Every company is both a seller and a buyer of goods and services. The credit department has an array of tools, techniques, processes, policies, procedures and best practices that enable it to evaluate new applicants as well as existing customers. These tools offer insights about the company’s Liquidity, Financial Leverage, Profitability, Efficiency and Long-Term Viability. One way that I have added value involves using these tools to evaluate the financial health of key suppliers as well as potential new suppliers.
About a year ago, I recommended against establishing a new relationship with a potential supplier based on my concerns about the would-be supplier’s long term viability. The quote given by this company was more than 25% lower than other suppliers’ quotes. As a result, the purchasing department was not happy about my recommendation. However, based on declining sales, negative cash flow and significant net after tax losses, I was not comfortable having this company building a critical component for us.
About 5 months ago, the would-be supplier filed for Chapter 7 bankruptcy protection. Our production line could have been down for weeks if we had selected that supplier. The purchasing department got some of the credit for the ‘save’ but my
contribution was also recognized by senior management… and the best part was that it was easy. If you are not doing this type of work for your company, consider volunteering to do so. I have yet to work for a company whose purchasing department would prefer to make these decisions independently.
Anyway, that’s my opinion. What’s yours?
Michael Dennis’ Covering Credit Commentary. Michael’s website is www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.