Performing Effective Financial Analysis of Suppliers within the Sourcing Team
CUNA Mutual Group Jeff Peterson Director - Sourcing & Vendor Management Office
www.sig.org/eval Performing Effective Financial Analysis of Suppliers within the Sourcing Team
Sourcing Industry Group October 2015
CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group About CUNA Mutual Group
• CUNA Mutual Group is a leading provider of financial services to credit unions, their members and valued customers worldwide and was founded in 1935
Corporate Headquarters Madison, WI
Operations Waverly, IA | Fort Worth, TX | Great Bend, KS
International Operations Dominican Republic, Jamaica, Puerto Rico, Trinidad/Tobago
Approximately 3,700 employees
www.cunamutual.com
Financial Highlights (in millions) 2014 2013 Total Revenue* $3,070 $2,966 GAAP Net Income $206 $162 Statutory Total Adjusted Capital $1,964 $1,795
*Prior period information has been restated to conform to current period presentation for discontinued operations.
Total revenue excludes net realized investment gains and losses. 3 Presenter Biography
Jeff Peterson- CPA, CPSM Director - Sourcing & Vendor Management Office, CUNA Mutual Group
B.B.A., Accounting and Management, University of Wisconsin-Madison M.B.A., Management, University of Wisconsin-Madison
• 20 years of Financial Services experience – Background in Accounting and Finance • Corporate Audit, Project and Product Management, Sourcing / Supply Management
4 Agenda
• Discuss ways of reviewing your supply base for financial risks – Financial Statement Refresher – Key Financial Ratios – Public Companies – Private Companies • Audited / un-audited financials • Banking relationships – Commercial Lending ideologies to consider – Non-financial signals
• Discuss an approach for creating tiers for the financial review of suppliers (primarily risk-based) – Level of dependency on supplier / supplier’s services – Portability • Switching costs / time to convert – Performance
5 Why assess the financial status of suppliers?
Revenue Impact - $$
Credibility Impact Reputation Impact
Supply Chain dependency
Customer-facing Impact
Security or privacy exposures
6 Why do many individuals avoid financial analysis?
• Information isn’t readily available
• Detailed, specialized knowledge – Accounting rules – Financial Analysis – Notes to the financials
• Time-consuming
• Almost never any immediate benefit…
7 Financial Statements 101
Source: Investopedia.com • Balance Sheet – A financial statement that summarizes a company's Assets, Liabilities and Shareholders' Equity at a specific point in time. • These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested / funded by the shareholders.
– The balance sheet must follow the following formula: • Assets = Liabilities + Shareholders' Equity
• Income Statement – A financial statement that measures a company's financial performance over a specific accounting period. • Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. • It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.
– Also known as the "profit and loss statement" or "statement of revenue and expense".
8 Financial Statements 101
Source: Investopedia.com
• Statement of Cash Flows: – One of the quarterly financial reports any publicly traded company is required to disclose to the SEC and the public.
– The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter.
– Because public companies tend to use accrual accounting, the income statements they release each quarter may not necessarily reflect changes in their cash positions. • For example, if a company lands a major contract, this contract would be recognized as revenue (and therefore income), but the company may not yet actually receive the cash from the contract until a later date.
9 Key Financial Ratios - Profitability
Profitability Ratios are used to assess the ability for a business to generate earnings as compared to its expenses and other related costs over a specific period of time. Generally, if the value is higher than a competitor, the company is performing better.
Net Income Return On Assets - ROA: Total Assets
Cash Flows from Operations Cash Return On Assets: Total Assets
Net Income Profit Margin: Revenues
Net Income Return On Equity - ROE: Shareholder's Equity
Source: Investopedia.com
10 Key Financial Ratios – Liquidity*
Liquidity Ratios are used to assess the ability for a business to pay off its short-term debt obligations. Generally, a higher value means there is a greater margin of safety the business has in covering its short-term debts.
