Managing Vendor Advances and Deposits in AP Automation

At the end of every fiscal year, the same ritual plays out in finance departments across the country: someone pulls up the prepaid assets account and asks, "What are all these deposits for?"

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The hunt begins. Scrolling through bank statements. Digging up old purchase orders. Emailing vendors who may or may not remember transactions from eight months ago. The AP manager cobbles together an explanation for most of them—but there's always that stubborn $8,000 payment to a supplier nobody can quite recall, for a project that might have been cancelled, or maybe completed, or possibly moved to a different vendor entirely.

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By the time the reconciliation is complete, the company has written off $12,000 in unrecoverable deposits, discovered $18,000 in duplicate payments where vendors forgot to credit advances, and burned 40 hours of finance team time that could have been spent on strategic analysis.

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This isn't a budgeting problem or a vendor management problem. It's a tracking problem.

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Vendor deposits and advance payments have become standard practice in B2B transactions. Custom manufacturing requires 30-50% upfront. International suppliers demand payment security before beginning production. Construction projects operate on milestone-based schedules. Long equipment lead times mean vendors need working capital months before delivery.

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But while deposits have become more common, most AP teams are still tracking them the same way they did twenty years ago: spreadsheets that three people update inconsistently, sticky notes on monitors, and the institutional memory of whoever processed the original payment.

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The financial impact is real. According to research from the American Productivity and Quality Center, between 1% and 2.5% of total disbursements processed by companies each year are duplicated or erroneous. Vendor advances create particular risk because the same supplier receives multiple payments for the same underlying transaction across different time periods.

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For a company processing $10 million in annual payables, preventable losses from poor deposit tracking can easily reach $100,000 to $250,000.

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Here's how modern AP automation solves the vendor advance tracking problem—and why manual tracking is costing you more than you think.

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Why Vendor Advances and Deposits Are Becoming More Common

The business landscape has shifted dramatically in recent years, making vendor deposits more prevalent across industries:

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Supply chain pressures and extended lead times. Manufacturing lead times have extended significantly since 2019. According to Deloitte's 2024 Manufacturing Industry Outlook, the average delivery time for production materials peaked at 100 days in July 2022—the longest in records dating back to 1987. While lead times have improved to 87 days as of August 2023, they remain well above pre-pandemic levels of around 65 days. Vendors now require deposits to secure production slots and materials in an environment where capacity is constrained and input costs remain volatile.

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Custom manufacturing and made-to-order products. Businesses ordering custom equipment, specialized components, or bespoke products face deposit requirements of 25-50% to cover the vendor's material costs and non-recoverable engineering work. This practice has become standard as manufacturers seek to reduce their risk on custom orders that can't easily be resold.

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International supplier risk management. Cross-border transactions come with payment risk on both sides. Suppliers in Asia, Europe, and Latin America increasingly require 30-50% deposits before beginning production, especially as currency fluctuations and elevated shipping costs have created additional uncertainty in global trade.

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Construction and project-based work. The construction industry has always operated on deposit and milestone payment structures, but these practices are now spreading to software development, consulting projects, and other professional services where work spans multiple months. Progress payments and retainage have become common even for smaller projects.

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High-value equipment purchases. Companies buying manufacturing equipment, vehicles, or technology infrastructure worth $100,000+ routinely pay 10-30% deposits to secure pricing and delivery dates, especially in markets with limited inventory and long lead times.

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The shift toward more deposit requirements is measurable across B2B transactions. For mid-market companies with $2M-$50M in AP spend, this could mean managing dozens or even hundreds of deposit transactions annually—each one creating a potential duplicate payment risk if not tracked properly.

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Types of Deposit Structures and When to Use Each

Not all vendor advances work the same way. Understanding the different structures helps you set up proper tracking from the start:

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Percentage-based deposits (most common). The vendor requires a fixed percentage upfront—typically 25%, 30%, or 50% of the total order value. You pay $15,000 on a $50,000 custom machinery order, then $35,000 upon delivery. This structure works well when the total project cost is known upfront and the vendor needs working capital for materials.

