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January 14, 2013

How a Yearly Review of Your Vendor Contracts Can Save Big Money

All businesses depend on a network of other companies to continue operating.  In fact, if you think about it, business-to-business commerce keeps the wheels of our economy going round; it would be impossible for any one proprietor to operate without the service partners that provide the nuts and bolts of day-to-day business life. This is why it’s important to treat your vendors and suppliers well.   

While it’s important not to take these providers for granted, however, problems can also arise when you get so caught up in the day-to-day affairs of running an enterprise that you forget to periodically take stock of who you’re buying from and why.  This can easily be taken care of by sitting down on an annual basis – the new year can be a great time for this – and reviewing your vendor contracts.

Here’s the thing.  Most businesses waste a lot of money on products and services they don’t even need.  You sign contracts with businesses and then forget about them, and when the need for those regular products or services passes, you fail to cancel.  Thus, the bills just keep coming in for something you don’t want or need.

And since you’re so busy, you probably don’t even think about until the money is due.  You begrudgingly pay the bill, but soon after your attention is distracted elsewhere until next month comes around, at which point it is again too late.

Has this ever happened to you? 

How To Perform An Annual Vendor Contract Review

This is a great example of a “profit leak” in your business that, once plugged up, can instantly alter the bottom line.  So, this year, include a Vendor Contract Review as part of your annual business strategy.

First, sit down and write out a list of all 3rd party vendors you work with.  Listing them in a spreadsheet somewhere provides a convenient way to see who is getting your cash every month with a quick glance, allowing you to evaluate your expenses in a matter of minutes.

Calculate how much each of these bills costs you ever year, and list that as well.  Every year, pull this list out and look at each item.  Stop for a second as you go down your list and ask yourself if the cost of that contract has been worth the value received over the past year. 

If not, is there any reason to think the scales will balance over the following year, or will it continue to be business as usual?

Give each vendor contract a moment of true thought.  Is the partnership really worth it?  Long-term relationships with vendors who treat you right are always important, but if you’re not getting anything out of a particular partnership anymore, there’s no sense in spending the money fruitlessly.

Also, it’s important to admit that sometimes a particular contract may not be working because you’re just working with the wrong provider.  If you’re not realizing the value because of poor service, late deliveries, or anything else that is the fault of the vendor, it might be time to shop around for someone else who can meet your expectations.

Once you’ve taken stock of all your vendor contracts, you should know which partnerships are beneficial and which are a drain on your revenue.  In short, if you’re paying for a vendor contract that you’re not getting value out of or, even worse, not even using anymore, it’s time to cancel those contracts. 

Make sure to do this every year, if not every month, and you can save a lot of money on unnecessary bills and contracts.

Do you have any questions about vendor contracts? If you do feel free to leave your question in the comments area below.