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Tips for mitigating the risk of financial failure of your suppliers

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Assessing your contract guidelines to ensure your institution is not left short by the financial shortfalls from your suppliers.

You will have assessed the financial health of your suppliers (and hence their risk of financial failure) when you procure the services. However, the financial health of your suppliers can deteriorate after procurement, either suddenly (for example because of the loss of a major contract or major litigation) or over time (for example, as a result of gradual changes to the profitability of a sector). It is therefore good practice to monitor the financial health of your key suppliers (i.e. those providing critical services) on an ongoing basis. Early recognition of the risk of supplier failure should allow you to be better prepared to deal with such failure and limit its impact on the continuity of services.

Usually in the education sector, those suppliers that are often providing critical services to education institutions can range from suppliers of facilities management services such as cleaning and catering, to ICT suppliers who may be managing your networks through to training partners responsible for delivering your curriculum. When dealing with these suppliers, we would recommend you consider implementing the following economic and financial standing measures in your contract management procedures:

  1. Include a suppliers economic and financial standing as a standard item on your regular contract review meetings.
    1. Seek access to forward looking information such as financial projections or a simplified business plan. Many suppliers will provide this information to their banks as a matter of course to support their credit lines so may have a standard pack available on request.
    2. Ask for evidence that they pay their suppliers promptly (failure to pay suppliers on time is often a warning sign of financial distress).
    3. Check for information that will help you determine their funding/income streams and what might be happening to these.
  2. Request an annual confirmation in writing backed up by their auditors, that no Financial Distress Event or any matter which could cause a Financial Distress Event has occurred and/or is subsisting.
  3. Know when your suppliers statutory accounts are published and introduce a review of these following publication.
  4. Establish ‘alert’ systems under which you are immediately informed of:
    1. any stock exchange announcements (where suppliers are quoted);
    2. press articles commenting on a supplier’s profitability or financial standing;
    3. any movements in suppliers’ credit ratings (where suppliers have formal credit ratings);
    4. any drop in Dun & Bradstreet and/or Company Watch H scores below standard financial health levels (e.g. 10 for D&B score and 25 for the H score).
  5. Don’t agree to any contract extensions without first evaluating the suppliers economic and financial standing.
  6. Ensure your contract terms and conditions include step in rights that set out in a clear, precise and unequivocal manner the circumstances under which you (or others) can step in to fulfil the suppliers obligations under the contract.

There are also a number of non financial warning signs to look out for that might indicate a suppliers potential financial distress, which include:

  • Unexpected resignations of key management / High employee turnover / few staff on site / plant and equipment disappearing from site
  • Weak management or overly controlling CEO
  • Delayed filing of statutory accounts / late provision of management information
  • Competitor gossip / market intelligence
  • Regulatory action
  • Declining share price / Sudden share price falls / Significant shorting of shares
  • Major adverse announcements (e.g. major litigation, large contract losses, etc)

The tips above have been taken from guidance issued by the Government Commercial Function, for more information and to access the guidance visit the Managing and monitoring suppliers' performance section on Further Education Library of Procurement.

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