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What Is a Short-Paid Invoice? How To Handle Short Payments

Published on 6 min read

In this blog, you'll learn everything you need to know about short payments.

From what a short-paid invoice is, to the business impact of short pays, to how you can prevent unexpected short pays from happening and ensure your invoices are paid in full.

Illustrated invoice indicating a customer is electing to short pay an invoice

Today’s business-to-business (B2B) buyers expect to pay using a range of payment options. They may insist on paying using digital methods, making recurring payments, or satisfying multiple invoices with a single payment. A short payment is another option buyers may look for and even expect.

Submitting a short-paid invoice is a convenient way for customers to make payments while they dispute certain elements of their bill.

In this blog, we’ll discuss:

      What is a short-paid invoice?

      A short payment is a payment that is less than the invoiced amount. A short-paid invoice is an invoice that hasn’t been fully satisfied by the payment that was submitted.

      A short-paid invoice is usually an indication that the customer is disputing some portion of what you’ve billed them for. That dispute may be valid or invalid, but either way, it’s something that your accounts receivable (AR) team must deal with quickly and professionally.

      Leaving a short pay unaddressed for any period of time effectively provides your customer a no-interest loan at the expense of your company’s bottom line. This also increases the chances that the outstanding balance will remain unaddressed and end up permanently unpaid.

      Why do businesses short pay invoices?

      There are many good reasons why a customer might partially pay an invoice, and there are also less respectable motivations. Let’s call these reasons “valid” and “invalid.”

      Valid reasons to short pay

      Valid reasons to make a short payment usually relate to questions or disputes about items on the invoice. A customer might short pay because they disagree with an element of the bill and would like to resolve the discrepancy before paying for the full amount. For example, a shipment might arrive with missing or broken items.

      Another good reason to make a short payment is to correct an error on an invoice. Perhaps an invoice lists the same item twice, but the customer only ordered one. The customer could pay the invoiced amount minus the extra item, satisfying what they believe is their obligation for the transaction.

      One common error that AR teams make is charging sales tax to customers who are tax-exempt, whether it’s because they live in a state with no sales tax or they have tax-exempt status. In that case, the tax-exempt organization may exclude the tax from their payment.

      Another valid reason why customers might short pay is when they make an honest mistake. Customers that aren’t using electronic payment management may simply write or key in the wrong amount, resulting in a short-paid invoice.

      Invalid reasons to short pay

      Invalid reasons to short pay usually involve customers intentionally avoiding payment. A customer may short pay because they don’t have enough cash on hand to satisfy the full payment. Or, they might do it because they simply want to pay less than required and hope you won’t notice or won’t follow up on the short-paid invoice.

      The business impact of short pays

      The most obvious business impact of short payments is the reduction in revenue these underpayments result in. This is especially problematic for invalid short pays, as those underpayments represent income that your business can legitimately claim.

      But beyond the revenue impacts, partial payments also present challenges when reconciling payments with open receivables. Before today’s advanced AR software came online, the complexities of handling short-paid invoices were a major source of headaches for accounting teams.

      A lot of manual effort would be required to follow up with customers to figure out why a partial payment was made and track the follow-up process.

      This heavily manual process was cumbersome and would take accounts receivable professionals away from other important tasks. But with new tools that streamline and automate the handling of short-paid invoices, this process is now much easier to manage.

      What is dispute and deduction management?

      A dispute occurs whenever a customer doesn’t pay the entire amount they’ve been invoiced for, whether that means they neglect the entire invoice or only pay a portion of it. In both cases, there could be legitimate reasons for the lack of payment, and it’s the accounts receivable department’s job to get to the bottom of it.

      For instance, it’s possible that a customer did not receive a particular item or received it damaged. Perhaps a customer was quoted a discounted price but is being invoiced for the full amount. Perhaps the customer was mistakenly charged for an item they did not order or they are being charged with a late fee they feel is unjustified.

      The process of resolving these issues is called dispute or deduction management. AR teams must investigate an issue and resolve it with the fairest outcome for both the supplier and the customer. Resolving disputes quickly is essential because the longer a resolution takes, the longer the business goes without receiving the revenue in question.

      How to resolve short pays

      Resolving short pays can be a tricky and time-consuming process. Traditionally, it involves a lot of back-and-forth with the client over mail, email, and phone. When these efforts are unsuccessful, AR teams may need to opt for more formal dispute resolution.

      They say an ounce of prevention is worth a pound of cure, and that is certainly the case with short payments. Automating as many aspects of your accounts receivable process as possible will help reduce the number of errors and discrepancies that so often result in invoice disputes.

      Communicating with clients through a centralized online portal also helps streamline the process of inquiring about short pays and resolving disputes.

      Quick tip 💡

      Make sure that your invoicing solution or accounting software includes customizable deduction codes. This will require your customers to indicate the reason for a short payment via an approved list of options, which will help you reconcile short pays without the guesswork.

      Versapay’s collaborative AR automation software provides exactly that capability, helping you streamline the dispute and deduction management process.

      When your customers pay through the Versapay platform, they can elect to pay multiple invoices or make a short payment. When making a short payment, customers are required to give a reason and can leave a note—directly on the invoice—providing additional context.

      Best practices for reducing your volume of short payments

      Regardless of the tools you have in place, there are always tactical adjustments your AR team can make to reduce the volume of short payments you receive.

      While collaborative AR software will go the farthest toward reducing short pays, following these best practices will help reduce their frequency, no matter how you manage your receivables:

      • Use a consistent and reliable invoicing method, including a set follow-up procedure

      • Have a process in place to check invoices for errors

      • Have a process for tracking valid reductions such as early payment discounts, working closely with your sales team, and

      • Work with a reliable sales tax calculation engine to ensure you’re calculating correct sales tax figures.

      All of these best practices are easy to follow when you use a collaborative AR platform like Versapay. When paying through Versapay, your customers can pay multiple invoices at once, schedule and automate recurring payments, leverage credits, and pay with their method of choice.

      Learn more about how Versapay helps your accounts receivable team spend less time handling short payments and more time focusing on strategic work here.

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