How to Generate Profit through Vendor Credit Recovery

As shared services mature, they strive to be and to be seen as value adding partners to the business. In addition to providing higher value functions, shared services are also finding ways to add to the company’s bottom line.

In finance shared services, making sure payment processes are watertight is crucial. Finding new streams of profit to add to the bottom line will also help to highlight the value of your AP department.

Many finance shared services have gotten better at preventing and catching duplicate payments through improved processes and through ERP systems. However many haven’t taken full advantage of Vendor Credit Recovery audits.

Ed Martinez, former Shared Services Director of Wendy’s and a consultant to shared service professionals recently wrote an article for us on best practice in AP. “Cash generated from the prevention and/or recovery of duplicate payments has decreased over the years. That means the large cash recovery opportunities can be found in an AP Vendor Audit Credit Recovery,” Martinez explained.

What is Vendor Credit Recovery?

Vendor Credit Recovery, a term actually trademarked by JPD Financial, is an audit credit recovery process that recovers cash credits that reside on the supplier’s Accounts Receivables (AR) books. These credits are the result of various factors such as overpayments to AP vendors by the AP staff as well as returns, rebates and allowances not properly processed by vendors.

Thomas Santacroce, VP of Business Development & Marketing at JPD Financial explains that with shared services, “it’s often not what goes wrong in our client’s AP, it’s across the hundreds or thousands of their suppliers.” Shared services, Santacroce said, “are dealing suppliers of all shapes and sizes and stages of their evolution and not everyone is on SAP. Suppliers may have issues with their systems or resources and can struggle to cope with the sheer volume of transactions.”

Vendor Credit Recovery firms work with buyers to identify all of their auditable suppliers to find any money that may be owed back to the company.

What difference can it make?

Santacroce says that interestingly, many of their shared services clients find that the credits recovered did not originate in the AP department. Many come from returns, warranties, rebates, or pricing, which are issues that originates at the suppliers’ end.  

While many shared services have made great strides towards improving their payment processes, Santacroce says, “Our clients have become very adept at fixing what happens within the four walls of their organization, but they can’t fix what happens within the four walls of their suppliers.”

What will it cost me?

Many Vendor Credit Recovery audit firms, like JPD Financial, are contingency-fee based.  This means there is low risk, and the 3rd party is paid if and when they recover funds. Martinez said when he used Vendor Credit Recovery for a shared services organization, “the cost to implement our 3rd party Vendor Credit Recovery process was zero, since fees to the 3rd party are on a contingency fee basis. The 3rd party receives a small per cent of cash recovered, so there are no fixed fees."

“More importantly," Martinez said, "there was no investment required by IT. The AP resource requirement is minimal, assuming the AP staff approves and processes the credits provided by the 3rd party partner on a timely basis, and avoids unnecessary review.”

Martinez said, “From my perspective, use of a 3rd party partner is critical to leveraging economies of scale and specialized skills. This allows the company to avoid the high internal labor cost involved in an AP vendor audit recovery process.”

But another way of looking at it, what will it cost to your business not to hire a recovery firm?

For example let’s say (to make the math easy) a recovery firm charges 25% of the money they recover on a no-win, no-fee basis. If they find $1,000,000, you pay them $250,000. That makes the cost of not hiring them $750,000 that could go to your bottom line.

While finance shared services should make every effort to avoid overpayments and payment issues to begin with, the return on investment in audit recovery is generally quite high as there are no fixed fees or initial investment required, and you can access the specialized skills of the third party companies.