Vendor Selection & Technology
Checking Up on Financial Health
by Taleo Research
Selecting a Hiring Management System (HMS) can be a nerve-wracking experience, particularly with the recent cases of high-profile vendors shutting down operations. The vendor you choose for your hiring management system becomes, in a very real sense, a business partner for you. The successful operation of your hiring management system is an integral component of a critical business process for your company. Given this, the important question that your research must answer is whether a particular vendor has the financial stability to sustain it long-term. To perform this due diligence, request key financial documentation for review.
Financial Statements
Your primary source of information for assessing a vendor’s financial health is the company’s financial statements. A small minority of vendors in the HMS marketplace are publicly traded companies, so the financial statements are filed with the Securities and Exchange Commission (SEC). In the case of privately held companies, the source of financial information is the company itself. Consequently, you should ask for audited statements, wherever possible. Since financial statements are usually audited on a yearly basis, ask for the most recent audited statements, as well as unaudited quarterly statements covering the period since the financial statements were last audited. As an additional check, you should ask for the vendor’s Dun and Bradstreet number, in order to purchase a credit report.
A company’s financial statements are divided into three parts: the income statement, balance sheet, and statement of cash flow.
- Income statement
You should request an income statement showing actual income for the previous four quarters. An income statement, also referred to as a “Consolidated Statement of Operations”, will show you trends in revenue growth. It will also show where the money is being spent, so you will know whether it is being spent on marketing, or on R&D and customer service. It would be in your best interests to find a vendor that has an R&D budget that is a healthy percentage of sales. - Balance sheet
The balance sheet you request should be no more than 60 days old. A balance sheet shows the current state of the company’s:
- Cash
- Receivables
- Fixed assets
- Intangible assets
- Liabilities
- Shareholder equity
On a balance sheet, shareholder equity must equal total assets less total liabilities. From the balance sheet, you will learn whether the vendor has enough working capital on hand. A company is in serious financial difficulties if its shareholder equity is in the negative—that is, if total liabilities outweigh total assets. - Statement of cash flow
You should request a statement of cash flow showing the actual figures for the last four quarters. A statement of cash flow will tell you how the company has been able to fund its activities in the past and how it will continue to fund activities (in some cases, until it reaches profitability).
In addition to asking for past annual and quarterly results, consider asking for the vendor’s projections for the next several quarters, in order to analyze future trends.
Do Your Due Diligence
The process of choosing a software vendor and implementing a software solution is costly in both time and resource allotment. Selecting a hiring management system provider that promptly goes out of business is very real concern in today’s market. It is essential to carry out due diligence on the financial statements of all prospective vendors under review. This article serves merely as a primer on the subject. Those within the HR department charged with conducting the selection process will undoubtedly want to bring in outside expertise in financial matters. Solid financial positioning, budgeting and management, although not apparent in the features and functionality of hiring management systems once in use, require scrutiny in order to make a successful solution choice.