How to Handle Short-Paid Invoices
Short-paid invoices are a challenge that every business owner faces. They can cause a lot of trouble and disorganization in accounts receivable.
Fortunately, there are some easy ways to manage short-paid invoices that can help you reduce the adverse effects they have on your business.
This article will go over:
- Possible reasons for short pays
- How to manage them
- How to avoid them in the future
Let’s jump in.
Why Short Pays Happen
There are quite a few reasons why a customer might pay less than the total amount due.
It is up to you to identify that reason.
Once you have identified the cause, you can start trying to fix the problem.
Valid Reasons for Short Payment
Sometimes, the customer is right in paying less than the full invoice amount.
For example, they might believe that you, the business, have not held up your end of the contract.
Or, maybe someone from your company offered the customer a discount but failed to notify you.
Here’s a list of potentially valid reasons for short invoice payments:
Disputes
A business can dedicate much time and effort to delivering the best customer service and quality products but fall short due to employee mistakes, vendor mistakes, or uncontrollable circumstances.
In these instances, a customer may not believe that it is right to pay the full amount. They then dispute it by not paying the amount due.
A customer might also refuse to pay the full invoice amount if the goods or services were not delivered on time or if they were billed for things they didn’t order.
Sometimes, the customer will explain their reasoning in a formal verbal or written dispute. Sometimes they do not, and you will need to reach out to rectify the issue.
Early Payment Discounts
If you offer a discount to your customers for paying the full invoice amount ahead of the due date, the customer may have deducted that discount from their invoice.
If the customer has in fact met the terms of your early payment discount program, their short-paid invoice is valid.
Tax Exemptions
Usually, a customer will inform you that they have a sales tax exemption before sending them a purchase order or invoice.
If your customer has a tax-exempt status but did not inform you of this until after receiving the invoice, they may short pay by deducting the tax from the invoice amount.
If this is the case, it’s crucial that you collect a tax-exempt certificate from them, or you may be liable if you are audited. Read more on how to handle sales tax exemptions here.
Promotions
There may also be times when you fail to account for a promotion-related deduction you promised a customer.
For example, maybe they planned to cash in credits they earned through a referral program, but their invoice didn’t include the discount.
Agreed-Upon Payment Plan
At times, a short paid invoice is simply due to terms agreed upon beforehand but not reflected in the invoice.
Invalid Reasons for Short Payment
Invalid reasons for short-paid invoices are when the customer breaks the contract due to no fault on your end.
Disputes
Unfortunately, some customers will dispute a perfectly good delivery of a product or service.
This could simply be due to the customer changing their mind after goods or services are delivered or already in transit.
Some customers may also try falsifying information about the goods or services to receive a deduction.
For this reason, it is essential to follow up on any customer dispute and get documented proof of the claims.
Not only does this prevent you from losing hard-earned money, but if the complaint is indeed valid, it can help you identify the cause of the problem.
Unearned or Invalid Discounts
Your customer may be confused about the terms of a particular discount. Perhaps they think they’re eligible for an early discount, or maybe they’re applying an expired promotion to their invoice.
Whatever the case, you may have to tell the customer that the discount isn’t valid.
Lack of Cash
Trying to stay afloat, your customers may not pay their invoice in full due to a lack of cash flow on their end.
As a business owner yourself, you understand that cash flow situations arise. However, you have your own accounts payable, and you need their payment to keep your cash flow in the green.
For some businesses, it’s just lousy company policy to short-pay their invoices, hoping that you’ll be appeased with a partial payment.
Related Reading: Understanding Incremental Cash Flow vs. Total Cash Flow
Innocent Mistakes
Your customers are human, and mistakes happen, but innocently short-paid invoices still need to be rectified.
How to Handle Short-Paid Invoices
How you handle short-paid invoices depends on whether they’re valid or invalid.
How to Handle Valid Short Invoices
If a customer has a valid dispute with their invoice amount due to a mistake on your end, the obvious resolution is to rectify the problem.
Talk to the customer to find out what you can do to correct your company’s mistake. Work with them to come to a mutual agreement.
For example, if they received an incomplete order, they may want a discount in addition to the missing product. It’s up to you whether you want to grant them a discount to compensate them for the inconvenience.
You should also take measures to prevent mistakes from happening again in the future.
