If short paid invoices aren’t properly managed, they can seriously impact an organization’s cash flow and become a drain on valuable accounts receivable (AR) resources. However, there’s no way for a business to avoid short payments altogether, so having the right tools and strategies in place for managing them is crucial.
What are short paid invoices?
If a customer pays less than the total amount charged on an invoice, that payment is commonly referred to as a short payment and the invoice in question as a short paid invoice.
A short payment can indicate that a customer is disputing a portion of the amount billed but may also result from simple accounting error. Whatever the cause, it’s important for your accounting team to address the issue quickly; the longer the outstanding balance remains, the greater the chance it will never be paid.
Why would a business short pay an invoice?
1. Valid short payments
If a customer pays less than the total amount invoiced in an attempt to hold a business to previously contracted terms, that short payment is considered valid. For example, a customer may have an issue with a portion of a bill and wish to resolve it before paying the entire invoice amount. A shipment arriving with missing items, a double charge, or a sales tax incorrectly charged to a tax-exempt customer can all result in valid short payments.
Or, as mentioned above, a short payment may be an honest mistake—a customer’s accounting team may simply have keyed in the wrong amount when submitting payment to the business.
2. Invalid short payments
A short payment is considered invalid if a customer is breaking a contract with a business by intentionally avoiding full payment of an invoice. In these instances, a customer may lack the funds for a full payment or hope to get away with paying less for goods and services provided.
The business impact of short paid invoices
Simply stated, short payments to your business reduce your revenue. Invalid short payments are particularly frustrating since your organization has a legitimate claim to this income.
In addition, short-paid invoices create headaches during the AR reconciliation process. For companies relying on manual AR processes, addressing the issue is particularly taxing. Following up with customers to find out why invoices aren’t fully paid and tracking the effort is a time-consuming undertaking — and it’s one that takes valuable resources away from other AR activities.
But now, accounting practices are increasingly adopting AR platforms with sophisticated capabilities for managing short-paid invoices, and they’re reaping the benefits of automated, streamlined workflows.
How to deal with short payments
If a customer fails to pay a full amount, or fails to pay an invoice entirely, your AR operation needs to get to the bottom of the issue. Did the customer fail to receive an item? Was the customer charged full price for a discounted product or service? Did a customer get charged for an item twice? Or does the customer simply not want to pay the full amount charged?
Dispute management is the methodology used to investigate and resolve short payments that are considered invalid, and may be handled by a collections team external to an accounts receivable (AR) team. Deduction management refers to the tools and strategies used to address valid short payments and are usually handled by an AR group.
Whether a short payment is valid or invalid, reaching a resolution quickly is key for the business involved, which may be operating without all of the income it has legitimately earned.
Short paid invoice letters
So, how do you go about resolving short payments? It’s a tricky process that has traditionally required a significant amount of time and carefully considered communication. To begin, your business can send a professional email requesting the remainder of payment due. Best practices for this communication, often still referred to as a short paid invoice letter, include:
- Attaching the original invoice and other documentation relevant to the products or services provided
- Including a link to your payment portal (if applicable) and outlining other payment options
- Reminding the customer of the due date previously agreed upon
- Letting the customer know that late fees are accruing and including the amount to date
- Providing information for reaching the appropriate contact in your organization
Proactive upfront efforts to reduce short payments to your business
If your own communications with a customer fail to produce the desired result, your AR operation may need to look into a more formal means of resolving the issue. However, by implementing an enterprise AR platform, your business can automate processes and reduce the errors that often lead to unnecessary disputes. And by using a single centralized portal for your customer communications, you can significantly streamline the effort and eliminate time spent tracking the process.
And no matter what tool you’re using, you can apply the following best practices to reduce the number of short payments your business receives:
- Put a consistent process for invoicing in place that includes effective procedures for following up with your customers
- Implement a repeatable practice for reviewing your invoices for errors
- Design and deploy a process for tracking invoice deductions that are valid (e.g., discounts like early payment discounts)
- Incorporate an engine for sales tax calculation in your invoicing workflow
Automate your accounts receivable to best mitigate short paid invoices
Wondering what streamlined, fully automated AR can do for your business? Invoiced’s accounts receivable automation software helps businesses reduce the challenges they face in working with traditional AR processes.
To find out more about the automated capabilities that can support each aspect of your AR operations — like Invoiced’s powerful Cash Application system for quickly and automatically matching customer payments with invoices and balances – schedule a demo today.
