How to save money with vendor anlaysis

Mar 21, 2024

 

When it comes to FP&A, we don't always see the direct result of our efforts on the P&L. But there is one place where every ounce of energy yields expense savings:

Vendor Rationalization

In this guide, I'm going to show you step-by-step how to use vendor level expenses to analyze and cut costs in a systematic way in any business.

Even better, I've also included a video lesson on how to do this step-by-step using Reach Reporting. Reach Reporting allows you to do everything I'm about to show you but in a fraction of the time as you can in Excel. It's a win-win, you get to learn a new tool and speed up your workflow.

Enjoy!

Click here or the image below to watch the lesson on YouTube:

 

What are vendor-level expenses?

Think of your company's expenses like items on a personal budget. Instead of broad categories like 'utilities' or 'entertainment', think of vendor expenses as the regular monthly fees you pay - like your Netflix subscription or gym membership. Categorizing expenses by vendor helps you see how you're using your money and what's really necessary. This clarity gives you two benefits:

  1. Expense Validity: You can question if each vendor cost is worth it, making sure you're only paying for services that help your business. It's not about spending less; it's about maximizing every dollar.
  2. Better Predictions: By looking at your past spending with vendors, you can better estimate your future costs, making it easier to adjust to any changes in service or price.

 

Why Vendor-Level Expenses Matter

Uncovering vendor-level expenses allows for more precise analysis and decision-making. With this transparency, finance leaders can:

  • Negotiate Better Deals: Armed with data, you go into vendor negotiations with a clear picture of your business's spending history and can push for more favorable terms.
  • Spot and Stop Leaks: By identifying vendors with disproportionate costs or negligible returns, you can 'plug the leaks', redirecting capital to strategic areas that foster growth.
  • Improve Cash Flow Management: Understanding your expenditure cycle ensures that you're not surprised by recurring costs, smoothing out cash flow projections and reducing financial stress.

 

How to use vendor-level expenses for analysis

Here are the steps I like to use when driving P&L benefits with vendor-level expenses:

1. Gather Historical Data:

Ensure that your accounting team categorizes every expense correctly, mapping them to the vendor where applicable. This may involve reviewing vendor level expenses with your accounting team monthly before the books close.

2. Trend Analysis Over Time:

Examine your spending trends with various vendors over the last 3 to 12 months. Note any significant increases or decreases that warrant attention. New vendors or services could also appear during this time, flagging potential areas for review.

3. Highlight Concerning Trends:

An unexpected increase in spending with a particular vendor could indicate a change in business needs or, conversely, wasted resources. This is the time to ask tough questions and assess if this aligns with your financial and business goals.

4. Collaboration with Budget Owners:

Finance shouldn't operate in a silo. Collaborate with the department heads responsible for the respective vendor relationships. Are these expenses necessary? Are there alternative, more cost-effective solutions? Often, business leaders aren't fully aware of the costs associated with recurring charges.

5. Update Forecast:

Based on your conversations and the highlighted trends, update your financial forecasts. This step is crucial in ensuring that your vendor-level analysis isn't just retrospective but proactive in guiding future financial decisions.

6. Continuous Evaluation and Adjustment:

This is not a one-time exercise. Regularly evaluate your monthly vendor spend against your forecast. If variances appear, dig deeper to understand why and make necessary changes in your spending strategy.

 

Action items:

Run through the 6 steps above and see where you get stuck.

Use a tool like Reach Reporting to help you streamline the process.

Work on developing a monthly cadence for evaluating vendor level results and using that to inform your forecast.

Pro tip: keep track of the savings you identify each month so you can add it to your resume.

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