10 c's of supplier evaluation

Homework For Financial Statement

SOURCING SUITABILITY TO FMS 1

Module 4: Sourcing essentials in procurement and supply

Membership: 005597613

Program name: CIPS

Group Number: 6

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Table of Contents

Executive Summary ........................................................................................................................ 3

Introduction ..................................................................................................................................... 4

Financial Review ............................................................................................................................ 6

Income Statement and Balance Sheet ......................................................................................... 6

Profitability Ratios ...................................................................................................................... 8

Asset Efficiency Ratios ............................................................................................................. 10

Liquidity Ratios ......................................................................................................................... 11

Gearing Ratios ........................................................................................................................... 12

Impact of the Financial Ratios on the Pre-qualification criteria ............................................... 13

Recommendations ......................................................................................................................... 13

Conclusion .................................................................................................................................... 15

References ..................................................................................................................................... 17

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Executive Summary

The study seeks to undertake a comprehensive financial review to find out the suitability

of the proposed company in taking the functions offered by FMS. The financial review will

involve studying the key financial statements of the company that includes the balance sheet and

the income statement. These statements shall also get reviewed broadly by incorporating

appropriate financial ratios that will provide necessary information that regards the company’s

suitability in undertaking the functions of FMS. Some of the financial ratios to get utilized

include profitability, liquidity, asset efficiency and gearing ratios. FMS must rely on the

outcomes of the financial review as it is vital before getting into a contract with the company.

The situation is to ensure that the company engages in a profitable contract that would provide

the high-quality services for its market. The financial review shall form the basis for the

recommendation of the company to FMS as a suitable partner delivering the services resulting

from the outsourced functions.

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Introduction

Facilities Management Services (FMS) is in the process of undertaking a pre-

qualification exercise to ascertain the suppliers that would suit their sourcing endeavors. It is,

therefore, significant that the company has proper information that should highlight the

suitability of the company for their sourcing and procurement functions. The awarding of the

procurement and sourcing tenders by a company gets achieved after a vigorous process of

appraising the available candidates to examine their superiority in ensuring that the company

would acquire quality and productive for its production process. This particular exercise,

however, becomes directed at studying the financial capability of the candidate in maintaining a

proper procurement and sourcing for FMS. The common appraisals of organizations before

approving them for procurement and sourcing gets aimed at studying the outsourced company’s

strategies, employee culture, financial capability and the sustainability of the company in the

provision of services to the outsourcing company. The 10 C’s of supplier evaluation can also get

incorporated into a prequalification model for appraising the suppliers for the sourcing function.

FMS can rely on these 10 C’s to determine the suitability of potential clients. The 10 C’s include

competency, capacity, commitment, control, cash, cost, consistency, culture, clean, and

communication (10 Cs of Supplier Evaluation - Strategy Skills From MindTools.com, n.d.). The

competency involves the study of the supplier’s capabilities and also assessing the problems that

affect the supplier and their ability to rise above such setbacks. The capacity entails the

determination of the supplier’s ability to handle the needs of the sourcing function. The supplier

must have the relevant resources to undertake the procurement process for FMS. Commitment

comes into play through identifying the supplier’s dedication to offering high-quality products

and services. The commitment evidenced by the supplier makes it certain that the company can

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earn high-quality service from the supplier. The control aspect of the pre-qualification seeks to

find out how much control the supplier has on their processes, systems and procedures. A high

control presence indicates the ability of the supplier to carry out the function of FMS efficiently

to meet the target goals. The cash aspect of the pre-qualification checks the financial health of

the supplier to make it certain that the supplier has enough cash on hand to run the core functions

offered by FMS. The pre-qualification model also looks into the costing provided by the supplier

because the company seeks to identify a supplier that is cost-conscious so as to enhance the

profitability of FMS. The model also involves the test for consistency of the supplier in offering

high-quality products and services for FMS. The measurement of consistency of the supplier gets

determined by the regularity of the company to ensure product and service delivery to its clients

