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5 Best Practices for Reducing Short Payments in Accounts Receivable

What you’ll learn


  • Learn the key factors that contribute to short payments
  • Explore steps for a smooth and hassle-free deduction process

Cash flow is the lifeblood of every business. Yet, many organizations place blind faith in their customers when it comes to accounts receivable. This often leads to cash flow woes and inadequate working capital.

One of the biggest challenges organizations face today is poor payment practices by their customers. And, short payment is one of the most serious issues that the receivables team faces quite frequently.

Short payments occur when customers underpay their invoices, i.e., customers remit less payment than the actual invoice amount. This can happen for a variety of reasons, both legitimate such as excess invoice amount due to invoicing errors or invalid such as deliberate underpayment, leading to an unauthorized deduction.

To tackle the problem of short payments, it is imperative that organizations come up with well thought out strategies. In this article, we look at reasons for short payments as well as suggest best practices that can help tackle this issue.

Why do short payments happen?

The reasons why customers make short payments can either be legitimate (e.g. delay in delivering the product/service) or unanticipated (e.g. cash flow problems for the client). Whatever be the reason, short-paid invoices disturb the smooth functioning of your accounts receivable department. Your AR team is compelled to track down and resolve these inconsistencies in customer payments.

Some of the most common reasons that prompt organizations to make short payments include:

  • Disputes
    Disputes are unexpected short pays made by the customer if inefficiency is observed at the supplier’s end. For example, a customer might refuse to pay the full invoice amount if there was a delay in the delivery of service/products or if the invoice charged them for items that they didn’t order.
  • Earned discounts
    Organizations often offer “early pay discounts” to their customers. The customer earns such discounts if the payment is made before a predetermined date. However, if not recorded properly, the payment may look like a short pay.
  • Tax exemptions
    Some industries have tax exemption benefits (e.g. sales tax exemption). In such scenarios, the customer usually informs about their exemption before placing the order or before the invoice is generated. If your customer forgets to inform you of this, they may deduct the tax amount from the invoice and then make the payment. If this is the case, then it is important that you collect and audit their tax-exempt certificate.
  • Cash flow strategy
    Sometimes customers find it difficult to pay invoices in full due to an unfortunate cash crunch. However, some businesses may also use disreputable practices such as deliberately paying less than the invoice amount as a strategy to keep their companies afloat. These organizations practice this on every single invoice and hope that the suppliers write off the shortfall as a loss.
  • Marketing discounts
    A common practice followed, especially in the CPG industry, is to offer discounts to customers in exchange for product promotion support (trade promotion). You may fail to account for credits that customers earned through a referral program or a promised deduction when preparing the invoice. These can also lead to short payments.
  • Human error
    One of the most innocent reasons for short pay is human error. It happens, especially when organizations use manual invoicing and payment processes. These errors rarely occur when the organization uses electronic invoicing and payments along with a customer portal.

How do you eliminate short pay?

Short payments are inevitable. What you can do, however, is to reduce the frequency of partial payments by following certain business best practices. The next section covers a few best practices that you can follow for a smooth and hassle-free deduction process.

Best practices for reducing short payments

  • Use modern deduction management solutions
    Traditional ERP systems or accounting software do not always help correctly identify deductions. Using a modern accounts receivable solution with deductions management features will efficiently help detect and track the different types of deduction codes. With customizable deduction codes, you will be able to reconcile valid short-paid invoices faster.
  • Use an eInvoicing solution with payment portal
    Another method is to introduce your customers to an EIPP solution. It will provide your customers the flexibility to make electronic payments and also choose the appropriate deduction code at the time of payment. Once your customers make the payments, the application will ensure the invoices get coded with the appropriate deductions and discounts.
  • Identify patterns and find a solution
    Reporting tools help you identify short pay trends and track all disputes and deductions. You will also be able to identify customers who are in the constant habit of making short payments. Share these insights with your customer service and sales teams to address the issue of short payments.
  • Effective communication
    Always make sure that customers are communicated about the payment terms ahead of time, including the consequences of short pay. Make sure that all the interactions with the customer are documented to help settle any potential disputes. Also, ensure that your AR team is in sync with the other departments in your organization like marketing and sales. Effective communication can prevent many of the payment problems that businesses face.
  • Set tolerance limits
    You must set tolerance levels around acceptable short pays, especially for potentially delinquent customers. This ensures that your customers don’t regularly make short payments. However, you must also take care to ensure that your actions do not damage business relationships. You can strategically improve the relationship by:
    • Creating clear payment terms and policies
    • Controlling the mode and time of payment
    • Limiting credit unless short payment is declared valid and resolved.

    What does HighRadius offer?

    Implementing the best practices discussed above and using the right tools to detect and resolve valid deductions will help you reduce the number of short-paid invoices and optimize cash flow.

    Autonomous solutions, such as HighRadius’ cloud-based AR solutions will help you standardize your AR process while serving as a platform for cross-departmental collaboration. Our solutions offer features such as automatic deduction correspondence, deduction codes, backup document capture, collaboration channels, and approval workflows to streamline the deductions management process and strengthen customer communications.

    Conclusion

    Every business is plagued by short-paid invoices, but the better prepared you are to deal with them, the lower your revenue loss will be. A strict check on short-paid invoices is one of the most efficient ways to reduce losses and ensure a steady cash flow and a healthy balance sheet.

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    HighRadius Integrated Receivables Software Platform is the world’s only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway – covering the entire gamut of credit-to-cash.