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Fixed-amount deposits. The vendor requires a specific dollar amount regardless of final invoice total. You pay a $5,000 deposit to start a project that might ultimately cost $40,000 or $60,000 depending on scope changes. This structure appears in professional services, construction, and situations where the final cost isn't yet determined.

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Milestone-based payments. Common in construction and software development, payments tie to specific project achievements: 25% at contract signing, 25% at design approval, 25% at installation, 25% at final acceptance. Each payment is technically an advance against the final deliverable, requiring careful tracking of which milestones have been paid.

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Retainage (reverse deposits). Instead of paying upfront, you hold back 5-10% of each payment until project completion. The vendor receives $90,000 on a $100,000 project, with the final $10,000 released only when all work is accepted. This requires tracking withheld amounts that eventually become payable.

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Blanket purchase orders with draws. You commit to $100,000 in annual purchases from a vendor, pay $25,000 upfront, and they credit your account as you place individual orders throughout the year. This structure is common with frequent suppliers and requires tracking the remaining deposit balance across multiple transactions.

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Each structure presents different tracking challenges. Percentage-based deposits need matching to specific invoices. Milestone payments require tracking which milestones have been paid and which remain outstanding. Retainage demands holding funds in a quasi-escrow state. Blanket POs need running balance calculations across multiple draws.

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The Hidden Costs of Manual Deposit Tracking

Most AP teams start with good intentions. They create a spreadsheet: vendor name, deposit amount, date paid, PO number, remaining balance. Someone updates it after each payment. It should work.

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It doesn't.

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Spreadsheet errors compound over time. One person updates the tracker. Another person processes payments. A third person approves invoices. The spreadsheet lives on someone's desktop, or in a shared drive where version control doesn't exist. Sarah updates the "Deposits_Final.xlsx" file while Tom works in "Deposits_Final_v2.xlsx." Neither realizes the other's changes exist until reconciliation reveals a $15,000 discrepancy.

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Duplicate payment risk increases with volume. Your company paid a $20,000 deposit to Acme Manufacturing in February. In July, their invoice arrives for $80,000—the remaining balance after the deposit. But Acme's accounting department made an error. They billed the full $100,000 without crediting your deposit. Your AP clerk, processing 200 invoices that week, doesn't catch it. You pay $80,000 when you should have paid $60,000. That's a $20,000 overpayment that might take months to recover—if you ever notice it at all.

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According to CFO.com's analysis of APQC benchmarking data, even top-performing organizations report that nearly a full percentage point (0.8%) of their annual disbursements are duplicate or erroneous. Bottom performers report more than twice that amount at 2% of total annual disbursements. When deposits are involved, that percentage climbs higher because the same vendor receives multiple payments for the same underlying transaction.

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Lost deposits become write-offs. You paid a $5,000 deposit for custom software development in March. The project was delayed. Then cancelled. Then restarted with a different vendor. Eighteen months later, during year-end close, your controller asks: "What's this $5,000 payment to TechVendor from last year?" Nobody remembers. The vendor claims the deposit was forfeited per the contract. Maybe it was. Maybe it wasn't. Without documentation and tracking, you can't fight it. That $5,000 becomes a write-off.

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Reconciliation becomes a quarterly nightmare. Your company has 30 open deposits at any given time. Each quarter, someone needs to match them against invoices received, payments made, and outstanding balances. This takes your AP manager 8-12 hours per quarter—time that could be spent on strategic analysis instead of archaeological detective work through payment records.

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Vendor disputes damage relationships. You insist you paid a deposit. The vendor insists you didn't—or that it was credited already. Without instant access to documentation, payment history, and audit trails, these disputes drag on for weeks. Phone calls. Emails. Account reconciliation meetings. Even when you're right, the relationship suffers from the friction.

