Understanding and Managing Short Payments

Table of Contents

1. What is a Short Payment?
2. How do You Write a Short Payment?
3. Why Should You Short-Pay an Invoice?
4. How to Resolve Short Payment Invoices?
5. Short Payments Best Practices
6. Streamline Your Payments Strategy

A short payment can occur for various reasons. It typically arises when a customer delays payment or expresses dissatisfaction with the delivered goods or services.

Handling such partial payments can prove challenging for the accounts receivable (AR) team. Since the total amount has yet to be settled, closing the invoice becomes impossible. Simultaneously, your team must follow up with the customer to collect the outstanding balance.

You can gain valuable insights by delving into the reasons behind short payments to enhance payment-processing best practices.

Key Takeaways

• Short payments occur when customers pay less than the total amount owed, often due to dissatisfaction, errors, or financial issues.
• Understanding the reasons behind short payments can improve payment-processing practices.
• Short payments can delay debt satisfaction, incur additional fees, damage credit scores, and strain relationships.
• Proper communication with creditors can help avoid the negative consequences of short payments.
• Creating a short payment form details the purpose, amount, payment instructions, and contact information.
• Best practices include clear payment terms, electronic invoicing, multiple payment methods, and automated follow-up workflows.
• Implementing a strong payment strategy and software can streamline collections, encourage prompt payments, and reduce unexpected short payments.

What is a Short Payment?

A short payment occurs when a debtor makes a payment on a debt that is less than the full amount owed. This can occur due to financial struggles, confusion about the amount owed, or a mistake in the payment procedure.

Short payments can have several consequences:

• Delay the satisfaction of the debt
• Potentially lead to additional interest and fees
• Damage the debtor's credit score
• Strain the relationship between debtor and creditor
• Lead to collection actions and even legal proceedings

If you cannot fully pay a debt, it is important to communicate with your creditor as soon as possible. Many creditors will work with debtors to create an affordable and realistic payment plan. This can help avoid the negative consequences of a short payment and get you back on track towards financial stability.

What is the Meaning of a Short Payment?

The Accounts Receivable team often handles short payments. As the contract agreement outlines, these are anticipated when customers take advantage of early payment discounts, sales promotions, or other deductions that reduce the invoice amount. These instances do not incur any penalties.

However, unexpected short payments pose a different challenge. The AR team must investigate the reason for the non-payment and its legitimacy. They must gather documentation, such as customer complaints and supporting evidence about defective goods or services. This process of assessing the claim's validity, either agreeing with or refuting it, consumes significant time and resources.

How Do You Write a Short Payment?

Writing a short payment requires careful planning and attention to detail. Here's a step-by-step guide to help you craft an effective short payment:

1. Define the Purpose. Clearly outline the reason for the payment. State the purpose succinctly, Whether for a product, service, or donation.
2. Research Payment Options. Identify the preferred payment methods accepted by the recipient. This could include cash, checks, credit cards, or online platforms like PayPal.
3. Calculate the Amount. Determine the exact amount to be paid, including any taxes, fees, or discounts. Double-check the total to ensure accuracy.
4. Create a Payment Form. Design a simple and visually appealing payment form that includes the following elements:
   • Recipient's name or business name
   • Date of payment
   • Payment amount (in numbers and words)
   • Purpose of the payment
   • Space for the payer's signature
5. Include Payment Instructions. Provide clear instructions on how to make the payment. This could involve mailing a check to a specific address or providing account details for electronic transfers.
6. Add Contact Information. Include the contact details of both the payer and the recipient, including email addresses and phone numbers, in case of any queries or discrepancies.
7. Review and Finalize. Review the short payment form for any errors or omissions. Ensure all the information is correct and up-to-date.
8. Sign and Distribute. Sign the short payment form and provide a copy to the recipient. Retain a copy for your records.

Why Should You Short-Pay an Invoice?

There are many reasons customers choose to send a partial payment. The list includes:

• Products were defective or damaged
• Services and goods were not delivered under contract terms
• Marketing discounts, sales tax exemptions, and promotions were applied in the invoice but not listed
• Early payment discounts were not applied to the invoice
• The customer is on a custom payment plan
• The buyer doesn't have enough cash for the transaction
• The customer wants to apply the early payment discount after the deadline
• The buyer is hoping you will write the payment off as bad debt
• Human error concerning the payment method, business details, or other required payment information

The AR and collections teams often balance customer relationships with capturing payments. To do that, it's essential to be fully aware of whether the short pay was expected.

How To Resolve Short Payment Invoices?

Since expected short pay is rarely an issue and is covered by payment terms, AR teams focus on unexpected partial payments.

Resolving all unexpected short payments is impossible. However, implementing a comprehensive payment strategy can reduce them. The more unexpected late payment cases your AR team handles, the more time they spend on repetitive administrative tasks.

Ways to minimize late payments, unexpected partial payments, and bad debt are:

• Using B2B payment automation and payment methods
• Offering various payment options
• Providing short-term payment plan options
• Drafting automatic follow-ups
• Including late fees and penalties in the payment terms

Short Payments Best Practices

Even with early payment discounts and digital transfers, not every client will send an immediate payment. However, you can ease your cash flow and decrease time spent on short payments by following these best practices:

1. Be clear and concise about your payment terms in the buyer agreement.
2. Send electronic invoices, ideally with a self-service payment portal, for a no-hassle customer experience.
3. Offer more than one payment method. The more ways to pay, the more likely your customer will deliver faster.
4. Use deduction codes to easily manage early payment discounts, promotions, and other legitimate reasons for short payments.
5. Work with an ERP and payment integration that includes transaction dispute options.
6. Limit credit to customers with a good payment track record.
7. Implement a digital AR solution that captures data from the first invoice to payment collection.
8. Create automated follow-up workflows.
9. Generate receipts promptly—automation makes this a cinch.

Streamline Your Payment Strategy

Don't let short payments hold back your cash flow. A strong strategy and software can simplify your collections process, encourage quick payments, and cut unexpected short payments.

At Paystand, we provide your AR team with the necessary tools for success. Our end-to-end AR automation, seamless customer experience, and ERP integrations can help your team increase earnings and track key metrics. We also offer customizable collection plans specifically designed to handle short payments.

Discover the convenience of streamlined collections with B2B payment automation.