There will be times when every Accounts Payable function engages in short-paying invoices.
Whilst there may be a range of reasons to make this decision, it is important to follow some basic procedures when short-paying invoices to ensure your accounting records are maintained correctly and relations with your suppliers are not jeopardised.
In this blog we will explore the issue of short-paying invoices and how your Accounts Payable team should handle what can be tricky situations.
Put simply, when you decide to short-pay an invoice, you are opting not to pay the full amount that was agreed between your organisation and a supplier, as stipulated in a Purchase Order.
Many organisations send a supplier a remittance advice upon payment of an invoice. The remittance advice usually includes essential information, such as the invoice number, so the supplier’s Accounts Receivable team knows how to correctly attribute the incoming funds to a particular customer’s account.
However, the amount of information that can be included on a remittance advice is usually quite limited.
If, for any reason, you are not paying the invoice amount in full, this can create complications with your supplier’s Accounts Receivable department. They are likely to be calling your organisation’s Accounts Payable team seeking an explanation.
However, by the time the supplier is following up on the short-payment, days or weeks may have passed since the payment was remitted. Your Accounts Payable team is unlikely to have the information to hand as to why the invoice amount was not paid in full. This is particularly likely in big accounting teams handling hundreds, if not thousands, of invoices.
Handling short-payments correctly is essential to maintain accurate internal records, ensure that funds are not being misappropriated by malicious insiders, and maintain good relationships with your suppliers.
There are multiple reasons why you may opt to short-pay invoices.
Some reasons are valid, whilst other are invalid. For example, a valid reason to short-pay an invoice may exist when a supplier has not met the terms of a Purchase Order or contract. It would be invalid to short-pay an invoice in circumstances where a supplier has fulfilled their contractual obligations with your organisation and supplied all the goods or services you ordered correctly and on time.
Some common short-payment reasons include:
In some of these cases, such as discounts for early payments, the short-pay amount will have been negotiated in advance with your supplier. However, in other cases, such as the delivery of damaged goods, no such prior agreement is likely.
Irrespective of the reason for the short-payment, whenever an invoice is not paid in full, it is important to maintain detailed records in your Vendor Master File and to always communicate the reasons to the supplier.
Failure to maintain complete records may result in accounting discrepancies between records in your Vendor Master File and bank statements at audit time.
Whenever invoices are not paid in full, it is important for the maintenance of good supplier relationships, that the reasons for any deductions are communicated in as much detail as possible to the supplier, preferably before the due date.
Of course, a supplier may not agree to a short-payment, however at least it will eliminate many unnecessary calls from the supplier’s Accounts Receivable team. Naturally, many suppliers will object to short-payments and are likely to complain, even if you have taken the trouble to communicate your reasons in full to them. Despite this, maintaining open communications with suppliers is a sign of good-will on your part and may help reduce friction.
By taking the time to include detailed notes in your ERP and Vendor Master File about the reasons for any short-payments or deductions, any member of your Accounts Payable team will be able to rapidly respond to queries raised by the supplier. This is particularly important if the matter is raised after several months, or in the case of an audit.
Some organisations never short-pay an invoice. If they feel the full amounted stated on the invoice is not correct, or not justified, they revert back to the supplier and advise them to amend the invoice and re-submit it. This avoids the problem of invoiced amounts not aligning with paid amounts and can make life easier come audit time.
As a vendor management tool, eftsure allows you to easily keep track of all outgoing payments.
Whenever your Accounts Payable team processes an invoice, eftsure maintains a complete audit trail, so any short-payments will be tracked. This not only helps your organisation maintain the integrity of the entire Accounts Payable process, it also ensures that any discrepancies between invoices and outgoing funds due to short-payments can be easily reconciled come audit time.
Contact us today for a no-obligation demonstration and learn how eftsure can help enhance your AP processes.
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