Best Practices for Your Vendor Management Audit

Businesses conduct vendor management audits every year to ensure their business is healthy. These audits can help you identify inefficiencies in current systems and processes, correct red flags and determine areas of improvement that fit your business needs.

The 2023 PwC Employee Financial Wellness Survey showed that 52% of CEOs think their companies have begun cost-cutting measures as they attempt to keep business running smoothly despite global social and economic challenges like war and price inflation. As your business grows and you build strong vendor relationships, it's important to conduct a vendor audit to help mitigate the process of cost reduction and improve operations for your business along the way.

The importance of an audit checklist

Companies conduct audits to track their finances every year, but you don't have to stop there. It's also key to audit your vendors to help identify potential risks, inefficiencies and compliance issues before they become a problem.

Start by creating a vendor management audit checklist. This checklist will serve as a tool that tracks important metrics and will help you determine if your business should keep its current vendors or explore other options. Here's what to include in your checklist.

Start with essentials

Prepare your vendor audit checklist by listing your most essential metrics. These vary by business and may include:

• Pricing: Review how the pricing fits into your budget. Also, perform the calculations to determine if you're getting the return on investment you'd initially planned.
• On-time delivery: Does the vendor hit the deadlines and due dates you request? Have late deliveries on promises cost your company time and money?
• Support: Have you encountered issues with the vendor where you need help? If so, has the vendor provided adequate support?
• Security: Cybersecurity is an ongoing threat all businesses need to worry about. Does your vendor provide secure services, including frequent updates?
• Safety: Is your vendor meeting all the safety regulations required by law? Do the products or services your vendor offers have your employees' health and safety in mind?
• Compliance: Your business might have to meet specific state and federal regulations. Is your vendor also meeting these, and are they also assisting your compliance?

In addition to the essentials, you may require that vendors align with your core values and needs. You'll want to include these in your vendor management audit checklist, which may vary per business.

• Inclusion or diversity standards: Your company might prefer to work with vendors that support diversity and inclusion. Can the vendor provide statistics to back up its stated claims?
• Environmental standards: If your business prefers to work with more environmentally friendly vendors, see if they meet the criteria you've set.
• Technology: If you're a technology-forward brand, you'll want to confirm that your vendors use the most up-to-date systems—for both efficiency and security.
• Employee retention: Vendors that value employee retention strategies may be more reliable if they're compensating their employees well. And they might be reducing employee turnover by ensuring benefits and a healthy workplace culture.

As you develop your vendor management audit checklist, you'll get a feel for specific factors to include that meet your business needs.

Audit annually

Whether you have a small or large business, it's a good rule of thumb to perform vendor audits on an annual basis. However, if a particular vendor is critical to your business or supply chain, you may consider scheduling audits more frequently.

When starting with a new accounting software vendor, for instance, consider checking at the 6-month mark to ensure everything is going smoothly. That way, you can identify any potential red flags before tax season. After that, you can determine if you want to proceed with annual audits as usual.

Pick the right vendors

Choosing the right suppliers and building strong vendor relationships is far more important than you might think. A great vendor that meets your business requirements and values can make running your business much easier in the long term.

Here are a few considerations when picking a vendor.

• Investigate: There's no shortage of information online about virtually any company. Before you pick a vendor, look at its reviews and see what staff and customers have to say.
• Set your priorities: Before you perform an audit, know what you're looking for first. Every brand has key metrics that are important to management and the organization. Know those going into your audit.
• Build a team: Create an audit team with a manager and members from departments that work with each vendor. With their shared knowledge and experience, they can develop the checklist.
• Keep an open mind: You may consider vendor consolidation if it makes sense for your business. Discuss the most efficient, cost-effective options with your team and go from there.

The bottom line

As you review vendor benefits and risks, know that you're not alone. Every year, businesses perform audits to track and ensure their business is running smoothly from the inside out. Annual or more regular vendor management audits can help you manage risks, and referencing your vendor audit checklist will help you focus and adapt key metrics as your business grows.