Short payments are inconvenient. They disrupt the accounts receivable process and require investigation on the part of AR representatives.
Unfortunately, they are also a problem that every accounts receivable department will have to deal with at some point. When that happens, it’s important to have a plan in place so that you can quickly resolve the issue and minimise the impact on your cash flow.
What is a short payment and why does it happen?
A short payment occurs when a customer underpays their invoice. There are various reasons a customer may not pay the full amount of an invoice, some of which are valid and others which are not.
Here are some of the most common and legitimate explanations your organisation is likely to face:
- Disputes - A portion of the invoice is disputed, and the customer would like the issue resolved before paying the full amount. A variety of causes may lead to a dispute. For instance, the customer may have received a damaged shipment, there may have been delays in delivery, or the customer may have been billed for items that they didn’t receive or order.
- Tax exemption - A customer may underpay a bill because they were charged sales tax but qualify as tax exempt. This could be because they live in a state with no sales tax or have tax-exempt status.
- Discounts – Some organisations offer a discount for customer behaviors, such as early payment. If improperly notated, it may appear that a customer short-paid an invoice when they pay the discounted amount. This can also occur if the customer was offered some other form of discount which was not properly recorded on their account.
- Human Error – At times, a short payment may simply be the result of human error. This is particularly true for customers who manually process their accounts payable. A simple keystroke mistake or typo could result in the payment amount being wrong.
While the above are legitimate reasons for a customer’s short payment, there are also occasions when a customer may withhold full payment as a deliberate practice. At times, a customer may short pay an invoice as part of a cash flow management strategy, choosing to pay less than the full amount to minimize their outflow of money. It is also possible that a customer does not have the cash on hand to cover the payment, or that they are simply hoping that your accounts receivable team won’t notice the discrepancy.
Feature Resource: Customer Dispute Toolkit
How do short payments impact your business?
The most immediate impact of short payments is a disruption of cash flow and a reduction in revenue. This can become problematic if financial decisions have been made around your accounts receivable forecast.
A secondary complication can be the amount of work that a short payment causes for your accounts receivable team. This is especially true if your team is using manual processes for AR. Each instance complicates the cash application process, and AR representatives must research the reason for the short payment and then track the process until it is resolved.
How to resolve short payments
Once a short payment has taken place, your team will need to communicate with the customer to find out the cause and come up with a workable solution. This typically involves frequent communications via email or by phone, as well as combing through customer records.
One of the first steps typically taken is sending a short-paid invoice letter. These communications should include:
- A copy of the original invoice, alongside any additional supporting documentation
- Instructions on how to quickly remit payment, including a link to a payment portal if available
- A reminder of the previously agreed-upon due date for the invoice
- Information on any late fees that may have been applied
- Relevant contact information in case of any additional questions
Depending on the nature of the short payment, you may also need to begin a formal dispute resolution process. All of these can be time-consuming operations, particularly if your accounts receivable is handled through manual processes.
The simplest way to solve short payments is to take steps to minimise how often they occur.
➜ Make Short Payments A Breeze With The “Customer Dispute Toolkit”
Preventing short payments
There are several practical steps that your team can take to reduce instances of short payments. These best practices include:
- Look for patterns – by tracking all dispute-based short payments, your team can detect potential patterns and common problems. Once identified, these issues can be addressed with customer service, logistics, and other stakeholders to fix the issue. If the problem is tied to one specific customer, your team can look at stricter payment terms, such as requiring payments upfront or extending less credit.
- Consistent invoicing method – establish a routine that all invoices must follow to minimise variation and potential errors. This includes a follow-up cadence. Utilising collection templates can make this process easier.
- Track valid deductions – work with your sales team to create a regular process for tracking valid deductions, such as a discount for early payment.
- Use a tax engine – adopt a tax engine that will integrate with your ERP to accurately calculate sales tax or omit it in locations or for organizations where it does not apply.
Automate the Payment Process
Adopting an automation solution in accounts receivable can also help minimise the frequency of short payments.
Software such as Quadient AR allows customers to make payments through a customer payment portal that provides full visibility into their open invoices. Using the software, they can also make a promise to pay and apply available credits directly to an invoice.
The solution also allows customers to ask questions and/or raise disputes, which are then assessed via machine learning and AI technology and directed to the relevant team member for speedy resolution.
With an unlimited set of users, Quadient AR allows all stakeholders in the payment process to gain visibility into accounts, meaning departments such as accounts receivable and sales can better coordinate and ensure the legitimacy of deductions and the accuracy of invoices.
Not only do each of these features help minimize the likelihood of short payments. They also facilitate faster resolution when and if they do occur.