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A finance director at a $30M manufacturing company described the problem: "We were tracking deposits in a spreadsheet that three different people updated. When we finally implemented AP automation, we discovered $87,000 in deposits that had never been properly credited or reconciled. Some were over two years old. We recovered maybe half of it. The rest we had to write off because we couldn't prove our case."

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Common Deposit Tracking Failures and How They Happen

Let's walk through three real-world scenarios that illustrate how manual deposit tracking fails:

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Scenario 1: The uncredited deposit duplicate payment.

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March 15: Your company orders $60,000 in custom components from a supplier. Contract requires 30% deposit ($18,000) upfront. Your AP team processes the deposit payment, notes it in the spreadsheet.

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June 22: Components are ready. Vendor sends final invoice for $60,000. They forgot to credit your $18,000 deposit. Your AP clerk, processing 40 invoices that day, doesn't cross-reference the spreadsheet. The invoice matches the PO total, so it looks legitimate. Payment is approved and sent.

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July 30: Your controller is reviewing cash flow and notices two large payments to the same vendor within four months. Investigation reveals you paid $78,000 for a $60,000 order. You've overpaid by $18,000.

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August-October: Three months of back-and-forth with the vendor to recover the overpayment. They insist their records show only one payment. You send bank records. They issue a credit memo. The credit sits unapplied for another month. Eventually you recover the money, but you've lost the time value of $18,000 for six months plus countless hours of reconciliation work.

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Scenario 2: Multiple POs, one vendor, no matching system.

Your company works with a construction supplier on five different projects simultaneously. You've paid deposits on three of them:

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Project A: $10,000 deposit on $40,000 total
Project C: $15,000 deposit on $50,000 total
Project E: $8,000 deposit on $35,000 total

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When invoices start arriving, they reference PO numbers but don't always clearly indicate which deposit applies. Invoice for Project A shows $40,000 (full amount, no credit). Invoice for Project C shows $35,000 (correctly credited). Invoice for Project E shows $35,000 (should be $27,000).

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Without an automated system linking deposits to specific POs and flagging discrepancies, your AP team processes the invoices as they appear. By the time someone notices, you've overpaid on two projects and spent hours reconstructing the payment history.

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Scenario 3: Year-end close reveals unreconciled deposits.

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December 28: Your accounting team is closing the books. Someone runs a report of all prepaid assets and deposits. The spreadsheet shows $73,000 in outstanding deposits across 15 vendors. But which ones are legitimate deposits awaiting application, and which ones represent invoices that already came in and were paid without properly crediting the deposit?

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Your AP manager spends the week between Christmas and New Year's contacting vendors, pulling payment records, and trying to reconcile. She finds:

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$22,000 in deposits that were properly credited (but never removed from the spreadsheet)
$31,000 in legitimate outstanding deposits awaiting final invoices
$12,000 in deposits where the final invoice came in, wasn't credited, and was paid in full (duplicate payment scenario)
$8,000 in deposits for orders that were cancelled but never refunded

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The reconciliation takes 30 hours. The duplicate payments require another 20 hours to recover. The cancelled order deposits? Two vendors agree to refunds, three claim the deposits were non-refundable per contract terms you can't locate. You write off $4,500.

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This happens every year. Same problems, different vendors, different dollar amounts.

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Best Practices for Structuring Deposit Agreements

Before we get to the automation solution, let's establish the foundation: proper deposit agreements. Even the best tracking system can't fix poorly documented deposit terms.

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Clear contract language on deposit terms. Your purchase order or contract should specify: exact deposit amount or percentage, due date, what the deposit secures (materials, production slot, design work), conditions under which it's refundable, and how it will be credited against the final invoice. Vague language like "deposit required" isn't enough.

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PO documentation requirements. Create a separate PO line item for the deposit payment, distinct from the final delivery PO. This makes tracking easier and creates a clear audit trail. If using a single PO, include explicit deposit terms in the line item description.

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For companies using NetSuite, the blanket PO and prepayment workflow offers a structured approach to handling these transactions within your ERP.

