Short Pays: Why They Happen and What You Can Do About Them
Short Pays, or Short Payments are when customers underpay their invoices. This can happen for a variety of reasons, all of which hinder your company’s cash flow. Whether the reasons are expected (such as a known manufacturing delay) or unexpected (due to a customer cash flow problem), these short payments can cause your accounts receivable department to get stuck in the weeds while they identify, track down and resolve these inconsistencies. And while, yes, overpaying an invoice can also throw off balances, it occurs much less frequently than you might expect.
Understanding why your customers aren’t paying their invoices correctly and knowing how to deal with this when it does occur will help you avoid this wrench thrown into your A/R process.
Why can’t customers pay the right amount?
There are many different reasons why a buyer will short pay an invoice, and these fall into two general categories – valid and invalid. A valid short pay is for a legitimate reason, and it shows the customer holding the supplier to the terms of the contract. An invalid short pay is one in which the buyer is breaking the contract, and not paying even though the goods/services were delivered in a timely manner. The following list will explain some of the real and the unexpected reasons customers give for short pays.
If a customer disagrees with the invoice and believes that the full service or products were not delivered in the specified condition and on time, they can argue that they should not be required to pay the full amount listed on the invoice. Examples of valid disputes include mistakes such as receiving damaged products, delivery of goods later than the delivery date, or receiving an incomplete or wrong order. Invalid disputes might include a buyer stretching the truth about delivery mistakes or changing their mind after the order was placed and in transit. The burden lies with you, the supplier, to research the issue, determine if it’s a valid dispute which needs to be rectified, or an invalid dispute, which needs to be resolved through collections.
It’s common for organizations to offer their customers “early pay discounts” for paying their invoice within a specified amount of time. If a customer pays by the due date may and includes the earned discount, the payment may look like a short payment, but is not. Some customers may attempt to take an unearned discount by including the early pay discount in late payments which do not qualify for it.
Chances are your invoicing software automatically charges sales tax for your customers, but sometimes organizations have a tax-exempt status. That short-paid invoice is actually a mistake on your end. Depending on your accounting software, you may be able to include a non-profit designation or a tax-exempt deduction code which will make closing invoices easier. If not, you’re going to have to deal with these short pays manually.
Cash flow strategy
Short-paid invoices are also used as a business strategy to keep companies afloat. Sometimes your customers can’t pay your invoice in full because they don’t have the cash on hand. Instead of working out a payment plan with you, they simply submit partial payments in order to keep you confused and working overtime. Other companies have an unofficial policy to short pay every single invoice in order to manage cash flow. These organizations hope that suppliers like you can’t track their short pay properly, and will just write off the shortfall as a loss. These strategies may be unethical, and it’s up to your organization to develop policies and contract terms to protect against them.
Marketing and trade promotion discounts
One of the most common use of discounts and deductions in retail and consumer packaged goods are the use of trade promotions to promote products. Suppliers will discount goods and services for buyers in exchange for marketing help, such as advertising, promotions, and end cap placement.
Oops! Short pay mistakes
Every now and then a short pay is simply an innocent mistake. It happens, especially when manual invoicing and payment processes are being used. These errors rarely occur accidentally when electronic invoicing and payments are used with an EIPP portal.
The best ways to handle short pays
There is no one single solution that will resolve and prevent all short pays from occurring, but there are lots of smart strategies you can use together in order to lessen their impact on your organization. Automation, data analysis, and other best practices will help you reduce the number of short pays and open invoices in order to keep your A/R team running more smoothly.
Deduction management software
Your best bet is to start with an invoicing solution or accounting software with customizable deduction codes that will help you reconcile open invoices with short pays faster.
Automate, automate, automate
Even better – choose an automated EIPP solution that allows your buyers to pay electronically and use deduction codes which will give you information about their short payment. This type of A/R automation software will give you the ability to invoice your customers quickly, and allow them to submit fast payments electronically. Best of all, because the payment and remittance information is linked together, your cash application process will be automated as well.
Instead of struggling with difficult customers who don’t like to pay on time or in full, you can strategically improve the relationship by setting a series of strategies and technologies:
- Create clear payment terms and enforce your policies
- Use technology to control which payments you will accept from them, and when you will accept them.
- Use a solution that will allow you to manage customers’ automatic payment settings to reduce short pays from customers who are likely to submit unexpected short pays.
These strategic decisions will allow you to avoid customers who try to “game the system” and keep honest, loyal customers happy.
Reporting tools can help you identify short pay trends by reporting on short payment (and overpayment) results to help identify customer service issues as well as allow you to identify customers who continually try to “pull one over on you.” Analyzing this data and passing it on to your sales and billing teams to address the root cause can cut down on these short pays in the future.
Moral of the story? Don’t be lackadaisical when dealing with these sort of annoyances. But also, certainly don’t feel like it’s out of your control, either. With a few policies in place, you can minimize the havoc and lost money that short pays and unrecognized deductions can bring.
Speaking of automation…
Want to learn more about how a Billtrust automation solutions can work for you, even if you’re in the middle of an ERP overhaul? Take a look at the solutions Billtrust offers.