Hi Everyone! 

It’s Hector and over the past couple of months I’ve been hearing from you regarding more than the usual share of short pays on your invoices. Let me take a moment to recap the Short Pay problem and offer some solutions. 

Short Pays, Short Payments or Deductions are when customers underpay your invoices. This can happen for a variety of reasons, all of which hinder your company’s cash flow. Whether the reasons are expected (such as a known manufacturing delay) or unexpected (due to a customer cash flow problem), these short payments can cause your accounts receivable department to get stuck in the mud while they identify, track down and resolve these glitches. Understanding why some customers aren’t paying invoices correctly and knowing how to deal with them will help you reduce your A/R process from getting bogged down. 

Disputes – There are many reasons why a customer will short pay an invoice, and these fall into two major categories – valid and invalid. A valid short pay is for a legitimate reason, and it shows the customer holding the supplier to the terms of the contract. An invalid short pay is one in which the buyer is breaking the contract, and not paying in full even though the goods and services were delivered according to all the terms and conditions. 

If a customer disagrees with the invoice and believes that the completed products and services were not delivered as per agreed terms, it’s a valid excuse. Examples of valid disputes include: 

  • damaged products
  • late delivery
  • Incomplete or wrong order

Invalid disputes usually include a customer stretching the truth about product quality, delivery lateness, or customer service issues. One of the strongest pieces of confirmation supporting any claim by the customer of a mistake will be the timely communication and paper trail in having reported the issues to the appropriate individual(s).

Early pay discounts – It’s common for organizations to offer their customers “early pay discounts.” If a customer pays by the early due date then they can rightfully take the discount. However, some customers may attempt to take an unearned discount for payments that do not qualify for it. Sometimes the check or wire remittance may come in a few days or even well after the early due date but still before the established due date, putting the company in a little bit of a quandary. Do they accept the short payment or do they go back and request the additional 1-2% discount? It probably comes down to a case-by-case situation. 

Payment strategy – Sometimes your customers can’t pay your invoice in full because they don’t have the cash on hand. Instead of confirming a payment plan with you, they simply submit partial payments, of any size, in order to keep you entangled in managing their balance due. Not surprisingly, other companies have an unofficial policy to short pay every invoice in order to manage cash flow. These businesses hope that suppliers will eventually just write off the shortfall as a loss. However, it’s up to you to firmly set the ground rules the first times this happens. 

Honest mistakes – From time to time a short pay is simply an innocent mistake. It happens, especially when manual invoicing and payment processes are being used. These errors occur much less when electronic invoicing and payments are set up properly from the beginning. 

There is no one single solution that will resolve and prevent all short pays from occurring, but there are lots of effective strategies you can use together in order to lessen their impact on your organization. Automation, data analysis, and other best practices will help you reduce the number of short pays. In addition:

  • Create clear payment terms and enforce your policies.
  • Use technology to control which payments you will accept and when you will accept them.
  • Use a solution that will allow you to manage customers’ automatic payment settings to reduce short pays from customers who are likely to submit unexpected short pays.

These guidelines and methods will hopefully help you to manage or even avoid customers who try to “game the system.”

Hector the Collector is a credit, collection, and human resources advice column by Nancy Seiverd President CMI Credit Mediators Inc. Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!

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