(10 Cs of Supplier Evaluation - Strategy Skills From MindTools.com, n.d.). The culture of the

supplier also gets measured to find out if the workplace ethics of the supplier would match those

of FMS. A proper alignment of the supplier ethics to the company’s culture becomes essential

for meeting the company’s objectives. The model also seeks to carry out a sustainability test for

the supplier to reveal their endorsements in preserving the environment and taking other

sustainability measures. Lastly, the communication component of the process intends to disclose

how the supplier would communicate with FMS regarding the procurement function or in the

event of any crisis. Proper communication policies enhance the planning functions of the

company. In this study, the practitioner also gets interested in learning about the financial status

of the company being hired by FMS for its sourcing and procurement functions. The

achievement of the essential information that concerns the company would employ a thorough

review of the company’s accounts so as to reveal its appropriateness in carrying out the functions

offered by FMS. The review of the account shall undertake a study of the core elements in the

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provided financial statements of the company, that is, the balance sheet and the income

statement. The review of the account shall get completed after carrying out the significant

financial ratio analyzes that would influence the company’s financial capability to provide the

functions provided by FMS. The financial review shall get carried for the two years provided,

that is, 2013 and 2014 so as to come up with a proper comparison of the company’s

performance. The ratio analyzes shall highlight the strength or weakness of particular financial

element portrayed by the respective ratios (16 Financial Ratios for Analyzing a Company’s

Strengths and Weaknesses, n.d). This financial analysis shall create the basis for the probability

of FMS to subcontract its sourcing and procurement functions to the organization. As such, the

financial appraisal of the organization becomes pertinent to the decision-making of FMS in

partnering with the organization to deliver the functions outsourced. The completion of the

organization’s financial review shall pave the way for a comprehensive recommendation to FMS

on the suitability of the organization for its sourcing and procurement. The recommendation shall

also outline the maximum investment amount that FMS can utilize with the organization for

carrying out its functions.

Financial Review

Income Statement and Balance Sheet

The review of the income statement and the balance sheet gets undertaken for the

financial periods of 2013 and 2014. The company’s turnover as depicted in the income statement

has an increasing trend that is quite impressive for the business performance of the organization.

The company recorded a turnover of 138.276 million pounds in the period ended March, 31st

2013 and the turnover increased to 161.438 million pounds in the period ended March, 31st 2014.

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The increase in the turnover portrays the company’s ability to increase its sales level over time.

The company has also produced an increasing gross profit for the two financial periods, hence,

making it a profitable entity that could enable FMS in improving its profitability. The gross

profit for the financial period ended 2013 is 25.622 million pounds and the amount increases to

36.671 million pounds for the period ended 2014. The net profit properly indicates the

company’s financial performance as it illustrates that the company manages to come into

profitability after a previous loss-making in the financial period ending 2013. The company had

made a loss of 1.352 million pounds in the year ended 2013 and managed to produce a profit of

2.672 million pounds for the period ended 2014. The ability of the company to come out of a loss

scenario into profitability is a proper indication of the suitability of the company for the sourcing

and procurement functions of FMS. The income statement, thus, provides insightful elements

that relate to the company’s financial performance, which FMS should study keenly to determine

the suitability of the company. The balance sheet, on the other hand, demonstrates that the

company has an increasing trend regarding its total assets amount for the two financial periods.

The total assets in the financial period ending 2013 indicate a total of 40.524 million

pounds that increases to 51.882 million pounds in the financial period ending 2014. The increase

in the company’s total assets is a reasonable indicator of the company’s ability to expand its

wealth over a short time (Barnes, 1987). The increasing trend also illustrates the company’s

proficiency in accumulating more assets to support its financial performance in the long-term.

The net assets of the company, however, represent a different picture as there is a slight drop in

the net assets for the year ending 2014. The net assets reduce from a high of 4.231 million

pounds in 2013 to 4.206 million pounds in the year ending 2014. The slump in the net assets is,

conversely, quite small concerning it dropped by 0.025 million pounds and this can get attributed

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to the increasing value of the creditors, as well as, an increase in the provision for liabilities by

the company. As such, that could not represent a great deal regarding its financial capability

because the company’s total assets have experienced an increasing trend over the two years. The

capital structure of the company is quite remarkable as there is no debt financing in the structure.

The lack of debt capital indicates the company’s financial independence in performing its

organizational operations without assistance from debt financiers. The total shareholders’ funds

of the company in the year 2013 were 4.231 million pounds whereas in 2014 the amount reduced

to 4.206 million pounds. The small reduction in the shareholders’ funds could get attributed to

reduced earnings taken from the income statement because the share capital remains unchanged

for the two financial periods.

