Why Do Suppliers Use Financial Information?

by Marquis Codjia; Updated September 26, 2017

Business partners, such as suppliers and service providers, use financial information for various reasons. They delve into accounting statements to evaluate the state of the economy and appraise how companies are faring in the competitive landscape. Suppliers rely on financial statements to appraise the economic soundness of customers, especially those they intend to deal with on a long-term basis.

Financial Data

Financial data is a loose term referring to a hodgepodge of items, running the gamut from financial statements and budgeting information to economic reports and data summaries about a specific sector or region. Suppliers rely more on certain items than others, especially those related to business partners’ data. This is because credit risk, the loss expectation resulting from a partner’s default, is often more pronounced in an environment where vendors don’t check the financial histories of customers and service providers.

Uses

A supplier uses financial information as part of the due-diligence process, an important step in identifying the risks associated with doing business with a client. The vendor may do so before -- or after -- establishing a business relationship with the customer, depending on the sector and transaction. Suppliers rely on specific bits of data when gauging customers’ financial profiles. These relate to solvency indicators in balance sheets as well as liquidity information in statements of cash flows. Vendors also comb through customers’ income statements to set clients that are making money apart from those scraping by in near-insolvency. Suppliers also use financial information with an internal focus, meaning they use to understand their operations and determine whether they’re making money.

Relevance

The debate over financial transactions often ripples from vendor and customer quarters to the investment landscape. Business partners, including investors, pay attention to the way vendors use financial data to advance their interests. Specifically, financiers analyze how suppliers shape customers’ assessments of product quality and challenge companies to be more forthcoming with performance data. By requiring that economic allies present accurate accounting data, a supplier helps the public see the efforts that top leadership makes to improve profits, product quality and customer service.

Regulatory Impact

By using financial information in various business decisions, suppliers ensure data accuracy and serve as an extra layer of monitoring in regulators’ financial-transparency schemes. Put more simply, the fact that vendors check customers’ data before providing goods and services helps root out instances of fraudulent financial reporting. This is particularly true if the vendor is a large multinational firm that has adequate resources to conduct full-scale due diligence before engaging in transactions. Government agencies at the forefront of the fight against financial fraud include the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.