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Ask The Experts – Supplier Financial Appraisals

Monday February 22nd, 2010

By David Griffiths, PASS Consultant

PASS consultant David Griffiths answers your queries on Supplier Financial Appraisals.

What are Supplier Financial Appraisals?

This is a method used to conduct a first stage financial appraisal of suppliers in an Open Procedure scenario under the EU Procurement Directives. The following brief summary of the process should be used in conjunction with more detailed guidance.

What are the key points? 

  • The scope of appraisal should be proportionate to the size and risk of the contract.
  • The appraisal should move away from the mechanistic application of financial criteria. All bidders should be treated fairly with SMEs not being disadvantaged.
  • If bidders are unable to provide audited accounts, other information should be requested that is considered sufficient for information purposes.
  • Financial standing should only be considered as part of the risk assessment.
  • Rejection of bidders on turnover alone should be avoided
  • A bidder’s cash generating ability should be assessed.
  • Credit ratings from specialist providers are a useful tool.

The key objective is to analyse a supplier’s financial position and determine the level of risk, taking into account the contract requirement and its value. The assessment of risk should be based on sound business judgement rather than a mechanistic approach.

What is the next stage?

Bidders may be invited to complete a questionnaire (not to be confused with a PQQ) that can be used to measure them against the client’s minimum standards. The questionnaire could cover areas such as: 

  • Financial position – is there any evidence to prevent you doing any business with them?   
  • Financial strength – what is the risk that the company will not trade well into the future?
  • Financial capacity – what is the risk that the company will not be able to secure the resources to fulfil the contract?
  • Financial dependency – what is the risk that the company will become financially dependent upon this contract?

What information is required?

Under EU procurement rules, proof of the supplier’s financial and economic standing may be requested, for instance accounts relating to the business; banker’s references; turnover of the business (three years’ accounts may be requested but this is not a requirement). When a procurement is submitted to the OJEU, the information required must be specified in the Contract Notice.

What should be looked for when completing the Supplier Financial Appraisal?

Financial position – is there any evidence this is a company that you would not do business with? Examine the Directors’ and/or Officers’ professional status; County Court judgments etc. Consider whether the company uses professional accountants and their ability to provide accounts or similar, for instance a Business Plan supported by banker’s/financial institution references.

Financial strength – is there a risk that this supplier will not trade well into the future? Evaluate the selected balance sheet ratios.

Financial capacity – what is the risk that this supplier will not be able to secure the resources required to fulfil the contract? Appraise gearing ratios and any agreements secured in principle.

Financial dependency – what is the risk that this supplier will become financially dependent upon this contract? Look at their contract to turnover ratio and the contract to projected turnover ratio.

What further checks can be implemented?

Basic checks can be made at Companies House where the status of the company can be verified. Companies convicted of certain offences should be excluded from the competition (see Public Contracts Regulations 2006).

The scope of analysis must be applied to each bidder responding to the advertisement. It should draw attention to any significant items in the accounts including turnover, cash movements and balance sheet strengths and weaknesses. When addressing these matters, procurement staff should be encouraged to think in a broad, commercially focused manner.

Data from the profit and loss account should be reviewed. Losses in themselves do not justify elimination as start-up companies, for example, often return losses during their early years. The cash flow should be analysed as the profit and loss account and balance sheet do not provide a thorough financial assessment. The cash flow statement shows cash generation. This is a major influence on investment capacity and the level of debt that can be carried.

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