Profitability Ratios

The return on capital employed (ROCE) of the company increases from -31 percent in the

year ended 2013 to 98 percent in the year ended 2014. The increase in the company’s ROCE

portrays the capability of the company to utilize the capital available for improving its financial

performance. The situation demonstrates that the company can have the aptitude to multiply the

investment fund provided by FMS. The negative ROCE for the year 2013, however, raises many

questions as to why the company would have reduced its effective utilization of the capital

offered (McConaughy & Phillips, 1999). The return on equity (ROE) of the company increases

from -32 percent in the period ended 2013 to 64 percent in the period ending 2014. The increase

in the ROE depicts the capability of the company to increase profitability for the investor’s

money. The investment undertaken by FMS to the company would, therefore, accrue profits to

FMS because of an increasing ROE of the company. Like, the ROCE the ROE has also risen

considerably from a negative percentage, hence, creating uncertainty about the stability of the

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company’s financial performance. The gross profit margin for the company depicts an increasing

trend from a low of 18.53 percent in 2013 to 22.77 percent in 2014. The increasing gross profit

margin is a positive element to the company’s financial health as it demonstrates the capacity of

the company to meet its operating and additional expenses. The increasing profit margin would

also portray that the company can meet its future operations costs.

The little fluctuation of the gross profit margin between the two years is also a good

indication of the company’s financial health. The operating profit margin of the company also

illustrates an increasing pattern as it increases from -0.97 percent in the year ending 2013 to 2.61

percent in the year ending 2014. The rise in the operating profit margin indicates that the

company can effectively satisfy its creditors and also increase the shareholder’s returns over

time. The higher operating profit margin in 2014 would inform the shareholders and the

stakeholders of the company that the company does not suffer from any foreseeable financial

risks. An increased operating profit margin would also show that the company can easily meet its

fixed costs and also produce cash flows that would support the company’s future operations.

The net margin of the company displays a rising pattern over the two financial years with an

increase from -0.98 percent in the year ended 2013 to 1.66 percent in the year ending 2014. The

increase in the company’s net margin would signify the company’s ability to achieve authentic

profit from the sales made. The net margin of 1.66 would translate to profits of 1.66 pounds per

every pound of sales conducted by the company. As such, the net margin also demonstrates that

the company can attain costs minimization, thus maximizing the profits accrued from the

turnover.

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Asset Efficiency Ratios

The company’s asset turnover ratio decreases from 3.41 in the year ended 2013 to 3.11 in

the year ended 2014. The reduction in the value of the asset turnover is quite unfortunate for the

company’s financial health because this would depict that the company’s efficiency in utilizing

the available assets into revenue is reducing. The situation would necessitate the company to

formulate new strategies for improving its operations so as to increase the efficiency of

generating revenues from the employed assets. The better side of the company’s asset turnover

ratio is that it has decreased very slightly, thus illustrating that the company might still have

greater chances of enhancing its efficiency in generating revenue from its assets. The accounts

payable turnover ratio portrays a decreasing trend as the ratios falls from 3.33 in the financial

period ending 2013 to 2.86 in the year ending 2014. The decrease in the accounts payable

turnover ratio would represent that the company is now taking longer to pay its short term

liabilities. The situation might have negative financial implication for the company’s ability to

meet its short-term obligations. As such, it also shows a decreasing trend on the company’s

short-term liquidity. The return on total assets ratio (ROTA), on the other hand, reveals an

increasing trend as it gets evidenced that it increases from -3.32 in the year ending 2013 to 8.13

in the year ending 2014. The increase in the ROTA is a positive sign on the company’s financial

performance over the two financial periods. The rise on the ROTA underpins that the company

can increase its earnings by employing the available assets before paying up the contractual

obligations that include; interests and taxes. The inventory turnover ratio for the company does

not show any change over the two years as it remains at 0.01 in both 2013 and 2014. The

suitability of this ratio would, however, get gauged by comparing to the industry levels of other

competing companies. Low inventory turnover ratios would depict the case of a company

experiencing ineffective buying or having excess inventory. The company’s inventory is,

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conversely, not in excess as the stock decreased in 2014 as compared to 2013. The inventory

turnover ratio is, therefore, okay for the company.