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Deposit refund policies for cancelled orders. Establish standard terms before you need them. For custom manufacturing, deposits may be non-refundable if work has begun. For standard products, deposits should be refundable within a certain timeframe. For project-based work, tie refundability to specific cancellation windows (full refund if cancelled within 30 days, 50% refund within 60 days, forfeited after work begins).

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Handling unused deposits. What happens when a project comes in under budget, or you don't use your full blanket PO commitment? Options include: applying the excess to future orders (requires tracking credit balance), requesting a refund (requires established refund process), or allowing it to age until it's either used or written off (terrible option, but common in practice). Document your choice in the original agreement.

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Vendor communication templates. Create standard email templates for deposit-related communications: payment confirmation ("We've paid your $X deposit for PO #12345"), final invoice reminders ("Please ensure our $X deposit from [date] is credited on your final invoice"), and discrepancy alerts ("Your invoice for $X doesn't reflect our $Y deposit—please issue a corrected invoice or confirm the deposit application").

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These practices reduce disputes regardless of your tracking system. They create paper trails that protect both parties and make reconciliation straightforward instead of adversarial.

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The Automated Approach: How AP Automation Handles Deposits End-to-End

Modern AP automation platforms like Centime transform deposit tracking from a manual reconciliation challenge into an automated workflow with built-in safeguards.

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Here's how the process works from deposit payment through final reconciliation:

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Recording advance payments and linking to vendors. When you pay a deposit, the system records it as a prepayment or credit against that specific vendor. The payment is tagged with the PO number, project reference, or custom field that identifies what the deposit secures. This isn't a line in a spreadsheet—it's a structured data record that the system can reference automatically during invoice processing.

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In Centime, you can schedule invoice payments for deposits and mark them with the appropriate categorization. The system maintains the vendor relationship and deposit status without manual tracking.

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Automatic matching when final invoices arrive. When the vendor's final invoice enters the system—whether through email capture, EDI, or manual upload—Centime's AP automation checks for existing prepayments or credits against that vendor. If found, it flags the invoice for review and suggests applying the credit.

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This is where automation prevents the duplicate payment scenario. Instead of relying on your AP clerk to remember a deposit from three months ago, the system automatically surfaces that information during the approval workflow.

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Flagging invoices that should credit existing deposits. The system compares the invoice amount to the PO total and existing deposits. If the math doesn't work—invoice for $50,000, PO for $50,000, but there's a $15,000 deposit on record—Centime generates an alert: "This invoice may not have credited the existing deposit. Review recommended before approval."

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Your AP team can then contact the vendor for a corrected invoice or manually apply the credit within the system before processing payment.

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Year-end reporting on outstanding deposits. Instead of manually compiling a list of uncredited deposits at quarter-end or year-end, the system maintains real-time visibility. Run a report showing all deposits older than 90 days, 180 days, or 365 days. See which vendors have outstanding credits, which deposits have been fully applied, and which require follow-up.

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Integration with ERP systems. For companies using NetSuite, Centime integrates with blanket PO and prepayment workflows to ensure deposit tracking synchronizes between systems. For Sage Intacct users, prepayment handling flows directly into the general ledger without manual journal entries.

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The automation doesn't just track deposits—it actively prevents the errors that manual tracking allows.

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Preventing Duplicate Payments When Vendors Don't Credit Advances

Even with the best vendor relationships, mistakes happen. The vendor's AR department doesn't communicate with their shipping department. The person who took your deposit is no longer with the company. Their system doesn't flag that your account has a credit balance.

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Here's how AP automation creates multiple layers of protection:

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Three-way matching that includes deposit history. Traditional three-way matching compares the PO, receiving document, and invoice. AP automation adds a fourth element: existing deposits or prepayments. Before approving payment, the system verifies that any deposits on record have been properly credited.

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Centime's invoice approval automation includes configurable matching rules that can require deposit verification for invoices above certain thresholds or from specific vendors.

