Short Paid Invoices: 5 Quick & Effective Ways to Handle Them, and More

Introduction

Dealing with short-paid invoices is a critical aspect of maintaining financial health and fostering strong client relationships. However, handling and resolving these invoices can be a tricky and time-consuming process that can take up a lot of your accounts receivable team time.

In this article, you’ll learn everything you need to know about handling these invoices and reducing short payments. And with a little effort, you’ll be equipped to address short-pay invoices easily and ensure your business financial system is functioning well. 

We’ll begin with the basics to ensure you understand everything about short payments. If you prefer, you can skip the basics and jump to the sections that catch your interest.

What is a Short-Paid Invoice and Why Do They Happen?

A short-paid invoice refers to an invoice that has been partially paid, with the payment received less than the total amount specified on the invoice. 

They happen because of mistakes or misunderstandings with invoices. When you receive a short payment, it might mean that your customers feel that the work or goods promised have not been fully delivered as expected.

They happen because of mistakes or misunderstandings with invoices. When you receive a short payment, it might mean that your customers feel that the work or goods promised have not been fully delivered as expected.

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Various factors can contribute to this situation, but some of the most common reasons that prompt organizations to make short payments include the following:

• Disputes: Disputes are unexpected short payments 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 you must 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 common 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.

Whatever the reason may be, your collections processes must incorporate a strategy for addressing short payments. Neglecting to do so can have detrimental effects on your cash flow, potentially burdening your accounts receivable team in the process as they are compelled to track down and resolve these inconsistencies in customer payments.

Recommended Reading: 5 Common Cash Flow Management Challenges and Their Solutions for 2023

How Do You Prevent Short Pay from Occurring?

There is no single solution that can prevent them, but there are a few ways that can help in reducing them. We’ll discuss five methods shortly. But first, let’s clarify what dispute or deduction management is, as it’s essential for resolving short-paid invoices effectively.

What is dispute and deduction management?

Dispute management comes into play when a customer fails to pay the full amount indicated on their invoice. It involves the process of addressing and resolving these payment discrepancies, commonly referred to as dispute or deduction management.

Recommended Reading: Understanding the Deductions Management Process

Teams responsible for accounts receivable (AR) must thoroughly investigate these issues and find a fair resolution that satisfies both the supplier and the customer. Timely resolution is crucial because the longer it takes to resolve a dispute, the longer the business must wait to receive the revenue in question.

Recommended Reading: 11 Deduction Management Trends Every Supplier Should Know About

Best practices for dispute management

Dispute and deduction management is a critical process in the Order-to-Cash (OTC) cycle. While disputes are common and sometimes inevitable, you can reduce their frequency by following these best practices:

1. Clarify Payment Terms: Review payment terms and policies before engaging with new customers.
2. Validate Purchase Orders: Thoroughly validate purchase order details, including pricing, quantity, and payment terms, to catch errors and discrepancies early, minimizing future dispute cases.
3. Timely Follow-ups: Maintain regular follow-ups with customers regarding past-due invoices. This proactive approach allows more time to address potential bottlenecks.
4. Utilize AI-Based Software: Consider leveraging AI-based deduction management software to expedite the resolution of disputes.

Why effective dispute management matters?

Inefficient deductions handling can have significant downstream impacts, including:

1. Working Capital Constraint – When a substantial portion of working capital is tied up in disputes, it poses a risk to your company’s profitability.
2. Escalating Operational Costs – AR teams often invest extensive time in manually collecting documents and coordinating across departments to validate details. This labor-intensive process hampers resource efficiency and diminishes productivity.
3. Rise in Invalid Write-offs – Invalid write-offs can severely dent your company’s financial performance.
4. Deteriorated Customer Experience – Many mid-sized businesses’ AR teams operate on an ad-hoc basis, leading to prolonged communication with customers. This delay in the deduction process can adversely impact the customer experience.

How Automation Benefits Deduction Management

Manual handling can make the accounts receivable dispute resolution process cumbersome and time-consuming. This labor-intensive process can significantly impact your outstanding receivables.

AR automation offers a solution to expedite the resolution process and reduce the need for manual intervention.

1. Accelerated AR Processing: Scalable automation tools like the RadiusOne AR Cash Reconciliation App can eliminate manual and repetitive tasks by identifying deductions at the source, such as short payments or overpayments, facilitating early resolution and faster recovery.
2. Enhanced Productivity and Efficiency: Automation streamlines dispute resolution with higher accuracy, saving valuable time and optimizing resource utilization.
3. Improved Cash Flow: A robust accounts receivable deduction management solution minimizes financial losses from disputes and enhances cash flow.

Unchecked, inefficient deductions management can significantly impact your company’s profitability. However, proactive dispute resolution is a step in the right direction to maintain a positive customer experience, reduce risks, and improve revenue.

Tips for Reducing Short Payments

To reduce short payments, it’s essential to manage your collections well. By maintaining a proactive approach to collections, you can significantly reduce short payments and improve your cash flow management.

Here is how to do that:

1. Be clear with your 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.

2. 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.

3. Use an eInvoicing solution with a 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.

4. Utilize reporting tools to uncover patterns and solutions: Reporting tools are invaluable for detecting trends in short payments and monitoring all dispute and deduction cases. 

   Additionally, they enable you to pinpoint customers who consistently make short payments. Share these insights with your customer service and sales teams to effectively address the issue of short payments.

5. Establish tolerance thresholds: It’s essential to define tolerance levels for acceptable short payments, especially with customers who may be prone to delinquency. This practice helps deter regular short payments.

   Nevertheless, it’s equally important to safeguard your business relationships. You can strategically enhance these relationships by:

   1. Crafting explicit payment terms and policies.
   2. Managing payment methods and timing.
   3. Restricting credit unless a valid short payment issue has been declared and resolved.

   While short-paid invoices are a common challenge for every business, proactive preparation significantly mitigates revenue loss. Vigilant monitoring of short-paid invoices stands out as one of the most effective strategies to minimize losses, ensuring a consistent cash flow and a robust balance sheet.

How HighRadius Can Help Resolve Short Pays and Disputes Faster

Implementing the tips covered above and using the right tools to detect and resolve 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 deduction management process and strengthen customer communications.

FAQs

1). How do you inform a customer about a short payment?

To inform a customer about a short payment, prepare a clear and polite message outlining the discrepancy, providing payment details, and offering assistance. Maintain professionalism and document the interaction for record-keeping and follow-up, if needed.

2). How do you handle short-paid invoices?

Handling short-paid invoices involves promptly identifying the discrepancy, informing the customer, and facilitating resolution. This includes clear communication, offering payment instructions, and documenting the process for effective accounts receivable management.

3). How to write a short payment letter?

To write a short payment letter, ensure you mention the specific invoice or transaction, explain the shortfall, and provide clear payment instructions.