Liquidity Ratios

The current ratio for the company gets maintained at 1.03 over the two years and does not

experience any fluctuations. The fact that the current ratio is over 1 illustrates that the company

has the capability to pay its short-term and long-term liabilities. The situation implies that the

company is in a better state of financial health and would not face any risks of inability to pay its

creditors and debt (Varaiya, 1987). The reduced value of the current ratio could also be an

indication that the company is efficiently utilizing its current assets properly to generate revenue

and also meet its financial obligations. The quick ratio of the company portrays a dominant

pattern from 0.99 in the fiscal period ending 2013 to 1.01 in the year ending 2014. The increase

in the quick ratio is a positive sign of an excellent financial condition for the company. The

increased quick ratio would portray that the company can easily pay up its current financial

obligations using its most liquid assets. The company would, therefore, have a good relationship

with its short-term suppliers and other short-term liabilities that it incurs. The minimal value of

the quick ratio is also an indicator that the company’s most liquid assets get utilized well, and the

company does not have any excess liquid assets that would get endangered in the company. The

cash ratio of the company also demonstrates an increasing trend with a rise from 0.15 in the year

ending 2013 to 0.26 in the year ending 2014. The increase in the cash ratio indicates that the

company can now pay up its short-term debts using its cash and cash equivalent assets. The

small value of the ratio specifies that the company does not maintain huge amounts of cash and

cash equivalent assets in its asset structure, a situation that is also laudable considering the risks

involved in having large amounts of cash been handled by the management.

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Gearing Ratios

The total debt to equity ratio for the company reveals a decreasing pattern from 2.62

percent in 2013 to 1.74 percent in 2014. The situation portrays that the company has no debt

financing in its capital structure but only a small proportion of its long-term liabilities (Horrigan,

1968). The reducing value of the total debt to equity ratio indicates the company’s ability to pay

up its long-term liabilities over a short period. The low debt to equity ratio is a positive sign that

depicts that the company has no risks that get associated with the utilization of debt financing.

The total debt ratio of the company discloses an increasing trend from 90 percent in the year

ending 2013 to 92 percent in the year ending 2014. The increasing value of the total debt ratio

may get attributed to the high short-term liabilities of the company because the long-term

liabilities are at a minimum. The situation would portray to investors that the majority’ of the

company’s assets are financed by debt, which is not the case. There is, therefore, the need for the

company to reduce its short-term liabilities so as to cut down the total debt ratio (Carslaw &

Mills, 1991). The interest cover ratio of the company experiences an increasing trend from a low

of -74.67 in the year ending 2013 to a high of 248.06 in the year ending 2014. The increased

interest cover is a good signal for the company’s financial health because it can easily pay its

interest, thus making it, even more, creditworthy to the debt financiers. The interest cover for

2013 was, however, below 1, a situation that jeopardizes the company’s solvency as it depicts its

inability to meet interest obligation. A company that cannot meet its interest obligations would

risk to becoming bankrupt, and this would worry the shareholders a big deal (Altman, 1968). The

equity multiplier of the company reveals an increasing trend from 9.58 in the year ending 2013

to 12.34 in the year ending 2014. The increase in the equity multiplier would depict the

company’s enhanced efforts to finance its assets through debt, however, in our case the

company’s debt come in due to its higher long-term liabilities. The equity multiplier of the

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company is, conversely, at a good level as it is not very high, thus signaling the investors that

company has a low financial risk.

Impact of the Financial Ratios on the Pre-qualification criteria

The ratios identified from the financial statements of the supplier would become

significant in determining the aspects identified in the 10 C’s supplier evaluation model. The

financial ratios for the period of 2014 are quite okay for the successful evaluation of the

supplier’s suitability according to the 10 C’s. The situation is because the financial ratios for the

financial period ending 2014 can efficiently satisfy the aspects identified in the 10 C’s model. As

such, this would imply that the supplier exhibits the determining factors of competency, cash,

and consistency. The financial ratios of the previous financial period, that is, the period ending

2013 became quite unsuitable because of the poor financial performance of the supplier. As such,

the adverse financial ratios would negatively affect the pre-qualification model utilized in

appraising the supplier. In this case, the supplier would not satisfy the components of cash,

capacity, consistency, and competency that get incorporated in the 10 C’s supplier evaluation

criteria. The differing financial performance of the company within the two financial periods

diminishes the supplier’s consistency in ensuring profitability for the company. The company

also had very minimal cash in the period ending 2013 that would become unsuitable for the cash

capacity of the company to handle the functions offered by FMS.

