What is a Short Pay? How To Handle Short Payments

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, including using AR software. 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?

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

Short payments can disrupt cash flow, strain supplier relationships, and increase administrative burdens. They can lead to:

1. Operational disruptions: Difficulty in budgeting and forecasting due to inconsistent cash flow.
2. Increased administrative costs: More time and resources needed for reconciliation and dispute management.
3. Potential legal and contractual issues: If short payments persist, it may lead to legal disputes or renegotiations of terms.

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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).

The truth is, no business can ever get rid of short pays completely. But the use of tactical strategies and the right technology can help any business create long-term solutions which reduce the number of short pays.

To mitigate the occurrence of short payments and ensure timely settlements, you need to come up with a strategy and set up processes so the occurrence of short pays happen less frequently. The key lies in prevention, where proactive measures are taken to address this issue effectively.

Efficient resolution of short pays requires a structured approach:

1. Identify the reason: Determine if the short pay is due to a valid deduction or an error/dispute.
2. Communicate with the buyer: Reach out promptly to clarify the issue and gather necessary information.
3. Document and verify: Maintain thorough documentation to support your position and resolve disputes.
4. Negotiate if necessary: Engage in negotiations to address any discrepancies and reach a mutually agreeable solution.

Our top 10 best practices for preventing short payments:

To avoid situations of short payments, consider this:

1. Invoice customers promptly and accurately. The sooner a customer receives an invoice, the sooner they are likely to pay it. Ensure that invoices are error-free, preferably using electronic invoicing and automation. Double-check all numbers and details to ensure accuracy and alignment with the agreed terms.
   
   AR automation software will give you the ability to invoice your customers quickly, and allow them to submit fast payments electronically. Best of all, because the payment and remittance information is linked together, your cash application process will be automated as well.
2. Clearly communicate payment terms. Establish an official invoicing policy that outlines acceptable payment methods, late fees, and penalties for delayed payments. This clarity helps set expectations with buyers and fosters a smoother invoicing and payment process, including how you deal with short pays.
3. Send timely payment reminders. Provide friendly reminders to customers a few days before payments are due. This thoughtful gesture serves as a gentle nudge and demonstrates your commitment to maintaining a strong business relationship.
4. Streamline payment processes. Offering convenient payment options, such as electronic funds transfer, encourages prompt payments and reduces the likelihood of short payments. Provide flexibility in payment methods, allowing customers to choose how they want to pay, including partial payments or payment promises in certain situations. You can use the technology to control which payments you will accept from customers, and when you will accept them.
5. Maintain open lines of communication. In the event of a short payment, promptly reach out to the customer to address the issue and find a resolution. Establish clear communication channels, including well-defined contracts, payment terms, due dates, and acceptable payment methods.
6. Resolve disputes and errors quickly. Have a well-defined process in place to swiftly handle any disputes or potential invoicing errors. Addressing these issues demonstrates professionalism and helps maintain a positive business relationship.
7. Track payments closely. Regularly monitor payments to identify any instances of short payments early on. This proactive approach allows for timely intervention and resolution. It will also help you make improvements that will yield long-term results.
8. Use software with deduction or dispute management features. This allows your customers and collections team to use reason codes in order to explain short payments.
9. Maintain flexibility with short payments. AR software empowers you to accept incoming funds or restrict such occurrences, ensuring you have control over your cash flow.
10. Use credit limits. For customers who have not paid in full - unless short payment is valid and being resolved - you can limit credit.

Prevention focuses on minimizing instances of short pay and maintaining a financially healthier environment.

Learn more about short pays by reading the Billtrust blog post, "Short pays: Why they happen and what you can do about them."

Implementing a robust deduction management system involves:

1. Integration with accounting software: Ensure your deduction management system integrates seamlessly with your existing accounting software for accurate tracking.
2. Regular audits: Conduct regular audits to identify any discrepancies and ensure deductions are applied correctly.
3. Training for staff: Provide training for your team on how to handle deductions and resolve issues effectively.

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