What is a Short Payment?
Short payments occur when customers delay payment or express dissatisfaction. Handling them is challenging, but strategies like electronic invoicing and clear payment terms can cut issues. Streamlining payment processes and using automation can also help improve cash flow.
A short payment can occur for various reasons. It typically arises when a customer delays payment or expresses dissatisfaction with the delivered goods or services.
Handling such partial payments can prove challenging for the accounts receivable (AR) team. Since the total amount has yet to be settled, closing the invoice becomes impossible. Simultaneously, your team must follow up with the customer to collect the outstanding balance.
You can gain valuable insights by delving into the reasons behind short payments to enhance payment-processing best practices.
Why Should You Short-Pay an Invoice?
There are many reasons customers choose to send a partial payment. The list includes:
- Products were defective or damaged
- Services and goods were not delivered under contract terms
- Marketing discounts, sales tax exemptions, and promotions were applied in the invoice but not listed
- Early payment discounts were not applied to the invoice
- The customer is on a custom payment plan
- The buyer doesn't have enough cash for the transaction
- The customer wants to apply the early payment discount after the deadline
- The buyer is hoping you will write the payment off as bad debt
- Human error concerning the payment method, business details, or other required payment information
The AR and collections teams often balance customer relationships with capturing payments. To do that, it's essential to be fully aware of whether the short pay was expected.
Decoding Short Payments
Handling short payments often falls on the AR team. They often expect short payments when customers avail themselves of early payment discounts, sales promotions, or other deductions that reduce the invoice amount. Such instances are outlined in the contract agreement and do not incur any penalties.
But unexpected short payments present a different challenge. In such cases, the AR team must track down the customer and determine the non-payment reason and its legitimacy. Then they must document the complaint and request supporting evidence about defective goods or services. They need to assess the claim's validity and either agree or refute it, which consumes more time and resources. It is important to note that until the matter is resolved, the remaining payment won't be transferred to the business bank account.
Furthermore, unexpected short payments that transition into late payments can also result in penalties and late fees, per the stipulated payment terms.
How To Resolve Short-Pay Invoices?
Since expected short pay is rarely an issue and is covered by payment terms, AR teams focus on unexpected partial payments.
Resolving all unexpected short payments is impossible. However, they can be reduced by implementing a comprehensive payment strategy. The more unanticipated late payment cases your AR team handles, the more time they spend on repetitive administrative tasks.
Ways to minimize late payments, unexpected partial payments, and bad debt are:
- Using B2B Payment Automation and payment methods
- Offering various payment options
- Providing short-term payment plan options
- Drafting automatic follow-ups
- Including late fees and penalties in the payment terms
Short Payments Best Practices
Even with early payment discounts and digital transfers, not every client will send an immediate payment. However, you can ease your cash flow and decrease time spent on short payments by following these best practices:
- Be clear and concise about your payment terms in the buyer agreement.
- Send electronic invoices, ideally with a self-service payment portal, for a no-hassle customer experience.
- Offer more than one payment method. The more ways to pay, the more likely your customer will deliver faster.
- Use deduction codes to easily manage early payment discounts, promotions, and other legitimate reasons for short payments.
- Work with an ERP and payment integration that includes transaction dispute options.
- Limit credit to customers with a good payment track record.
- Implement a digital AR solution that captures data from the first invoice to payment collection.
- Create automated follow-up workflows.
- Generate receipts promptly—automation makes this a cinch.
Streamline Your Payments Strategy
Don't let short payments hold back your cash flow. A strong strategy and software can simplify your collections process, encourage quick payments, and cut unexpected short payments.
At Paystand, we provide your AR team with the necessary tools for success. Your team can increase earnings and track key metrics with our end-to-end AR automation, seamless customer experience, and ERP integrations. We also offer customizable collection plans specifically designed to handle short payments.
Discover the convenience of streamlined collections by booking a demo with our experts today.