Blog · Procurement and supply chain · Procurement
Review a supplier's liquidity, borrowing and cash-flow trends alongside your purchasing exposure. Use a consistent statement workbook to identify the questions procurement and finance should resolve before increasing commitments.
Vendor financial statement analysis connects a supplier's liquidity, borrowing and cash-flow trends to the purchasing commitments your company is considering. Compare consistent statements first, then examine how much money and operating capacity depend on that supplier. A ratio is a prompt for investigation, not a supplier approval or a prediction of failure.
Request financial statements and notes for comparable annual periods, plus the latest interim information. Record the supplier's legal entity, reporting currency, period-end dates, accounting basis and statement status. A parent company's statements do not automatically describe the subsidiary that holds your contract.
The SEC's guide to financial statements distinguishes the balance sheet's position at a point in time from income and cash-flow statements covering a period. Keep those dates visible when assembling the workbook. Do not compare a full year's operating cash flow with a short interim period without identifying the difference.
For a public supplier, the SEC guide to reading a 10-K identifies audited financial statements, accompanying notes and the auditor's report as parts of the filing. Read the notes for maturities, restrictions and commitments that a ratio table cannot show. Private suppliers may provide a different level of reporting; label what you actually received.
General financial analysis covers a company's broader performance. This review stays with procurement's question: what should change before your company adds purchasing exposure?
Consider an illustrative US component supplier. The two columns below cover fiscal years ending December 31. All figures are USD. In this simplified example, all borrowing is long-term and there are no other liabilities.
| Statement line | 2024 (USD) | 2025 (USD) |
|---|---|---|
| Unrestricted cash | 300,000 | 150,000 |
| Net trade receivables | 1,100,000 | 900,000 |
| Inventory | 600,000 | 750,000 |
| Current assets | 2,000,000 | 1,800,000 |
| Noncurrent assets | 2,600,000 | 3,700,000 |
| Total assets | 4,600,000 | 5,500,000 |
| Current liabilities | 1,000,000 | 1,500,000 |
| Borrowed debt, all long-term | 1,800,000 | 2,400,000 |
| Equity | 1,800,000 | 1,600,000 |
| Annual revenue | 8,000,000 | 8,600,000 |
| Annual operating income | 800,000 | 430,000 |
| Annual operating cash flow | 500,000 | 120,000 |
| Annual capital purchases, cash paid | 300,000 | 250,000 |
First prove the balance sheet. Current assets equal cash plus receivables plus inventory. Total assets equal current plus noncurrent assets. For 2025, liabilities and equity are 1,500,000 + 2,400,000 + 1,600,000 = 5,500,000, matching assets. The corresponding 2024 total is 4,600,000.
Use a calculation sheet with these columns: A year, B current assets, C current liabilities, D cash, E net trade receivables, F borrowed debt, G equity, H revenue, I operating income, J operating cash flow and K capital purchases. In L2 through P2, enter current ratio, quick ratio, borrowed debt/equity, operating margin and cash after capital purchases, respectively:
=IF(C2>0,B2/C2,NA())
=IF(C2>0,(D2+E2)/C2,NA())
=IF(G2>0,F2/G2,NA())
=IF(H2>0,I2/H2,NA())
=J2-K2
Fill down for the other year. These quick ratios use only unrestricted cash and net trade receivables; keep that definition identical across suppliers. The borrowing ratio excludes operating liabilities and therefore differs from total liabilities divided by equity.
| Measure | 2024 | 2025 | Question raised |
|---|---|---|---|
| Current ratio | 2.00 | 1.20 | What increased near-term obligations? |
| Quick ratio | 1.40 | 0.70 | How collectible are receivables? |
| Borrowed debt / equity | 1.00 | 1.50 | When does borrowing mature? |
| Operating margin | 10.0% | 5.0% | What reduced operating earnings? |
| Cash after capital purchases (USD) | 200,000 | -130,000 | How is the cash shortfall funded? |
Ratios are rounded to two decimals, margins to one decimal and dollar figures to whole dollars. For example, the 2025 quick ratio is (150,000 + 900,000) / 1,500,000 = 0.70. Cash after capital purchases is 120,000 - 250,000 = -130,000. That residual is a defined calculation here, not a claim about the supplier's total financing need.
Revenue rose while operating margin and operating cash weakened. Ask about the causes before drawing conclusions. Inventory may be planned stock for a contract; capital purchases may support expansion. The workbook identifies the movements, while supporting schedules explain them.
Next, bring your accounts payable, open-order, prepayment and supplier-tooling records. Use nonoverlapping categories so the same obligation does not appear twice.
| Exposure item | Amount (USD) |
|---|---|
| Outstanding prepayments | 180,000 |
| Company-owned tooling held by supplier | 70,000 |
| Additional noncancelable purchase commitments | 50,000 |
| Gross amount to review | 300,000 |
| Annual spend with this supplier | 1,260,000 |
| Total annual category spend | 4,200,000 |
The first three rows total $300,000. They describe different exposures with different potential recoveries; the total is not an expected loss. Tooling ownership and access rights need separate confirmation.
The supplier represents 1,260,000 / 4,200,000 = 30.0% of category spend. That is a purchasing concentration measure, not its share of your supplier's revenue. Add lead times, qualified alternatives and the parts needed to keep production running before deciding how much operational dependence it creates.
Finance can request updated cash and debt information; procurement can review deposits, order cadence and alternative supply. Assign an owner and review date to unresolved questions. For broader warning patterns, see financial distress analysis; for how explained results should be checked, see AI for financial analysis.
Upload the supplied statement workbook and purchasing-exposure records; Covirage maps the columns, and its tools compute and check the comparisons. The external AI model explains the results with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data after setting up your business.
See Covirage for procurement for the purchasing context.
Request balance sheets, income statements, cash-flow statements and accompanying notes for comparable periods, plus the latest available interim information. Record whether the statements are audited, reviewed or prepared by management. Ask finance to resolve missing definitions before calculating ratios from an incomplete package.
There is no universal procurement cutoff. The useful level depends on the supplier's industry, cash cycle and asset quality. Compare consistent periods and investigate changes in receivables, inventory and near-term obligations rather than treating a single current ratio as an approval rule.
Yes. Accounting profit and operating cash flow measure different things. Cash can be tied up in receivables and inventory, and borrowing or capital spending can create additional demands. Ask for the cash-flow explanation and debt maturity information instead of relying on profit alone.