You may have received a check from your customer, but that doesn’t necessarily mean that the sale itself is finalized. If what you’re looking at is a partial or short payment, there’s a lot of work left for you to do. After all, if short-paid invoices aren’t properly managed, they can seriously impact your organization’s cash flow and become a drain on valuable accounts receivable (A/R) resources.
Unfortunately, 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. In this article, we’ll examine what it means to short pay an invoice, how those partial payments might negatively impact your organization, and what measures you can take to minimize their likelihood.
What is a short payment?
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 is a short-paid invoice. As such, since at least some of the funds tied to the sale have transferred to the seller, these accounts should be tracked and treated separately from those invoices with missed or non-existent payments.
A short payment can indicate that a customer is disputing a portion of the amount billed, but it may also result from a simple accounting error or other issue. Whatever the cause, your accounting team needs to address these issues quickly, as the longer the outstanding balance remains, the greater the chance it will go unpaid.
Why short payments occur
There are several reasons why you might be given a short payment, intentionally or unintentionally. For example, a customer may have an invoice dispute and wish to resolve it before paying the entire amount. Or, as mentioned above, a short payment may be an honest mistake — for instance, a customer’s accounting team simply keyed in the wrong amount when submitting payment to your business.
No matter the motivation, these reasons can commonly be sorted into one of two categories:
Valid reasons to short-pay invoices
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. Some of the more common instances include:
- Partial delivery: If a customer’s shipment arrives with damaged or missing items or if a service you’re performing remains unfinished, don’t expect a full payment.
- Invoicing errors: When an outgoing invoice includes inaccurate pricing or product totals, buyers will often correct those errors in their payments.
- Duplicate invoices: Sometimes the error isn’t within the invoice itself but within your broader A/R efforts, particularly if you bill more than once for the same sale.
- Overlooked discounts: Be sure that you don’t forget to apply any sales discounts or promotional credits to your outgoing invoices because your customers likely won’t forget.
- Tax issues: Not all customers are required to pay sales tax (e.g., a charitable organization), so be sure that you are properly calculating the appropriate obligations and fees for each purchase.
- Remittance confusion: Not all perceived short payments are actual short payments — misplaced or unclear remittance advice can undermine your cash application efforts, leading to confusion over which invoices are covered by a specific payment.
- Vague payment terms: When you draft your payment terms, be sure that they are easy to understand, or your customers might opt for a different interpretation.
Invalid reasons to short-pay invoices
A short payment is considered invalid if a customer is breaking a contract with a business by intentionally avoiding full payment of an invoice. These instances might look like:
- Insufficient funds: If your customer doesn’t have sufficient cash on hand to cover the payment, they may only cover a portion of the charge.
- Human error: If your customers use manual processes in their payment efforts, there’s a good chance that a transcription mistake or other unintended error can result in a short-paid invoice.
- Unearned discounts: Sometimes, a buyer will mistakenly believe that they are entitled to specific discounts that don’t apply to their purchase.
- Fraud: Less trustworthy organizations might only provide partial payments, hoping you’ll overlook the discrepancy or write it off as bad debt (assuming they can drag out the process for long enough).
How short-paid invoices impact businesses
Simply stated, short payments to your business reduce your revenue. And 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 accounts receivable reconciliation process.
For those companies relying on manual A/R 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 that takes valuable resources away from other activities.
How to handle short payments
Admittedly, the most straightforward approach to dealing with short payments is to prevent them from ever happening in the first place. Automating your A/R processes with software, like our Accounts Receivable Automation solution, can help reduce the number of errors that are common to manual
processes or disjointed workflows. With timely, accurate invoices being delivered consistently, you’ll leave your customers with fewer valid reasons to offer a short payment.
If a customer, however, fails to pay the full amount due or fails to pay an invoice entirely, your staff need to get to the bottom of the underlying issue as quickly as possible. The most straightforward method is to contact the buyer directly, usually via phone, email, or text. With our solution, we include self-service payment portals that empower end customers to address issues and submit disputes on their own. This two-way communication channel helps cut down the entire invoice-to-cash (I2C) cycle.
What is the difference between deduction management and dispute management?
When it comes to the actual investigation, you’ll want to vary your approach depending on whether or not the short payment was valid or invalid. Deduction management refers to those tools and strategies used to address what are presumably valid short payments, and they are handled by the same staff that manage your A/R. These reviews are fairly straightforward, predominantly exploring whether the buyer is legitimately entitled to a particular discount or some other consideration.
Dispute management, in turn, refers to the methodology used to investigate and resolve short payments that are atypical or suspected to be invalid. These efforts may be handled by a collections team external to your accounts receivable team, depending on the size of your organization. Unlike deduction management, these investigations will typically require additional documented evidence to prove or disprove the legitimacy of the dispute, such as records citing two different prices or photographs of the damaged shipment.