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Automated alerts when invoice amounts suggest deposits weren't credited. The system learns your deposit patterns. If you typically pay 30% deposits on custom orders, and a final invoice comes in for 100% of the PO value instead of 70%, the system flags it as anomalous. The invoice enters a special review queue before anyone can approve payment.

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Approval workflows that flag potential duplicates. Centime's flexible invoice approval workflow can route flagged invoices to specific approvers who have authority to verify deposit application. For example, invoices where deposit math doesn't reconcile might require controller approval instead of standard AP manager approval.

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The system also checks for duplicate invoices based on vendor, amount, date, and invoice number—catching cases where a vendor accidentally bills twice for the same deliverable.

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Vendor communication templates for deposit application requests. When the system identifies an invoice that should have credited a deposit but didn't, it can generate a pre-formatted communication to the vendor: "Our records show a $15,000 deposit paid on [date] for PO #12345. Your invoice #6789 for $50,000 doesn't reflect this credit. Please issue a corrected invoice crediting the deposit, or confirm if the deposit was applied to a different transaction."

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This transforms the conversation from accusatory ("Why didn't you credit our deposit?") to collaborative ("Let's reconcile our records to ensure accurate payment").

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Manual payment recording with deposit notation. In cases where you've paid a deposit outside the system (wire transfer, check, etc.), you can mark invoices as paid manually with notation about the deposit. This creates the audit trail needed for later reconciliation.

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The goal isn't to catch vendor mistakes—it's to prevent your own payment errors before money leaves your account.

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Year-End Deposit Reconciliation Strategy

Even with automation, year-end requires a focused review of outstanding deposits. The difference is that automation makes this review take hours instead of days, and prevents most of the problems before they reach year-end.

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Reviewing outstanding deposits by aging buckets. Run reports showing deposits outstanding for:

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0-90 days (probably legitimate deposits awaiting final delivery)
91-180 days (may be legitimate for long lead-time orders, but require verification)
181-365 days (high risk—likely represent reconciliation failures or forgotten deposits)
Over 365 days (almost certainly require write-off or recovery action)

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For each aging bucket, you'll take different action. Recent deposits just need confirmation that the vendor hasn't yet delivered. Older deposits require active investigation.

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Determining whether to recover, apply to future orders, or write off. For deposits over 180 days old, contact the vendor to determine status:

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If the original order was fulfilled and invoiced, but the deposit wasn't credited, request a credit memo or refund. You have a legitimate claim to recover the overpayment.

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If the order was cancelled, review the original contract terms. If the deposit was refundable, request a refund. If non-refundable, consider whether the vendor will allow you to apply it to future orders. If neither, prepare to write it off.

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If the vendor claims they already credited the deposit but your records don't show it, conduct a transaction-by-transaction reconciliation. One of you is wrong. The system with better documentation usually wins this dispute.

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Tax implications of unreconciled deposits. Deposits sitting on your books as prepaid assets affect your balance sheet. When you write them off as unrecoverable, that becomes a deductible expense. Your accountant will want clear documentation of recovery attempts before authorizing write-offs. The audit trail in your AP automation system provides that documentation.

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Cleaning up deposit tracking for a fresh fiscal year. Before closing the books, resolve or reclassify every outstanding deposit. Don't carry forward unreconciled balances into the new fiscal year—they compound and become even harder to resolve.

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With proper AP automation, this year-end review becomes a verification exercise rather than an archaeological dig. You're confirming that the system's records are accurate, not rebuilding those records from scratch.

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Technical Implementation in Centime

For finance teams ready to move beyond spreadsheets, here's how deposit tracking actually works in Centime:

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Processing advance payments. When you need to pay a vendor deposit, create or import the deposit invoice as you would any other invoice. Use Centime's rapid coding to categorize it appropriately (prepaid assets, deposits, or advances depending on your chart of accounts). The payment is linked to the vendor record automatically.

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Applying credits to future invoices. When the final invoice arrives, use Centime's apply credits to invoices functionality to match the deposit against the balance due. The system calculates the net payment amount and maintains the audit trail showing both the original deposit and the final settlement.

