Most vendors have money that actually belongs to their customers – AKA “vendor credits.” For instance, the customer’s accounts payable department may have forgotten to deduct a discount and overpaid an invoice. Or, the vendor may inadvertently have double-billed a customer and been unable to return the money.
While many firms overlook these credits, doing so can cost them. “Vendor credits generally total between $600,000 and $900,000 for every billion dollars a company spends,” says Joe Flynn, Lavante CEO.
What’s more, just a few steps can help you reduce the frequency of vendor credits. To start, recognize that that the slip-ups that lead to credits can occur by both the vendor and customer. For example, a PO may omit the discount available on the transaction. Or, a company may fail to provide payment detail when sending its check, so the vendor holds onto the funds while figuring out how to allocate them.
No matter the cause, you want to stay on top of these credits. The more time that goes by, the more likely it is that an unclaimed credit will simply disappear. After analyzing millions of data points over the past 10 years, Flynn has found that an AP department has an 80 percent chance of recovering a credit that is one day old. Its chances drop to just five percent after 105 days.
Reducing the number and amount of vendor credits starts when setting up new vendors in your system. The data file should be thorough. Obtain the names of any parent companies or subsidiaries to which the vendor is related, as this reduces the likelihood of payments going to the wrong address and ending up as a credit. Double-check the company name, address and phone number, and make sure you’ve got the right address for the accounts receivable department; at some companies, this differs from the corporate headquarters location.
Once you’ve done all you can to make sure the data is in tip-top shape, it makes sense to restrict access to the database. This limits the risk that someone will introduce errors that cause a payment to go astray.
It also helps to periodically ask your vendors whether they’ve undergone any changes that may hold up your payments. Say a vendor merged with another company — you may need to change the address to which you’re sending your payments. At the same time, you’ll want to verify that your vendors have accurate contact information for you. If not, their efforts to track you down to clarify a payment will be hampered.
On a regular basis – preferably quarterly, but at least annually – obtain vendor statements, recommends Mary Schaeffer, an accounts payable consultant. Because some vendors suppress credit information when they print the statements, Schaeffer also advises instructing vendors to include all activity, and not just past due amounts.
Next up: The role of software and auditing in reducing vendor credits