For example, if they’re upset about a late delivery, you may want to grant them a discount even if the fault is on the delivery company. But, you should also contact the delivery company to file your own dispute and work with them to figure out how you can prevent similar problems from occurring again.
Deductions vs. Disputes
Even within the realm of valid short-paid invoices, there are two distinct categories:
Deductions and disputes.
A deduction is a form of short payment that’s expected or agreed upon ahead of time. This includes promotions, early payment discounts, and sales rebates that a customer can write off their invoice.
These types of invoices are the easiest to fix, as the customer is typically entitled to the discount they deducted. All you have to do is update your accounts receivable to reflect the deduction.
Disputes are unexpected short pays made when a customer argues that full payment should not be made based on a lack on your end.
In these cases, you may have to negotiate with the customer to come to an agreement you’re both happy with.
How to Handle Invalid Short Invoices
If you can’t validate a short-paid invoice, you need to gather evidence to dispute the payment.
With documented proof that the invoice is valid, contact the customer and request full payment.
Email is the best way to contact your customers, as it creates a record of your correspondence. This will be helpful if you have to pursue legal action at some point.
If you don’t receive a response from your emails, call them directly to discuss the matter.
How to Write a Short-Paid Invoice Letter
Going after a short-paid invoice can feel uncomfortable, but a late payment for services rendered can take its toll on your business’s financial health.
To ensure the success of your business, you may need to chase after these missing invoice amounts.
As explained above, the first step is to send a professional email to the customer requesting that they pay the remainder of the invoice due.
This website has a few email template examples to help you write your payment request letter and even breaks it down for you sentence by sentence.
Be sure to attach the original invoice and the documentation of the services provided. Include copies of any contracts or payment terms.
To make the payment process as easy as you can for them, include a link to your payment portal and explain all other payment options.
Remind the customer of the agreed-upon due date. Inform them that they are incurring late fees, including exactly how much and how often these late payments are added to the invoice.
Add your direct contact information so they can call you and, as always, be professional and courteous.
Related: How to Keep Track of Payments Received
How to Prevent Short Pays in the Future
While there’s no guaranteed way to eliminate short-paid invoices, you can cut down the frequency of partial payments by implementing certain business practices.
Use an Accounting Software With Good Deduction Management
Accounting software with different codes for different types of deductions can help you resolve valid short-paid invoices.
It’s best to find a program that allows you to customize the deductions to fit your needs. This can automate the correction of invoices simply by adding the deduction code to the invoice number.
In other words, the invoice won’t appear as “short” because your software accounts for the deduction ahead of time.
So, if your current accounting software does not offer deduction management features, it may be time to upgrade.
Use an Electronic Payment and Invoicing System
Another way to automate invoice deductions is to provide customers with a code to enter at the time of payment using an electronic invoice presentation and payment system (EIPP).
These electronic systems also allow you to set terms that won’t accept partial payment if you so choose. Learn more about what an EIPP can do for your business here.
Related: Simple Small Business Solutions You Actually Need
Identify Patterns and Find a Solution
Track all dispute-based short pays to identify common problems, then find solutions to those problems to cut down on the number of short pays you encounter.
Discuss the issues with your customer service team, logistics department, and managers to get more insight into how to fix the cause.
If one customer has a habit of paying less than their total, you can define stricter payment terms with them, such as requiring full payment upfront or extending a limited amount of credit.
Good Communication
Good communication can prevent many of the invoicing problems that businesses face.
As always, be sure your customers are aware of the payment terms ahead of time, including the consequences of short pays.
Document all communication with the customer and the agreed-upon payment terms to help settle any potential disputes.
Internal communication within your organization is also essential. If you stay abreast of the current issues that your team is facing, you may be able to resolve issues before the invoice is overdue.
Here’s another article that might be helpful for you: How to Recover Lost Revenue Through Freight Audits
Short-paid invoices are a reality that all businesses face, but the more prepared you are to deal with them, the less financial damage they’ll do to your company.
Having a healthy cash flow is essential to continue running your business. Ensuring that you collect upon invalid short-paid invoices is one way to keep a healthy balance sheet.
If collecting unpaid invoices is a bigger issue than you want to deal with, Now’s accelerated invoice services are the perfect solution. We do all the work for you while you rest easy, knowing you no longer have to worry about cash flow.
Learn more about the problems Now solves:
Increasing Working Capital | Solving Cash Flow Crunch | Alternative to Financing and Factoring
