Abstract graphic of financial savings by Megan Rexazin
Many companies overpay vendors by as much as 10% of their contracted fees, according to Forbes.
Whether you are purchasing cloud services, managed services for IT apps, contingent labor, or anything else, it is vital to not pay suppliers more than they are due. In this article, we will show you how.
Table of Contents
A vendor, also called a supplier, is a person or entity that provides goods or services to consumers or companies. Generally, the term “vendor” describes not the manufacturer, but the entity that is paid for the goods and services.
For example, vendors will sell goods at wholesale prices to retail stores such as Target, who will then sell those goods at retail prices.
Having said that, it is possible for a vendor to be both a seller (or supplier) and a manufacturer.
As a business, you will be responsible for processing vendor payments each month. This will require a robust checking and audit process, including reconciliation, to reduce the risk of overpayment or duplicate payment to vendors.
This will also help you prevent fraud and reputational damage, in addition to revenue losses.
Potential Reasons for Overpaying Vendors
There are 5 primary reasons you might end up paying vendors more than you intended.
Lack of account reconciliation
Duplicate or, almost identical, vendor names like “Dan’s Bar and Grill” and “Dans Bar & Grill”
Lack of control & checking
Operator input errors
Lack of standard vendor invoicing conventions
Contracts for services from vendors can be complex. The traditional scope of work (SOW) and master services agreement (MSA) structure can make comprehending the commitments time consuming and cumbersome.
Additionally, administering contracts requires understanding the context, such as industry information on practices and pricing, location of consumption, and so on.
Standard rate cards attached to master contracts are more complex than they first appear.
Hence, sometimes companies:
Pay twice for services that were actually included in other services
Overpay vendors when discounts and adjustments should have applied
Pay for services not rendered
And so on.
The Problem With “Minor” Variations
Small variations don’t just cause headaches for analysis – they also open up the possibility of fraud with "ghost accounts".
A “ghost employee” is an employee that is on your payroll and meant to collect a wage – except that they are not employed by your company. In innocuous cases, it could be, for example, a deceased person who by accident was not removed from the payroll. Frequently, however, a person is added deliberately to commit fraud.
The result is that money continues to flow from your company’s bank account into the pockets of potential fraudsters.
Similarly, there are “ghost vendors” – nonexistent companies you unknowingly keep giving your money to. Payments are pocketed by employees or related parties.
There are some common pitfalls with this type of fraud that make them a bit easier to spot, especially with reconciliation and audits.
Most fraudsters will re-use some real information that is already in your company’s system in a different capacity.
The most common of such details are an employee’s address as the supplier’s office, or an employee’s bank information.
Do Vendors Return Overpayments?
Generally, the larger the company, the less likely it is that you will receive a repayment or even notification. This is in part due to the many administrative procedures.
While many suppliers do return overpaid money once it has been identified, the return of overpayments isn’t necessarily high on a vendor’s priority list.
How to Prevent Overpaying Suppliers
It is crucial that you have robust procedures in place or a vetted accounting company to manage both your record keeping and your relationship with your supplier.
Invest in Training
A major problem is that contract administrators lack the training, context, and access to market information that is needed to prevent overpaying vendors. If you invest in equipping and training your administrators, you could potentially save millions of dollars.
It may seem counterintuitive, but vendors also benefit from your training. While ill-informed companies might initially seem like easy targets, they end up being problematic customers.
Most reputable vendors will want their customers to be well-informed and educated about what they are purchasing and the state of the market. This ultimately reduces costs from service delivery and results in a stronger relationship.
Daily Reconciliation and Checking to Prevent Fraud or Oversight
Overpaying suppliers can result from mere oversight or, much more seriously, deliberate fraud. Unraveling this problem once it has already occurred is difficult, so it is best to prevent it in the first place.
A common mistake, for instance, is changing a vendor but failing to cancel a direct debit to the old one. To avoid this, your accounting team should regularly check the direct debit list.
Vendors can also make errors. For example, they might send two identical invoices. To prevent this, you should record all invoice numbers and routinely check for duplicates.
Contractual Review Process
It is crucial to regularly review supplier contracts to prevent fraudulent or inaccurate supplier billing, as this can result in duplicate payment or overpayment.
Responsibility for data should be assigned to a central data team that can check for accuracy, compliance to standard terms and completeness. This team must also review vendor performance to ensure that contractual terms are met.
Review vendor contracts timely and against industry standard norms.
Request your legal team to review vendor authorization limits, confirm regulation compliance, and gauge appropriateness of the terms.
Choose Your Vendors Wisely
Set up a preferred vendor list. This will help you prevent fraud and position your company to negotiate favourable purchasing terms.
Make sure that key decision makers and personnel (such as the Chief Procurement Officer and the Chief Financial Officer) involved in the supplier negotiation process.
It becomes difficult to predict and manage cash flows and liquidity needs if one fails to accurately manage payables. Careless procurement standards can also place you at risk of overpaying suppliers or trading with unapproved suppliers.
It is important to track internal buyer practices to remain within authorized spending limits.
Issue purchase orders (POs) for every new order to validate all received orders.
Set accounts payable metrics and follow them.
Unauthorized payments to vendors can disguise internal fraud.
If an authorizing individual is not shown an invoice, or shown it twice, it could be due to error or potential fraud.
Robust Safety Measures
Dual-authorize all payments.
Signatories should create evidence they have seen an invoice before signing it.
Regularly monitor your accounts-receivable books.
Invoicing Process Management
There are some strategies you can consider to improve invoice processing:
Inaccurate invoices (including errors in amounts, address, quantities, etc.) should not be paid – they should be sent back to the vendor.
Try not to pay invoices early – pay them when they are due.
Invoices should be processed in a timely manner and have a date stamp. Ensure that this is also done in line with your internal service level agreements.
There should be a central processing office to maintain a consistent, standardized approach.
By implementing the above controls, you could potentially save yourself thousands of dollars in annual spending. If the case is of fraud, this could run into millions.
Two keys to reducing chances of fraud and overpaying vendors are bank account reconciliation and credit card reconciliation.
As you probably know from experience, these can be time-consuming and frustrating to carry out, so many companies turn to firms like NextGen Accounting for reconciliation services. Our management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC.
From us, you’ll get reliable documentation every single day. If it doesn’t pass audit, we’ll pay the fees.
If you want to streamline your business processes and save costs, contact us now!