As a company director responsible for the daily operations of your business or a member of the management team directly involved in orchestrating the company supply chain, carrying out extensive supplier due diligence should be the foremost concern. Due diligence is a form of risk mitigation and if conducted correctly, it could prevent your business from being sprung into the firing line, writes Jonathan Munnery, Partner at the insolvency practitioner Begbies Traynor.
Failure to take this step could result in opening your business to high financial risk which could hamper progress, stagger cash flow and push your business into a downward spiral.
What is supplier due diligence?
When deciding which suppliers to integrate into your supply chain, this decision holds more at stake than just picking between price points, product variety and service speed. Carrying out due diligence is vital for each contract that you commit to as this could impact your service delivery. Financial record – The financial health of the supplier will illustrate if the business is robust or likely to become insolvent. If the company is running out of cash, the supplier may demonstrate late payments or even miss payments, increasing the bad debt risk to you. Exposing your business to bad debt could result in company cash to drain fast, staggering your ability to maintain liabilities and fulfil financial commitments.
Carrying out a supplier check on Companies House will give you access to company accounts illustrating how the business is faring financially. Data-driven due diligence software can also run a check on whether the supplier has been on the receiving end of any legal action due to financial difficulty, such as a County Court Judgment (CCJ) or a Winding Up Petition.
Accreditations – Check the background of the business in question to confirm that they have the relevant qualifications and accreditations to deliver the advertised service. For example, an accountancy firm providing audit services should be registered as an auditor with a recognised supervisory body, such as the Institute of Chartered Accountants in England and Wales (ICAEW). Accreditations reflect the expertise and industry knowledge of the supplier, adding credibility to the brand as recognised by governing bodies.
Terms of sale and service delivery – The payment and service delivery terms should be carefully reviewed to ensure that your business isn’t committing to an unfair agreement, such as full advance payment prior to services delivered. If the terms of service reflect delivery times which could result in a delay, this could lead to turning to an alternative supplier.
Feedback – Online platforms are powerful indicators of a brands performance based on first-hand, customer experiences. Take heed of feedback from verified customers and evidence-based reviews to gauge an understanding of the business practices followed by the supplier. User ratings can often be found online, such as on Google My Business, Glass Door, Trustpilot, Feefo and social media platforms, such as LinkedIn.
If you fall foul of failing to conduct due diligence checks, this could have a drastic impact on your business which could eventually lead to company liquidation, however, the severity of which will be dependent on the value of your order.
How can poor due diligence practices impact my business
Trading with a supplier with a poor financial track record could result in a mirrored effect on your business. Placing a large volume order with an unreliable supplier could jeopardise your ability to deliver your service and result in unfulfilled orders and empty financial commitments, leaving a hole in your balance sheet. If you fail to recover payment from your supplier for unfulfilled services, this increases the likelihood of bad debt which is essentially owed money which can no longer be collected.
A build-up of financial losses may result in the financial health of your business to come to harm, pushing you to take legal action against the supplier. Issuing a statutory payment demand to formally request for repayment can help speed up the process, however, if you suspect that the supplier is insolvent, a winding up petition may be the answer. A winding up petition is a formal request to the court to close the business as it can no longer fulfil creditor repayments.
The importance of conducting due diligence on new suppliers can result in the difference between business survival and collapse. Failure to take the necessary precautions can threaten the daily running of your business, impacting company cash flow and attacking the smooth running of the business. If your business has undergone great damage, seek expert advice from a licensed insolvency practitioner to get your business back on track.
