What is Financial Health?

In today's dynamic business landscape, supply chain resilience is paramount. Disruptions can come from anywhere – a natural disaster, a geopolitical event, or even unexpected financial stress on a seemingly stable supplier. This is where financial health assessments become a powerful tool.

Financial Health, at its core, is a pulse of a company’s well-being. Every decision a company makes—how they are engaging with their counterparties, managing their finances, funding their business, whether they are making investments or cost cuts, or burning through cash—is reflected in their financial statements.

Why is Measuring Financial Health Important?

Companies don’t fail overnight. Telltales are visible on their financial statements. A disciplined approach in assessing the financial health of your supplier provides you with advance warning into those telltales.  It uncovers your suppliers’ strengths, weaknesses, and provides insights into the actions your suppliers are undertaking to navigate through any opportunities or challenges. The outcome of the analysis helps you address any impending risks to your supply chain in a timely manner.

The Impact of Macroeconomic Conditions

The current economic climate, with factors like inflation and rising interest rates, presents significant challenges for businesses. Companies with strong financial health are better equipped to navigate these headwinds. They can absorb price fluctuations, meet regulatory requirements, and maintain quality standards. However, companies struggling financially may be forced to prioritize short-term survival over long-term investments in areas like innovation, cybersecurity, quality, or safety.

The increasing frequency of corporate bankruptcies underscores the importance of proactive supplier risk management. Data from RapidRatings shows companies globally are seeing a decline in financial health.  

• Financial health all around has weakened, with the average FHR dropping from a low-risk score of 62 in 2021 to a medium-risk score of 59 in 2023.
• Moreover, the level of risk differs across various sectors. The computer services industry, for example, has seen a steeper decline, particularly for private companies (8% decline) compared to public companies (5% decline).

RapidRatings’ Annual Default Review showcases the undeniable link between financial health and default. A staggering 95% of companies that defaulted (rated High Risk or Very High Risk by FHR, rating below 40) had exhibited financial weakness for three years prior. This data highlights the effectiveness of this approach for long-term risk prediction.

Data-Driven Insights: Predicting Defaults

Financial health assessments empower risk managers to make informed decisions based on accurate data. This proactive approach safeguards your supply chain and prevents costly blind spots.

Financial health monitoring tools, such as RapidRatings' FHR, provide a clear picture of your suppliers' financial health. The FHR goes beyond just default risk by assessing a company's efficiency, competitiveness, and operational resilience. These insights enable meaningful discussions with suppliers, fostering stronger partnerships and a more resilient supply chain.

Learn more about RapidRatings and SAP integrated financial health solution.

Discover the ways financial health reviews can help organization boost supply chain resilience.