Four ways to assess the strength of suppliers

Nigel Crunden
posted by Nigel Crunden
27 February 2015

As growth projections for UK economy in 2015 increase from 2.5 to 2.7 per cent, businesses must be sure to consider salient internal factors when evaluating confidence, rather than relying solely on macroeconomic growth indicators.

In a climate where the supply chain industry is increasingly volatile, there are a number of considerations that firms must make when planning activity for the year ahead.

1. The health of the firm’s contract portfolio

A company with a high proportion of long-term contract agreements in its order book is likely to be more secure than a firm completing work on a shorter term basis. However, a retained contract should not prompt reckless overconfidence; it is often a good idea to look over notice periods and analyse the probability of changes in market conditions or demand which could reduce a client’s requirement for the business’ goods or services.

2. Cash flow

Late payment and extended payment terms have long been problems for suppliers. These issues have regained prominence as dairy firm First Milk delayed payments to farmers and news emerged of large retailers enforcing lengthy payment terms on their suppliers. Any delay in payment may impact upon a firm’s ability to pay staff and fulfil orders, so risks must be assuaged through contingency planning and the exploration of potential short-term financing solutions that can keep the company afloat when cash-flow is threatened.

3. Access to finance

Often a strong indicator of how confident a firm should be in its plans for growth is its ability to access finance. Securing a debenture or loan at a competitive rate from a reputable lender is often an indication that the company’s business plan is commercially viable and its accounts are watertight. Difficulty in doing so suggests that financial institutions, who deal in risk, see the firm’s projections as unrealistic and should prompt internal investigation.

4. Projected capital investment spend

During the recession, businesses’ ability to invest in machinery, equipment and staff was greatly reduced, removing the opportunity to add lasting value to a firm’s assets or resources. The capability and purchasing power to grow in this way, whether it’s through the addition of new premises, fleet vehicles or technology, is a tangible sign that business confidence is nearing restoration.

Evaluation of these confidence indicators is a much more sound strategy when deciding a firm’s market position and prospects, rather than relying on UK-wide performance indicators alone.

☛ Nigel Crunden is a Business Specialist at Office Depot.

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