5 Best Practices for Reducing Short Payments in Accounts Receivable

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

• 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.