisions can provide insight into future financial obligations and risks.

Considering these comprehensive categories in the supplier evaluation enables companies to make informed decisions and minimise risks in their supply chain.

By regularly reviewing and adjusting the Financial Risk Rating within the BAMAC GROUP’s Financial Risk Report (FRR), you can ensure that your suppliers meet the required standards and build long-term partnerships that contribute to your company’s success. We have outlined further advantages of the report for you here.

You can request a free and complete sample report here.

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