Recommendations

The financial review undertaken for the company provides various insights that would get

reasonable in determining its suitability for the sourcing and procurement functions offered by

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FMS. The company’s income statement has revealed that the company has made a profit in the

two financial periods, that is, 2013 and 2014. The company became very profitable in 2014 after

facing losses in preceding financial period. The ability of the company to get up on its feet after

making losses is quite notable and would give positive signs for an excellent performance by the

company (Storey, 1987). The company’s balance sheet also demonstrates the company’s

capacity to increase its assets over the two financial periods, hence making it a reliable company

for achieving the desired growth. The increase in the company’s asset signifies to the

shareholders that the company would improve their wealth over the foreseeable future. The

financial ratios calculated in gauging the company’s financial health that include; profitability,

asset efficiency, liquidity, and gearing ratios also shed more light with regards to the company’s

financial wellbeing. The majority of the financial ratios undertaken have worked in the favor of

the company; however, several ratios show that the company still needs to improve on its

financial capacity. These financial ratios depict that the company did not perform well in the

financial period ending 2013. The company made losses and was not in a good position to

portray positive results to the shareholders. The situation, however, gets improved by the better

performance that got experienced in the financial period ending 2014. Following these outcomes,

there is a reasonable need for FMS to investigate the circumstance that led to the company

underperforming in 2013. The nature of the circumstances would then guide FMS well in

deciding on whether to take up the company for the tender of sourcing and procurement. For

instance, if the poor financial performance in 2013 got experienced as a result of industry-based

circumstances that would be quite rational for FMS to believe in the enhanced service delivery of

the company on the functions accorded. It can also get recommended that the company seeks

some leverage to ensure it becomes cushioned against any incoming shocks that would disrupt its

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financial performance. The company can leverage by acquiring debt financing in its capital

structure so as to minimize the impact of any financial risks that would be forthcoming (Nissim

& Penman, 2003). FMS is recommended to undertake a maximum contract value that is not

more than a quarter of the company’s total assets as at the financial statements of 2014. As such,

FMS would invest with a contract value of up to 12.97 million pounds so as to stay on the

threshold. The reduced contract value is to ensure that FMS does not suffer losses if the company

would perform poorly in the future financial periods of the company.

Conclusion

FMS is seeking to outsource its sourcing and procurement functions to a company whose

financial statements have become availed. The financial review of the company’s financial

information provides significant factors that FMS must consider before entering into a contract

with the company. The company has impressive income statements and balance sheets that have

revealed growth in its financial performance. The company is quite profitable and would become

a better partner in delivering services required by FMS. The poor performance of the company in

the financial period ending 2013 is, however, important for FMS to consider in the company’s

financial health. The financial ratios also performed portray that 2013 was a bad financial year

for the company. FMS should, thus, find comprehensive information regarding the poor financial

performance of the company in 2013. The company would be better off by including debt

financing so as to leverage itself from any financial shocks that would get experienced in the

future. As such, FMS should invest into a minimum contract value that would not put it in a

high-risk category in case the company would underperform financially in the coming years.

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Otherwise, the company portrays very probable capacity of growth given it became profitable

after facing losses in the preceding financial period.

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References

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https://www.mindtools.com/pages/article/10-cs.htm

16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses. (n.d.). Retrieved

from http://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-

strengths-and-weaknesses.touch

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate

bankruptcy. The journal of finance, 23(4), 589-609.

Barnes, P. (1987). The analysis and use of financial ratios: A review article. Journal of Business

Finance & Accounting, 14(4), 449-461.

Carslaw, C. A., & Mills, J. R. (1991). Developing ratios for effective cash flow statement

analysis. Journal of Accountancy, 172(5), 63.

FMS Facilities Management - FM outsourcing for building management and property

maintenance, cleaning, security. (n.d.). Retrieved from

http://fmsfms.com/maintenance.aspx

Horrigan, J. O. (1968). A short history of financial ratio analysis. Accounting Review, 284-294.

Ohlson, J. A. (1980). Financial ratios and the probabilistic prediction of bankruptcy.

Journal of accounting research, 109-131.

McConaughy, D. L., & Phillips, G. M. (1999). Founders versus descendants: The profitability,

efficiency, growth characteristics and financing in large, public, founding-family-

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Nissim, D., & Penman, S. H. (2003). Financial statement analysis of leverage and how it informs

about profitability and price-to-book ratios. Review of Accounting Studies, 8(4), 531-560.

Storey, D. J., Keasey, K., Wynarczyk, P., & Watson, R. (1987). The performance of small firms:

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