A wise man once said “Don’t judge a book by its cover”, but a wiser man said that “Books are the window into the author’s soul”. The books of business more popularly known as financial statements or balance sheets are the windows to the internal operations and functioning of businesses and being able to understand them has never been of higher importance than it is in today’s business environment of outsourcing certain business functionalities. While said outsourcing comes with various advantages as enabling the organization to concentrate its efforts on core business functions, lower compliances, and cost-effectiveness, these outsourced services suffer from the inherent risk of business disruptions that can be caused by the service provider becoming insolvent or forced to close shop due to financial non-viability. Recent headlines have been flooded with news of companies going out of operation for various financial reasons and the consequent impact it had on various entities which were taking services from such service providers. Be it the bankruptcy of Silicon Valley Bank which adversely impacted 100s of start-ups across the globe banking with SVB including over 60 VC back Indian start-ups that were unable to withdraw their own money kept with the Bank or the financial irregularities found in the books of Go Mechanic a tech platform for automotive maintenance and repair that resulted in customers having purchased its annual maintenance services for their vehicle fleets being left high and dry. Unexpected disruption in services caused due to insolvency or bankruptcy not only impacts the customers in terms of money lost in the form of advance given against the services but also results in the escalated cost of procurement from alternate vendors. 
The Collapse of SVB and Go Mechanic, whether an unpredictable saga or a result of negligence. In current business environment, distinguishing genuine assurances from false promises is becoming challenging.An instance that hits close to home is GoMechanic. A deep dive into the books of accounts of GoMechanic reveals that the founders took home a fat pay cheque in form of incentives, over and above their regular remuneration. The company’s annual report, registered with the Registrar of Companies (RoC), indicates that GoMechanic’s total income in 2021-22 amounted to INR97 crore, almost twice that of the previous year and an increase of more than 5 times in comparison to 2018-19. A rapid growth in this area, given the current environment, was questionable. However, under the hood of this growth and expansion in scale, “financial lapses” and “errors” were being committed, as now confessed by the company. It makes you wonder whether there were patterns that could have predicted the downfall of GoMechanic and SVB? The answer is YES ! If the customers of these companies would have gone through the books of their service provider they would have found the discrepancies that led to the breakdown. Is your current service provider at risk of facing a similar fate?Evaluating the vendor’s financial health also helps the organisation gauge their long-term viability. By assessing factors such as profitability, liquidity, and debt levels, the organisation can identify any potential risks that could lead to business disruptions or even vendor bankruptcy.Analyzing a vendor’s financial statements, the organisation can identify areas where the vendor might be willing to negotiate better terms. For example, if the vendor is experiencing cash flow issues, they may be open to offering discounts, extended payment terms, or reduced prices to secure the business. This can directly lead to cost savings for the organization. Just by examining the balance sheet of the vendor you can figure out if a vendor has a history of financial irregularities. For example, 1.Analyse liquidity and cash flow : You can assess the vendor’s liquidity by examining their current assets and current liabilities. Look for trends in working capital, cash, accounts receivable, and accounts payable. Cash flow can be predicted by analysing cash from operations.
The Collapse of SVB and Go Mechanic, whether an unpredictable saga or a result of negligence. In current business environment, distinguishing genuine assurances from false promises is becoming challenging.An instance that hits close to home is GoMechanic. A deep dive into the books of accounts of GoMechanic reveals that the founders took home a fat pay cheque in form of incentives, over and above their regular remuneration. The company’s annual report, registered with the Registrar of Companies (RoC), indicates that GoMechanic’s total income in 2021-22 amounted to INR97 crore, almost twice that of the previous year and an increase of more than 5 times in comparison to 2018-19. A rapid growth in this area, given the current environment, was questionable. However, under the hood of this growth and expansion in scale, “financial lapses” and “errors” were being committed, as now confessed by the company. It makes you wonder whether there were patterns that could have predicted the downfall of GoMechanic and SVB? The answer is YES ! If the customers of these companies would have gone through the books of their service provider they would have found the discrepancies that led to the breakdown. Is your current service provider at risk of facing a similar fate?Evaluating the vendor’s financial health also helps the organisation gauge their long-term viability. By assessing factors such as profitability, liquidity, and debt levels, the organisation can identify any potential risks that could lead to business disruptions or even vendor bankruptcy.Analyzing a vendor’s financial statements, the organisation can identify areas where the vendor might be willing to negotiate better terms. For example, if the vendor is experiencing cash flow issues, they may be open to offering discounts, extended payment terms, or reduced prices to secure the business. This can directly lead to cost savings for the organization. Just by examining the balance sheet of the vendor you can figure out if a vendor has a history of financial irregularities. For example, 1.Analyse liquidity and cash flow : You can assess the vendor’s liquidity by examining their current assets and current liabilities. Look for trends in working capital, cash, accounts receivable, and accounts payable. Cash flow can be predicted by analysing cash from operations. - Evaluate debt levels: Study the vendor’s long-term debt and short-term borrowings. Look for trends in debt levels over time and compare them with industry benchmarks. Assess the vendor’s ability to meet its debt obligations by considering debt ratio, debt-to-equity ratio etc.
- Assess solvency: Calculate key solvency ratios like the debt-to-assets ratio and solvency ratio, debt-to-equity ratio to determine the vendor’s ability to meet long-term obligations.
- Consider liabilities: Analyze the vendor’s liabilities, including both current and long-term obligations. Look for trends in accounts payable, accrued expenses, and other liabilities. Assess the vendor’s ability to manage their obligations and maintain healthy relationships with creditors. By analyzing the average trade payables, you can assess the vendor’s track record in meeting its own payment obligations.
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