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Tracking deposit status throughout the lifecycle. The vendor record shows all deposits, credits, and prepayments at a glance. You can see outstanding deposit balances without running reports or checking spreadsheets. When approving an invoice, this information is immediately visible to the approver.

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Reporting and audit trails. Generate reports showing:

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All outstanding deposits by vendor
Deposit aging analysis
Deposits applied in a given period
Vendors with uncredited deposits (potential duplicate payment risk)

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Every deposit payment and credit application creates an audit trail showing who processed it, when, what approvals were obtained, and how it was applied.

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NetSuite-specific workflows. For NetSuite users, Centime integrates with blanket PO and prepayment workflows to handle complex scenarios like blanket purchase orders with multiple draws against a prepayment balance. The integration ensures that deposit tracking in Centime synchronizes with vendor prepayment records in NetSuite.

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Handling exceptions. If a supplier invoice has been paid but still shows outstanding in Centime, the system provides troubleshooting steps to reconcile the discrepancy and ensure your records accurately reflect payment status.

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The technical implementation is straightforward, but the impact is transformative. You move from reactive reconciliation (discovering problems months later) to proactive prevention (catching issues before payment).

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Making the Shift: From Spreadsheets to Automation

The decision to automate deposit tracking isn't really about deposits—it's about whether your AP function operates strategically or spends its time on reconciliation archaeology.

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Consider what your AP team's time is worth. If your AP manager spends 12 hours per quarter reconciling deposits manually, that's 48 hours per year. At a loaded cost of $75,000 annually ($36/hour), you're spending $1,728 per year just on deposit reconciliation—and that doesn't count the duplicate payments that slip through, the vendor disputes that consume hours of additional time, or the year-end write-offs of unrecoverable deposits.

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For a company with 50 deposit transactions per year and a conservative 2% duplicate payment rate due to tracking failures (based on APQC's bottom-performer benchmarks), that's one duplicate payment annually. If your average deposit is $15,000, that's $15,000 at risk every year. Most companies eventually recover these overpayments, but not always, and not without significant effort.

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The ROI calculation is straightforward: automation eliminates 40+ hours of manual reconciliation, prevents most duplicate payments, and provides real-time visibility that turns year-end close from a nightmare into a routine verification.

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But beyond the financial return, there's a strategic benefit. When your AP team isn't buried in spreadsheet reconciliation, they can focus on supplier relationship management, early payment discounts, and cash flow optimization. Automation doesn't eliminate jobs—it eliminates the busywork that prevents finance teams from operating strategically.

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The Bottom Line

Vendor advances and deposits aren't going away. If anything, they're becoming more common as supply chains remain stressed (with lead times still 34% higher than pre-pandemic levels), custom manufacturing grows, and international suppliers require payment security.

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The question isn't whether you'll deal with deposits—it's whether you'll manage them with manual spreadsheets that introduce risk and require constant reconciliation, or with automated systems that prevent duplicate payments and provide instant visibility.

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Deposits are legitimate business practices. They help vendors manage working capital, secure production slots, and reduce risk. But they require proper tracking systems to work effectively.

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The hidden cost of manual deposit tracking isn't just inefficiency—it's real financial loss from duplicate payments, strained vendor relationships from reconciliation disputes, and year-end write-offs of unrecoverable deposits that were simply forgotten.

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Modern AP automation eliminates these risks without adding complexity. You gain visibility, control, and confidence that deposits are tracked properly from initial payment through final reconciliation.

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Your vendors get paid accurately. You avoid overpayments. Your team spends time on strategic finance work instead of reconciliation archaeology. And year-end close becomes a verification exercise instead of a month-long investigation.

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That's not just better AP process—it's better finance leadership.

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Ready to eliminate manual deposit tracking? See how Centime's AP automation handles vendor advances, prepayments, and deposit reconciliation without spreadsheets. Learn more about AP automation or schedule a demo to see deposit tracking in action.

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Managing Vendor Advances and Deposits in AP Automation

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