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by Rory Traynor
Public sector procurement is big business. According to the Institute for Government, last year government departments spent £284 billion on external suppliers – more than they spent on grants or employee wages.
Public spending comes from both large contracting authorities and smaller public organisations like schools and local councils. These smaller organisations often have tight budgets and limited time to hire the best contractors.
Because of this, it is crucial that they have good resources at hand to make quick and accurate decisions on which companies to hire.
Contracts Finder on its Own isn’t Enough
Contracting authorities looking to hire businesses to fulfil a contract must advertise on Contracts Finder. This is a government tool developed to provide all organisations with the chance to access public contract opportunities.
While the applications receive by public organisations will give them a good idea about suitable companies to hire, many factors go into making the right hiring decision. One that should not be missed is financial due diligence. This can be the difference between a contract being completed successfully and it being an expensive failure.
The Carillion case from earlier this year shows what can happen when a company with government contracts has financial trouble. At the time of Carillion’s collapse, it had around 420 UK public sector contracts. The failure led to significant financial losses and delays to some of the projects that Carillion had promised to complete.
How Red Flag Alert Helps
Red Flag Alert can help contracting authorities choose the right organisation to fulfil their contracts by providing detailed data on all aspects of the company in question. The information it shows includes:
- A financial health rating
- A detailed view on the liquidity of the company
- The capital adequacy of a company
- Age of the business
- Records of directors
Let’s take a look at how each of these factors can help with procurement.
Financial Health Rating
Red Flag Alert gives every business in the UK a financial health rating based on a number of data points. The rating can be used to quickly and easily see whether a company has financial problems.
It’s crucial to know an applicant’s financial health when considering which company to give contracts to – an organisation in financial distress may struggle to complete the project. If a company fails to complete a contract, it can lead to significant delays and high costs.
A key feature of Red Flag Alert’s health rating is the specificity of the ratings. Real-time information is used to look at the financial viability of a business. These ratings are based on algorithms developed over 14 years and the expertise of Red Flag Alert credit analysts. Using Red Flag Alert allows you to see problems with a potential supplier at an early stage: critical when making procurement decisions.
Detailed View on Liquidity
A company’s liquidity is a clear factor in its overall financial health. One big reason that businesses fail is that they run out of cash. This could be especially problematic if they take on a contract that they aren’t equipped to handle.
If a business has insufficient cash, it can lead to problems such as suppliers not being paid. In turn, this could lead to delays on the project you have contracted the business for.
Red Flag Alert gives you a clear view on working capital and relevant ratios that make it easy to assess how strong the business’s cash position is.
Capital Adequacy
Capital adequacy relates not just to how much capital a business has, but whether or not it has enough for the industry it operates in.
This is important, because undercapitalised businesses are at risk of insolvency. The key problem with Carillion was undercapitalisation; when the profits slumped, the business didn’t have the reserves to deal with the problems. Red Flag Alert will give you a clear view on a business’s capital levels and whether they are financed by a lot of debt – something that can be an issue if problems arise.
The Red Flag Alert financial health rating takes into account all of these factors, so if you don’t have time to dig into the detail then you can rely on the rating.
The Age of the Business
Red Flag Alert’s data will tell you the age of any business that wants to deal with you. While age alone is by no means an accurate indicator of a company’s financial health or whether it will be able to complete your project, alongside the other data provided by Red Flag Alert this can be a useful indicator.
For example, if you notice a company has formed recently, you can go into more detail during the hiring process about why it thinks it will be able to complete your project successfully, despite a lack of experience.
Likewise, an older company may have a long record of success in the area you plan to work in. However, this may not mean much if the other financial indicators are not healthy.
Past Records of Directors
This is another data point that — while not necessarily useful on its own — can give you a more in-depth picture of the business and its suitability to take on your task.
For example, a company may have a long history and be in good financial health. However, if it has a new director you may want to know how, if at all, this will change the way the business operates. You can also look at other businesses a director has an interest in and their performances.
Finally, a change of director could hint at other large changes within the business that could affect its chances of completing your project successfully. This doesn’t mean a company with a long-standing director is necessarily going to be better than one with a new director, just that this is something contracting authorities can dig into during the procurement process.
Make an Informed Procurement Decision with Red Flag Alert
Red Flag Alert provides vital information during the procurement process. It helps public organisations get a detailed look at who they are dealing with and whether they are in a stable position to take on your contract. This helps avoid potentially costly problems in the future. For a free trial, click here.
