Last week, we looked at the causes of most vendor credits, and offered some ideas for tracking them. Now, we’ll look at software and auditing when it comes to vendor credits.

Software solutions that consolidate and analyze your vendor and accounts payable data also can help you stay on top of vendor credits. What’s more, many software solutions let you automatically send queries to many vendors at the same time. To be sure, it’s not uncommon for just 15%-25% of vendors respond to an initial mailing. However, Lavante typically sees response rates grow to more than 90 percent, particularly when we combine updated data from our vendor network with proprietary communication software. At times, a second round of requests also may be necessary.

Also key to higher recoveries: working with audit firms that are experts in vendor credits. These auditors tend to be trained in collections – a skill that few accounts payable employees have had to develop. Most also have sophisticated technology, allowing them to conduct the audit with fewer employees.

For a successful audit, you’ll want to:

  1. Set clear goals and time frames. You won’t have time to do everything, so focusing everyone’s efforts is key.
  2. Develop reports that provide info you can use to reduce future vendor credits. As a starting point, they should provide information on the credit, the vendor’s compliance, and the age of credits as they are recovered, among other information.
  3. Talk with the audit staff regularly. You’ll stay abreast of their activities and can tap into their insight.
  4. Use the audit to learn what led to past mistakes and credits. Then you can implement the steps needed to improve the process going forward.

Also important in reducing vendor credits is highlighting their impact on your firm’s performance. Just as most firms measure days-sales-outstanding and days-payable-outstanding, Lavante has developed a metric for assessing days-credits-outstanding, or DCO. DCO measures your debit balance as well as the time-value and magnitude of credits that are open on your vendors’ accounts receivable records before your firm can verify the amount and recover it.

When companies fail to pay attention to their vendor credits, it’s not uncommon to find DCOs of up to 1,500 days. By consistently monitoring this area, however, it’s possible to drive down this metric to less than one month. That preserves cash flow and boosts the bottom line — which is the overall objective of managing vendor credits.