Team Management

The Small Business Owner’s Guide to Vendor Management

Olivia Jones  

Businesses of all sizes depend on their vendors in order to operate as normal. This article specifically explores vendor management for small businesses. Why? Larger, enterprise-level companies typically have more resources at their disposal to handle vendors. Small business owners often wear many hats, so to speak, and that comes with a different set of challenges. 

What is a vendor?

A vendor is a person or business that provides your company with a good or service. The commitment can range from virtually nonexistent (a vendor you work with on an as-needed basis) to long-term (a vendor you purchase a service from in advance, for a period of several months or years at a time). 

What are some examples of vendors?

Vendors provide the goods and services that businesses need to operate successfully. Examples of vendors include:

  • A large company that your business uses to send invoices or process credit card payments
  • A self-employed accountant who does your business’ taxes
  • A local bakery that caters your meetings
  • A law firm that advises your company on liability matters
  • A designer who creates your shop’s seasonal window displays

How is a vendor different from a contractor?

A contractor is a type of vendor. A vendor offers goods and/or services to their clients, while contractors typically offer only services to other businesses. An independent contractor is, by definition, not an employee, as only the deliverable is dictated by the client; when and how a contractor works is up to them. Not all vendors are contractors, but all contractors are vendors.

Are there any specific tax requirements when it comes to vendors?

This can get a bit tricky. Tax requirements depend on whether your vendor is also a contractor. 

If your vendor is a business, such as an LLC or C corp, you’ll need to request a W-9, which is a tax document that contains a vendor’s identifying information and tax ID number. Additionally, you may owe sales tax on your payments for the good or service depending on local law. Be sure to keep records of all payments and communicate this information to your accountant. 

If you’re working with a vendor who is also a contractor, there is an additional step. You’ll need to report how much you paid the contractor during the fiscal year using a form 1099. You will file a 1099 form for anyone to whom you paid more than $600 in exchange for services during the year, as long as they are not your employee. According to the IRS, a 1099 isn’t necessary for any contractors whom you pay less than $600 in one year.

Tax laws can be complicated and we can’t cover all the details for every situation here, so talk to your accountant to ensure that you’re filing correctly.

Why is vendor management important?

When you manage your vendors well, your business will run more smoothly and you’ll be better prepared to quickly adapt to new challenges. Poor vendor management leaves you vulnerable to costly disruptions in operations, not to mention tax and legal liability. 

Best practices

Set clear expectations to reduce scope creep

Miscommunication is at the heart of many issues between vendors and their clients. Most disagreements and logistical problems can be avoided entirely by laying out the scope of work (complete with detailed deliverables, deadlines, and costs) in advance. Before you begin work with a new vendor, discuss and agree on the basics that will go into your contract. For example:

  • When will your agreement begin and end? 
  • How much advance notice is necessary to terminate the agreement? 
  • How much work should the vendor expect from you? 
  • Will you expect your contractor to sign a non-disclosure agreement (NDA)? 

Setting clear expectations and operating with a legal contract will help keep all parties on the same page.

Stay organized

If you’ve ever bemoaned the loss of an important receipt or forgotten to respond to a time-sensitive email, you know how vital it is to stay organized. Time spent putting out fires is time that could be better spent focusing on business growth and management. But we all know it’s not as easy as simply deciding to be more organized. Dealing with multiple vendors at once can be logistically challenging for overworked business owners. 

To reduce problems that arise from juggling too much, consider the following:

  • Outsource detailed work to team members with sufficient  bandwidth and expertise. For example, don’t reconcile your own accounts; give that task to a bookkeeper. 
  • Make use of project management software such as Trello or to keep tasks organized.

Check in and reevaluate to prevent stagnation

Stagnation and lack of momentum means you stick around with existing vendors, even when things aren’t working well anymore. Just because a vendor was the best option when you first started working with them, doesn’t mean there isn’t something better out there now. There may be a business whose values better match yours, or that offers lower prices, or that is innovating with new software or services. That’s why it’s a good idea to analyze your vendor’s goods and/or services periodically to make sure you’re getting the best value.

This doesn’t have to mean breaking up with your current vendors. Regular check-ins can be an opportunity to offer helpful feedback to your vendors on how they can improve their products or services. It can also open a conversation to clarify expectations and goals. 

Build relationships

As important as it is to optimize your processes and hold your vendors to a high standard, maintaining a human touch is still key. In today’s age of automation and impersonal communication via tools like email, an empathetic, thoughtful conversation can go a long way to prevent miscommunication and ensure goodwill. Not only will building real, genuine relationships with your vendors keep you on the same page, it will also build a sense of trust and loyalty that goes both ways. When you fall on tough times and have to lean on support from your community, as we all eventually do, having a foundation of mutually beneficial relationships can lift you up when you need it most.

For small business owners, vendor management can be a confusing and overwhelming addition to their already full schedule of duties. But with care organization and planning, it doesn’t have to be. In fact, good vendor management skills can free up your time and energy, so that you can focus on what really matters to you: growing and nurturing your business.

Olivia Jones
Olivia Jones Olivia Jones is a freelance writer and former HR professional. She writes about HR and education for tech companies around the world.
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