What is a Short Pay? Your Guide to Deduction and Dispute Management
Any credit, finance, and collections manager will tell you that short pays wreak havoc on every organization’s ability to manage time, resources and cash flow. There is no way to avoid short payments, and it can be difficult to manage them. Let’s take a few steps back and first understand what short pays are, why they happen, and how to reduce them. A short pay is a partial payment of an invoice which can occur for any reason. Short pays can happen when a buyer feels the contracted work or services has not been fulfilled, or they can be used as a stalling tactic to avoid paying the entire amount due.
So what else do you need to know about short pays in order to come up with a strategy to deal with them efficiently?
Why do organizations short pay invoices?
There are so many reasons to short pay an invoice, but most reasons fall into one of two categories – valid and invalid. Some of the legitimate, expected reasons include:
- A shipment of goods arrived damaged
- Not all goods or services were provided on time as agreed
- Trade promotions and other marketing discounts which are not listed in the invoice
- Sales discount extended to a customer that is not reflected in the pricing and invoicing system
- Earned discounts for early payment
- Payment plan negotiated with collections team
There are also buyers who will unexpectedly short pay invoices for invalid reasons, or reasons which were not agreed up by the supplier. Some of these may include:
- Buyer is short on cash and can’t pay full invoice
- Human error
- Unearned discount – taking advantage of an early pay discount after the deadline
- Buyer only pays some invoices, not all, and doesn’t provide complete remittance information, complicating the cash application process
- Payment tactic to manage cash flow
- Business strategy with the hopes that the supplier will write off the short pay
What is the difference between deduction management and dispute management?
The real question to ask is, are these expected short pays or unexpected short pays? While both of these strategies deal with short pays, they handle the two very different aspects of this time-consuming problem. Deduction management refers to the technology and strategies used for dealing with valid, or expected short pays, and will usually be handled by your accounts receivable (AR) team. Dispute management is the methodology you use for dealing with unexpected, invalid short pays, and will often be handled by a separate collections team, if your organization has one.
Deduction management is how your team keeps track of expected short pays, such as marketing deductions, sales rebates, early pay discounts, and other markdowns which would lower the amount owed by customers. Any short pays due to a legitimate, agreed upon deduction, falls within the terms of the buyer-supplier contract and doesn’t require much effort beyond a simple verification process.
Dispute management places a burden on your AR team to solve the unknown problem of unexpected short pays. At first glance, it appears that the buyer has decided not to pay the entire invoice for an unknown reason. Your collections team is now tasked with calling the buyer, finding out the reason for the short pay, and then tracking down information within your organization to figure out whether or not the reason is valid. For example, if the buyer claims a shipment arrived damaged, you’re going to have to track down documentation and evidence to support or refute that claim. Tracking data will allow your organization to identify trends (such as a shipping department quality control issue which can be resolved).
How do you resolve short pays?
The truth is, no business can ever get rid of short pays completely. The use of tactical strategies and the right technology can help any business create long-term solutions which reduce the number of short pays. If your organization is just starting to work on the short pay invoice issue, you’re going to want to take it one step at a time.
Our top 10 best practices for reducing short payments:
- Set the right expectations with your buyers, explaining the invoicing and payment process, including how you deal with short pays
- Send your invoices quickly using your customers’ preferred delivery methods
- Provide flexibility and allow your customers to use electronic payment methods
- Use deduction management software that allows your customers and collections team to use reason codes in order to explain short payments
- Track deductions and short pays so you can analyze data and make improvements that will yield long-term results
- Use an integrated cash application solution with dispute management features
- Improve communication with other teams within your organization, including marketing and sales
- Limit credit for customers who have not paid in full (unless short payment is valid and being resolved)
- Equip your accounts receivable (AR) team with tools and techniques to handle unexpected disputes, including clear terms and conditions
- Make sure you have your accurate customer data on file to ensure that they receive all communication
Want to know more about Short Pays? Click here to learn more!