CUNA Mutual Group

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Performing Effective Financial
Analysis of Suppliers within the
Sourcing Team
CUNA Mutual Group
Jeff Peterson
Director - Sourcing & Vendor Management Office
www.sig.org/eval
Performing Effective Financial Analysis
of Suppliers within the Sourcing Team
Sourcing Industry Group
October 2015
CUNA Mutual Group Proprietary
Reproduction, Adaptation or Distribution Prohibited
© CUNA Mutual Group
About CUNA Mutual Group
• CUNA Mutual Group is a leading provider of financial
services to credit unions, their members and valued
customers worldwide and was founded in 1935
Corporate Headquarters
Madison, WI
Operations
Waverly, IA | Fort Worth, TX | Great Bend, KS
International Operations
Dominican Republic, Jamaica, Puerto Rico, Trinidad/Tobago
Approximately 3,700 employees
www.cunamutual.com
Financial Highlights
(in millions)
Total Revenue*
GAAP Net Income
Statutory Total Adjusted Capital
2014
$3,070
$206
$1,964
2013
$2,966
$162
$1,795
*Prior period information has been restated to conform to current period presentation for discontinued operations.
Total revenue excludes net realized investment gains and losses.
3
Presenter Biography
Jeff Peterson- CPA, CPSM
Director - Sourcing & Vendor Management Office, CUNA Mutual Group
B.B.A., Accounting and Management, University of Wisconsin-Madison
M.B.A., Management, University of Wisconsin-Madison
• 20 years of Financial Services experience
– Background in Accounting and Finance
• Corporate Audit, Project and Product Management, Sourcing / Supply Management
4
Agenda
• Discuss ways of reviewing your supply base for financial risks
–
–
–
–
Financial Statement Refresher
Key Financial Ratios
Public Companies
Private Companies
• Audited / un-audited financials
• Banking relationships
– Commercial Lending ideologies to consider
– Non-financial signals
• Discuss an approach for creating tiers for the financial review of
suppliers (primarily risk-based)
– Level of dependency on supplier / supplier’s services
– Portability
• Switching costs / time to convert
– Performance
5
Why assess the financial status of suppliers?
Revenue Impact - $$
Credibility Impact
Reputation Impact
Supply Chain dependency
Customer-facing Impact
Security or privacy exposures
6
Why do many individuals avoid financial analysis?
• Information isn’t readily available
• Detailed, specialized knowledge
– Accounting rules
– Financial Analysis
– Notes to the financials
• Time-consuming
• Almost never any immediate benefit…
7
Financial Statements 101
Source: Investopedia.com
• Balance Sheet
– A financial statement that summarizes a company's Assets, Liabilities and
Shareholders' Equity at a specific point in time.
• These three balance sheet segments give investors an idea as to what the company owns and
owes, as well as the amount invested / funded by the shareholders.
– The balance sheet must follow the following formula:
• Assets = Liabilities + Shareholders' Equity
• Income Statement
– A financial statement that measures a company's financial performance over a
specific accounting period.
• Financial performance is assessed by giving a summary of how the business incurs its
revenues and expenses through both operating and non-operating activities.
• It also shows the net profit or loss incurred over a specific accounting period, typically over a
fiscal quarter or year.
– Also known as the "profit and loss statement" or "statement of revenue and
expense".
8
Financial Statements 101
Source: Investopedia.com
• Statement of Cash Flows:
– One of the quarterly financial reports any publicly traded company is required to
disclose to the SEC and the public.
– The document provides aggregate data regarding all cash inflows a company
receives from both its ongoing operations and external investment sources, as well
as all cash outflows that pay for business activities and investments during a given
quarter.
– Because public companies tend to use accrual accounting, the income statements
they release each quarter may not necessarily reflect changes in their cash positions.
• For example, if a company lands a major contract, this contract would be recognized as
revenue (and therefore income), but the company may not yet actually receive the cash from
the contract until a later date.
9
Key Financial Ratios - Profitability
Profitability Ratios are used to assess the ability for a business to generate
earnings as compared to its expenses and other related costs over a specific
period of time. Generally, if the value is higher than a competitor, the company
is performing better.
Return On Assets - ROA:
Net Income
Total Assets
Cash Return On Assets:
Cash Flows from Operations
Total Assets
Profit Margin:
Return On Equity - ROE:
Net Income
Revenues
Net Income
Shareholder's Equity
Source: Investopedia.com
10
Key Financial Ratios – Liquidity*
Liquidity Ratios are used to assess the ability for a business to pay off its
short-term debt obligations. Generally, a higher value means there is a
greater margin of safety the business has in covering its short-term debts.
