My Procurement and Finance team are building out our Vendor Financial Viability Check process. What thresholds do you use for age of business, number of employees, and revenue to determine the vendor's risk and if you are open to doing business with them? How do you handle exceptions to these "rules", define mission critical vendors, and what is your process for completing these financial checks for new and existing vendors?

Being I work for a bank, we have internal and external resources to vet the financial health of vendors.  We then have to compare against what they do, and what happens of they fail to exist.  For example, most on-premise software is low risk because even if they disappear the software still exists.  We have criteria for reviewing pre-payments.  We dont want to give too much $$$, and have them not be able to deliver on the service.  When we find a vendor in less than desired health and they are critical, we work with our credit rating teams to develop measures that become part of the contract.  We work with our bankruptcy counsel to then build out what are our options if these triggers happen.

When building out a Vendor Financial Viability Check process, there are several considerations for determining vendor risk and whether to engage in business with them. Here's how these factors are commonly approached:

Age of Business: The age of a vendor's business is often taken into account. Generally, longer-established businesses are perceived as having more experience and a proven track record. However, the significance of business age may vary depending on the industry and the specific requirements of the organization.

Number of Employees: The number of employees can provide insight into a vendor's scale and capacity. A larger workforce may indicate greater resources, expertise, and stability. However, the relevance of employee count may differ across industries and the type of vendor being assessed.

Revenue: Revenue is a vital financial metric used to evaluate a vendor's financial health and performance. Assessing a vendor's revenue in relation to expenses, profitability, and growth helps determine its stability. Organizations typically set revenue thresholds based on their own risk tolerance and the nature of the products or services being offered.

Handling Exceptions: Clearly defined processes should be in place for handling exceptions to the established thresholds. In certain cases, qualitative factors such as market reputation, customer references, or unique circumstances may warrant exceptions. Establishing guidelines and decision-making criteria for evaluating exceptions on a case-by-case basis is crucial to ensure consistency and fairness.

Mission-Critical Vendors: Mission-critical vendors are those whose products, services, or support are essential to the core operations of the organization. These vendors have a significant impact on business continuity and success. Identifying and prioritizing mission-critical vendors helps allocate resources for more in-depth financial checks and due diligence.

Financial Check Process: A structured process for conducting financial checks on new and existing vendors should be established. This process may involve gathering financial statements like balance sheets and income statements, conducting ratio analysis to assess liquidity, profitability, and solvency, and reviewing credit reports or third-party financial ratings. Clearly defining responsibilities, documentation requirements, and timelines ensures consistency and efficiency.

It's important to involve relevant stakeholders such as procurement, finance, and legal teams when designing and implementing these processes. This collaborative approach ensures compliance, accuracy, and alignment with organizational goals and risk management strategies.