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Financial Stability

The financial stability of a company refers simply to whether it is doing well in business or not. There are various ways that it can be measured, but in the end they all add up to the same thing: is this company in sound financial shape or isn't it? If it is, then the company is probably a quality one that will continue to be viable into the future. If not, well...

Companies, even the largest ones, can appear to be in fine shape right up until the point where they close their doors. In fact, this is done intentionally. People like me tell customers to avoid purchasing from companies on shaky financial footing, stock analysts tell investors to sell the stock of troubled firms, and employees start to get jittery when bad times are on the horizon. Therefore, executives will never admit that a company is in bad shape until the repo man comes to take back their gold fountain pens and monogrammed golf tees. ;^) You can't rely on the company to tell you anything in this regard beyond what they are forced to admit because it can no longer be denied. :^)

As with the issue of how long a company has been in business, how important financial stability is depends on how long your relationship will be with the company. If you are walking into a retail store to buy a printer cable, do you really care about the vendor's financial stability? Buy the item, pay for it, walk out, and deal with the manufacturer if the cable fails (rather unlikely). If you are buying a new PC with a three-year warranty, however, would you want to buy one from a firm that was teetering on the brink of bankruptcy? How about if you were setting up a server for a company with 100 employees?

In general, smaller companies go out of business more frequently than larger ones, and newer companies go out of business more frequently than older ones. Financial stability is also much more important when dealing with smaller companies than larger ones. Small companies have an unfortunate habit of "disappearing" when they get into serious financial trouble. Larger companies usually do not; they are restructured or sold to other companies. In many cases you will still have some sort of "continuity" when the troubled company is sold--often warranty coverage and service contracts will continue to be honored (though sometimes with different terms, and sometimes not at all).

Warning: Very small, non-local mail-order PC makers are probably the riskiest. Early in my PC career I bought an expensive laptop PC mail order from a small company 3,000 miles away from me. The system developed problems, and the company wasn't helpful; within six months they were out of business and gone. Six months after that the PC ended up in the closet--permanently. Learn from my example.

Unfortunately, determining the financial stability of companies can be difficult, and it is even more difficult for smaller companies. At best, this is an effort that will yield only approximate information: as I mentioned before, most companies hold this information pretty "close to the vest". Here are some suggestions about how to determine the financial standing of a company:

  • Large Companies: Most larger companies are publicly traded, and there are various resources around that can help you determine their status in approximate terms. Public American firms are required by the Securities and Exchange Commission to publish certain financial data; it is usually fairly easy to find. What have their earnings been like for the last year? Look at their sales trend over the last year or two as well. Also look at the stock price: stocks can be volatile, but a steep decline could be a sign that someone is worried about something! Also, check discussions of the company in the various media for any rumblings of potential financial distress: when big companies get into serious trouble, rumors start flying. Just remember that rumors can be unreliable too.
  • Small Companies: Smaller companies can be hard to assess. You have to research the company in general terms, look at how long they have been in business, and most importantly, what they are doing now. Visit them in person and see if they look busy and if they seem to have their act together. See if they have long-term relationships with local businesses. Typically, when small companies get into trouble, their service and reputation begin to seriously suffer, so that's what you want to look for. There usually isn't much more that you can do than that. Private firms aren't required to make public their finances.

Next: References and Referrals

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