Vendor Credit
Learn about vendor credits, their types, when they’re issued, and how they can improve your facility’s operations and costs.
Jonathan Haney
Senior Director, Marketplaces
What is a Vendor Credit?
A vendor credit is a financial adjustment given by a vendor to a client to address issues with a product or service previously provided. This credit generally amounts to either partial or the total amount that the vendor owes the client. The client then may use that money for future purchases or invoices.
Such credits are usually the result of overbilling, returned goods, or unsatisfactory services. However, a company may apply vendor credits to other circumstances as well depending on the deal between the vendor and their client.
In facilities management, vendor credits help resolve billing discrepancies and maintain positive relationships. Additionally, by managing these credits effectively, managers may reduce their facility’s overall operational costs.
Understanding Vendor Credits
Vendor credits are part of the accounts payable process and are used to correct or acknowledge a discrepancy in the billing or fulfillment of services and products. They are essential for maintaining accurate financial records and can take various forms.
Examples of vendor credits include the following.
Monetary Adjustments
Monetary adjustments directly reduce the amount owed to the vendor on future bills. This method is straightforward to implement. All the vendor needs to do is adjust the balance due. There’s typically no need to issue new documents. Issuing a vendor credit through monetary adjustments also simplifies the reconciliation process for accounts payable.
Credit Memos
Credit memos are documents that vendors issue to acknowledge a credit amount on a client’s account. They serve as proof of the adjustment for both the vendor and the client. A credit memo may also be referred to as a credit note.
Refunds
A vendor may issue a refund back to the client’s original payment method rather than as a credit memo. In this case, the supplier would return the initial funds rather than applying a credit for future bills to the account. Alternatively, they may give their customer a new product for free.
When Are Vendor Credits Issued?
Vendor credits are typically issued under the following circumstances.
Returns or Exchanges
When goods are returned due to defects, damage, or other reasons, a vendor may issue a credit for the returned items. Doing so is a common practice in business across industries as it is an effective way to maintain customer loyalty when defective purchases happen.
Service Issues
If services performed do not meet the agreed-upon standards, a credit may be issued as compensation. Like refunded goods, this type of vendor credit typically involves the amount paid during the initial transaction.
Billing Errors
If a client finds overcharges or errors in their bills, a vendor may issue credits to correct these mistakes. Therefore, the client only pays for the services or products they agreed to purchase.
Negotiated Settlements
In disputes, vendor credits may be part of a negotiated agreement. This approach can save time and resources for both parties involved, instead of dealing with more complex negotiation terms.
How to Handle Vendor Credits in Facilities Management
Documentation
Ensure proper documentation by recording and tracking all received vendor credits. This practice keeps all of your vendor’s credits accounted for in your financial statements. Accurate documentation prevents financial discrepancies.
Communication
Clearly communicate with vendors to understand the reasons for credits and negotiate the expected resolutions. Negotiations help ensure that all bill adjustments meet your facility’s requirements.
Reconciliation
Regularly reconcile vendor statements with your internal records. Doing so helps you confirm that all credits paid were accurately applied and accounted for.
Challenges With Vendor Credits and How to Overcome Them
Managing vendor credits can present challenges. However, your facility can implement strategies to overcome or prevent them. Here are 3 examples.
Tracking
Keeping a precise record of every vendor credit requires systematic organization. Using a powerful accounting system combined with a good CMMS can help. These software tools help you compare credits to inventory stock, maintain an up-to-date ledger, and notify you when a vendor issues a credit.
Timing
It’s important to time credit applications with your cash flow needs and accounting cycles. To do this effectively, establish a schedule that aligns credit applications with key financial periods.
Accounting Adjustments
Accurately adjusting your accounting records to reflect vendor credits can be complex. Your facility can simplify this process by using software that integrates these credits into financial statements automatically. These tools reduce errors and ensure that your financial reports are always accurate.
Benefits of Vendor Credits for Facilities
Vendor credits, when managed strategically, can benefit your facility’s overall operational efficiency and financial health. Here’s how.
Improves Cash Flow
Using credits improves your facility’s cash flow simply because doing so lowers the amount of money you spend. As a result, you’ll be able to utilize your financial resources more effectively and stabilize your budget.
Enhanced Efficiency
Vendor credits can optimize internal processes by allowing your facility to reallocate saved funds to other areas. These reinvested funds can then go toward initiatives that improve operational efficiency and productivity.
Cost Savings
The most obvious benefit of getting a vendor credit is that you can use that credit to pay bills for future purchases. As a result, you can use the money you save on that transaction for other payments needed at your facility.