Current Ratio:
Current Assets
Current Liabilities
Quick Ratio:
Current Assets - Inventories
Current Liabilities
Operating Cash Flow:
Cash Flows from Operations
Current Liabilities
Working Capital:
Acid-Test Ratio:
Current Assets - Current Liabilities
(Cash + Accounts Receivable +
Short-term Investments)
Current Liabilities
Source: Investopedia.com
11
Key Financial Ratios - Leverage
Leverage Ratios are used to understand how a company is using various
methods of financing, or to assess its ability to meet financial obligations.
Generally, a higher ratio of debt can result in more volatile earnings as a
result of the additional interest expense.
Debt-to-Equity:
Total Liabilities
Shareholder's Equity
My experience to-date on leverage ratio information is it has importance in
order to understand supplier viability, but you generally have to dig into the
disclosures and notes within the audited financial statements.
Source: Investopedia.com
12
Importance of Base lining and Trending
Supplier Averages
Industry Category A
Financial Ratios
Example – For illustrative purposes only
Fiscal YE
YE 2008
Fiscal
2012
Fiscal
Fiscal YE
YE 2009
2013
Fiscal YE
Fiscal
YE 2010
2014
Return On Assets - ROA:
1.29%
-0.57%
0.51%
Cash Return On Assets:
7.55%
10.20%
8.78%
Profit Margin:
1.20%
1.78%
0.66%
Return On Equity - ROE:
3.81%
5.22%
3.58%
Current Ratio:
1.77
1.52
1.49
NOTE: Should be > 1
Quick Ratio:
1.38
1.18
1.16
NOTE: Should be > 1
Operating Cash Flow:
0.33
0.39
0.35
"Cash is King"
Acid-Test Ratio:
1.24
1.06
1.01
NOTE: Should be > 1 (Below 1 = extreme caution)
2.04
2.28
3.91
NOTE: The higher the number, the worse it is; i.e.
more debt/higher leverage
Profitability Ratios
Liquidity Ratios
Leverage Ratios
Debt-to-Equity:
13
Public Companies
• Most companies provide their financial statements on their websites
– LINK to CUNA Mutual’s 2014 financials
• All U.S. Public companies are required to file various statements with
the SEC.
– Generally, quarterly information can be found in 10-K statements
– LINK to EDGAR database with the SEC
– You may also consider comparing organizations with similar NAICS (North
American Industrial Classification System) codes
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Privately-Held Companies
• Data is often unavailable and inconsistent
• Preference is to negotiate the right to review Audited Financial
Statements. If unable to get this right or if unavailable, I would ask for:
– Unaudited Financial Statements
– Company Tax Returns
– Information on Banking relationships
• Commercial Lending Questionnaire – SBA.gov
• Business Tax Returns1
– Specific Financial ratios
• Other external sources are sometimes helpful
– Google or other Alerts
– Industry newsletters
1
– need to understand ownership structure
15
Ideas from Commercial Lending principles
Questions to ask commercial
lending partner:
• What is the current line of credit?
• Any credit remaining / available?
• Any debt? If so, how much?
• Any missed loan payments or overdrafts?
• How well established is the relationship?
16
Non-Financial Signals
• Quality concerns are
increasing
• Performance metrics
have an unfavorable
trend
• Delivery is delayed
• Reduction in
Administrative areas
• Off-cycle or nonseasonal changes
Increase in
issues /
performance
Reduction in
indirect
resources /
investments
Layoffs
Higher
Turnover
• Training
• Older versions of
sales collateral
• Newer technology or
investments in plant/
equipment
• Increased changes
in account
management,
production staff
17
Initial Categorization of Supplier Risk
Supplier Tiers –
using both
Quantitative and
Qualitative
Attributes:
Qualitative
attributes require a
somewhat detailed
understanding of
how the
relationship works
• Materiality
• Level of dependency on supplier / supplier’s
services
• Portability
• Switching costs / time to convert
• Performance
• May result in proactive planning to understand
viable alternatives
• Contracting or other efforts to have substitutes in
place
• May shape your sourcing strategy as well
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Questions?
19
Resources / Contact Information
Investopedia:
http://www.investopedia.com/
EDGAR (SEC) Database: http://www.sec.gov/edgar.shtml
Contact Information:
Jeff Peterson
jeff.peterson@cunamutual.com
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Performing Effective Financial Analysis of Suppliers within the
Sourcing Team
Jeff Peterson
CUNA Mutual Group
jeff.peterson@cunamutual.com
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