Current Assets Current Ratio: Current Liabilities
Current Assets - Inventories Quick Ratio: Current Liabilities
Cash Flows from Operations Operating Cash Flow: Current Liabilities
Working Capital: Current Assets - Current Liabilities
(Cash + Accounts Receivable + Acid-Test Ratio: Short-term Investments) Current Liabilities Source: Investopedia.com
11 Key Financial Ratios - Leverage
Leverage Ratios are used to understand how a company is using various methods of financing, or to assess its ability to meet financial obligations. Generally, a higher ratio of debt can result in more volatile earnings as a result of the additional interest expense.
Total Liabilities Debt-to-Equity: Shareholder's Equity
My experience to-date on leverage ratio information is it has importance in order to understand supplier viability, but you generally have to dig into the disclosures and notes within the audited financial statements.
Source: Investopedia.com
12 Importance of Base lining and Trending
Supplier Averages Industry Category A Example – For illustrative purposes only Financial Ratios
Fiscal YE 20082012 Fiscal YEYE 20092013 Fiscal YE 20102014 Profitability Ratios
Return On Assets - ROA: 1.29% -0.57% 0.51%
Cash Return On Assets: 7.55% 10.20% 8.78%
Profit Margin: 1.20% 1.78% 0.66%
Return On Equity - ROE: 3.81% 5.22% 3.58%
Liquidity Ratios
Current Ratio: 1.77 1.52 1.49 NOTE: Should be > 1
Quick Ratio: 1.38 1.18 1.16 NOTE: Should be > 1
Operating Cash Flow: 0.33 0.39 0.35 "Cash is King"
Acid-Test Ratio: 1.24 1.06 1.01 NOTE: Should be > 1 (Below 1 = extreme caution)
Leverage Ratios
NOTE: The higher the number, the worse it is; i.e. Debt-to-Equity: 2.04 2.28 3.91 more debt/higher leverage
13 Public Companies
• Most companies provide their financial statements on their websites – LINK to CUNA Mutual’s 2014 financials
• All U.S. Public companies are required to file various statements with the SEC. – Generally, quarterly information can be found in 10-K statements – LINK to EDGAR database with the SEC – You may also consider comparing organizations with similar NAICS (North American Industrial Classification System) codes
14 Privately-Held Companies
• Data is often unavailable and inconsistent
• Preference is to negotiate the right to review Audited Financial Statements. If unable to get this right or if unavailable, I would ask for: – Unaudited Financial Statements – Company Tax Returns – Information on Banking relationships • Commercial Lending Questionnaire – SBA.gov • Business Tax Returns1 – Specific Financial ratios
• Other external sources are sometimes helpful – Google or other Alerts – Industry newsletters
1 – need to understand ownership structure
15 Ideas from Commercial Lending principles
Questions to ask commercial lending partner: • What is the current line of credit? • Any credit remaining / available? • Any debt? If so, how much? • Any missed loan payments or overdrafts? • How well established is the relationship?
16 Non-Financial Signals
• Quality concerns are • Training increasing • Older versions of • Performance metrics sales collateral have an unfavorable • Newer technology or trend investments in plant/ Reduction in • Delivery is delayed Increase in equipment indirect issues / resources / performance investments
Higher Layoffs Turnover
• Reduction in • Increased changes Administrative areas in account • Off-cycle or non- management, seasonal changes production staff
17 Initial Categorization of Supplier Risk
Supplier Tiers – • Materiality using both • Level of dependency on supplier / supplier’s services Quantitative and • Portability Qualitative • Switching costs / time to convert Attributes: • Performance
Qualitative attributes require a • May result in proactive planning to understand somewhat detailed viable alternatives • Contracting or other efforts to have substitutes in understanding of place how the • May shape your sourcing strategy as well relationship works
18 Questions?
19 Resources / Contact Information
Investopedia: http://www.investopedia.com/
EDGAR (SEC) Database: http://www.sec.gov/edgar.shtml
Contact Information:
Jeff Peterson [email protected]
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Performing Effective Financial Analysis of Suppliers within the Sourcing Team
Jeff Peterson CUNA Mutual Group [email protected]
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