Whether a short payment is determined to be valid or invalid, resolving quickly is key for your business, which may be operating without all of the income it has legitimately earned.
6 best practices to prevent short payments to your business
As previously mentioned, your best option is to remain proactive and implement an automated accounts receivable (A/R) platform. With it, your business should be able to streamline and centralize workflows and reduce the errors that typically lead to unnecessary disputes. And by using a single, centralized portal for your customer communications, you can significantly streamline the process and eliminate time spent tracking it.
That being said, no matter what tool you’re using, you can apply the following best practices to reduce the number of short payments your business receives:
1. Put a consistent process for invoicing in place that includes effective procedures for following up with your customers
Beyond simply creating invoices, your billing solution should also include tools that streamline the dunning process. Our platform offers a Smart Chasing feature that automates follow-up communications related to outstanding bills, coordinating multi-channel touches to keep full and accurate payments at the front of your customers’ minds.
2. Implement a repeatable practice for reviewing your invoices for errors
Ideally, your solution will feature internal validation mechanisms that can detect and resolve potential invoicing errors before they’re ever sent to a customer. However, it’s also wise to routinely take the time to review and reevaluate the teams, technology, and documents involved in invoice creation.
3. Design and deploy a process for tracking invoice deductions that are valid (e.g., early payment discounts)
As a first step, ensure that you have clearly outlined the conditions of any potential discounts or deductions you offer and communicate them regularly to current and potential buyers. Similarly, your internal staff should be very familiar with any requirements. Finally, either introduce technology, like Invoiced’s A/R automation software, that can automatically apply these price reductions, or add review steps to your workflow to ensure that outgoing billing totals remain accurate.
4. Incorporate an engine for sales tax calculation in your invoicing workflow
Taxes can be complicated, especially if your customers operate in different countries or regions. Keep in touch with tax professionals to ensure you are collecting these government payments correctly, and, if possible, outsource the actual calculation and monitoring to your accounts receivable (A/R) technology.
5. Keep the lines of communication open to head off problems before they occur
If your customers feel they can easily get in touch with you, they are more likely to raise a concern or ask questions about their invoice before initiating a short payment. Of course, you may not have the staff available to keep in constant contact with all of your buyers, but if you give them the means to submit a dispute or clarify payment terms on their own, you can avoid a lot of confusion and frustration downstream.
6. Protect your bottom line by managing and mitigating credit risk
Any sale involving credit carries the risk of bad debt. However, by proactively researching and running credit checks on customers beforehand, you can avoid non-cash transactions with unreliable or questionable buyers. Of course, you may not have the resources to be this proactive for every transaction, but you can focus these efforts on new buyers or those customers with inconsistent payment histories.
Invoiced: Automate your accounts receivable to reduce short payments
What can streamlined, fully automated invoicing do for your business? Our Accounts Receivable Automation software can help you overcome the challenges associated with traditional billing processes, including short payments.
As previously mentioned, our Smart Chasing feature and self-serve payment portals help keep the lines of communication open, making partial payments less likely in the first place. And our automated workflows let you accelerate your I2P cycle while eliminating human-caused errors and freeing up your staff for more strategic efforts. At the same time, our robust reporting capabilities make it easy for you to identify process bottlenecks, spot payment anomalies, and track ongoing performance.
We’ve even updated our platform with the global payment capabilities of Flywire software, making it easy to conduct transactions and process relevant taxes and fees in 140 currencies. And when those payments are received, our CashMatch AI will route the funds to the appropriate customer accounts and invoices with minimal human involvement.
To find out more about the automated capabilities that can support each aspect of your invoicing operations, schedule a demo today.
Short Payment FAQs
What does it mean to short-pay an invoice?
To short pay an invoice means making a payment to a seller with funds that are insufficient to cover the full amount due on the relevant invoice. The cause for this partial payment might be due to disputes over the amount owed, simple oversight, errors, fraud, or several other reasons.
How do I fix a short payment?
As a seller, you’ll want to investigate the reason for the discrepancy and verify its validity. If valid, you will accept the given payment and close the invoice. If it’s invalid, you’ll need to communicate this fact to the buyer along with clear directions on how to pay the remaining balance fully.
What is an example of a short payment?
Consider this example of a short payment. Hal’s Hothouses is building a new location and orders 75 glass panels from Gary’s Glaziers. Unfortunately, due to shipping issues, 20 of the ordered panels arrived broken. Rather than paying for all 75 panels listed on the invoice, Hal’s Hothouses only pays for the 55 intact panels, resulting in a short payment for the invoice.
What is the meaning of short payment received?
A short payment received means the amount paid by a customer is less than the invoiced amount. This can happen due to disputes, discounts taken without approval, errors, or deductions for damaged or missing goods.
