Every businessperson knows that one’s company cannot operate indefinitely in “deficit mode.” Managing expenses to ensure they do not exceed income involves contract compliance.

Of the many aspects of contract compliance, the most obvious concerns vendor management. To that end, many companies conduct vendor audits to mitigate exploitation of the supply chain. Dishonest vendors pose an enormous threat to their clients: expensive fines for fraud and improper payments, loss of consumer trust, and loss of major contracts just to name a few. In order to prevent such losses, companies undertake vendor audits as part of wider compliance programs. Sure, such audits can be time-consuming and expensive, but isn’t it more costly to lose business and then have to try to win it back?

Vendor audits involve periodic reviews of vendors as a part of the company’s internal controls. These should occur whenever a new vendor is brought onboard or when a vendor contract is being considered for renewal. Check out vendors’ compliance with pertinent legislation and ensure–for contract renewals–that the vendors have fulfilled the clauses of their contracts with your business. This review may also shed light on obsolete contract clauses that should be eliminated from future contracts and additional work the vendor performed for your company that was not included in the contract.

The vendor audit may involve analysis of financial transaction and records, samples of high-risk transactions, review of the vendor’s documents and policies, and interviews with the vendor’s senior personnel. The review may reveal warnings that should trigger close scrutiny: advance payments, unjustified costs overruns, requests for additional payments, invoices without details, payments to offshore accounts, changes in the quality of materials or products provided.

A bit less obvious, contract compliance concerns operations and delivery management. The process behind administration of business practices should create efficiency and improve productivity. This may involve determining the size of manufacturing plants or the number of skilled personnel for optimal operation. It includes managing inventory, project schedules, materials acquisition, quality control, and maintenance policies. This entails determining who does what, when, and for how long. If your contract specifies that two of a certain category of employee must be used for a particular project and experience shows that three employees of that category are necessary, then it’s past time to adjust your expectations and your contract.

One such result of the analysis of goods and services is the conversion of offering services as packaged products. Take advertising, for example. A firm might sell content development, graphic design, film production, and so forth on an à la carte basis, which risks losing the client at any one of the stages of the project to a competitor. Or a firm might put together a package deal that offers standard services and promises a predictable product, say an ad in one of three specified publications, a TV advertisement, a certain type of online campaign, etc. The package deal, because the company can integrate the services, then costs less overall than the à la carte option.

Review your contracts to be sure that you are providing the services for which your clients are paying and that your vendors are providing the services you hired them to do. Discrepancies indicate mismanagement and should be corrected so that no one wastes time providing unnecessary services or delivers services for which they will not be paid.

It’s the nature of business: we don’t work for free. Develop a process that incorporates a routine review of your contractual obligations to be sure that the work matches the need and that compensation is fair.

The Heggen Group specializes in developing such processes. We can analyze your business and help you craft operation and delivery processes that will help you to manage your income and expenses.

 


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