There are scoring systems to gauge the financial soundness of software vendors. They ask for years of financial statements and from these statements try to determine the companies’ financial shape. The determination of financial soundness is in itself a subjective determination. Does having a large cash balance mean that you are financially sound or does it mean that you have not been investing in new technologies or reinvesting back into the company? Does having no debt mean that you are financially sound or does it mean that you are missing the boat by not borrowing to take advantage of business opportunities? If you had a bad year last year, does it mean that this year is doomed? And so on.

The only thing I look at on the financial statements is the notes section—if there are audited statements from a CPA. At a minimum, ask the following five questions in the RFP:

· How much is your recurring revenue? In other words, if you do not make a new software sale this year, how much revenue would you have coming in from your existing customer base?

· How many deals do you have in your pipeline and what is your success ratio of demos to sales?

· How many sales have you made this year?

· How many sales have you made that have not yet started implementation?

· How many implementations do you have in process?

To me, the past is past. What you want to know is whether the vendor is viable at the moment and how big its customer base and recurring revenue stream is. If you want to go into a full-blown analysis of the financial condition of a software vendor, you need to determine in advance what the criteria will be for financial soundness. I have been a CPA since 1982 and I can tell you that this is a slippery slope and not easily done unless you get audited (not a compilation and not a review) financial statements from a CPA. The audited financial statements should be given an unqualified opinion.