Short Payment | B2B Finance Glossary
What is a Short Payment?
A short payment or short pay is a partial payment of an invoice. A short payment can happen for a number of different reasons, but not all of them are valid.
What Are Valid Reasons That Some Organizations Short-pay Invoices?
- The customer negotiated a payment plan with the collections team
- The goods and services did not arrive on time
- The products arrived damaged
- The customer earned discounts from earlier payments
- A discount was given to the customer that was not reflected in the pricing and invoicing system
What Are Invalid Reasons That Some Organizations Short-pay Invoices?
- Human errors
- The customer is short on cash and can’t pay the invoice in full
- The customer is exercising an unearned discount
- The customer is using a business strategy in hopes that the supplier will write off the short pay
What is Dispute and Deduction Management?
It’s important to recognize when a short payment is expected or unexpected. A dispute happens when a customer doesn’t pay the entire amount delineated on the invoice. When this happens, it’s essential that the AR department investigates the issue and resolves it as quickly and fairly as possible for both the customer and the supplier.
Dispute management is part of the AR team’s job to solve unexpected short pay. The team members will have to contact the buyer, find out why the buyer is making a short payment, and then decide whether or not the reason is valid.
On the other hand, deduction management refers to the strategies used for dealing with valid or expected short pay. This process allows your team to keep track of expected short pay, marketing deductions, sales rebates, early pay discounts, and other markdowns that have the ability to lower the amount that the customer owes. If the short pay is truly legitimate, it must be verified, and then the issue will be resolved.
How Can Companies Go About Resolving Short Payments?
Resolving short payments is a challenging process that traditionally requires time and sophisticated communication levels. To start the process, businesses usually send an email requesting that the remaining portion of the payment is made. This email should include the original invoice and any other documentation that is relevant to the amount due, a reminder of the original due date, any late fees that have now been added, a link to make a payment, or information regarding other acceptable payment methods, and contact information in case the customer has any questions.
If sending an email with the above criteria does not work, you might have to use more formal methods to resolve the issue. Depending on the amount owed and your relationship with your customer, you might turn to legal proceedings or sell the debt to a collections department.
How Can Companies Prevent Short Payments from Occurring?
Automating AR processes is the easiest way to prevent short payments proactively. By implementing automated payments technology, your business can reduce errors and unnecessary disputes more easily. Plus, this technology can easily integrate into your ERP system and allow you to streamline the time it takes to track down missing or short payments.
Additionally, there are some best practices that can be implemented to reduce the number of short payments your business sees. This includes implementing a system to check for invoice errors, creating a better practice for following up with customers who still have outstanding invoices, and designing a process that allows your finance team to better track and review invoices for any errors they might have.
How do Short Payments Impact Your Business?
Short payments can greatly reduce the revenue a company is scheduled to receive at any given time – directly impacting cash flow. Invalid short payments are especially problematic because they are not something the business is anticipating, and they can reduce the amount of income the company depends on at any given time.
In addition to negatively affecting revenue, short payments can create unexpected issues when it comes to reconciling payments with open receivables. Automated accounting software can help resolve these issues more easily than undergoing tedious manual processes. For example, repeatedly following up with customers takes a lot of time, focus, and energy, and trying to figure out why only a partial payment was made when the full amount is owed can be a complex process. Additionally, when AR team members find themselves in the middle of trying to resolve short payments, they are taking time away from other critical tasks.
That’s why choosing the right accounting software can make or break your finance department. If you’re ready to take your AR processes to the next level and prevent short payments from occurring, schedule a time to speak with one of our payment experts here today.