Accounts Payable: To Short Pay An Invoice Or Not

Consultants Corner: Short Pay Invoice Headaches? Our Readers Offer 10 Better-Than-Aspirin Tactics

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t’s a dilemma that virtually every accounts payable department faces: what to do when short paying an invoice. Do you go ahead and short pay it hoping that the vendor will realize why you’ve reduced the payment or do you pay the entire amount invoiced and pray you’ll get the credit you’re owed? And, if you do short pay the invoice, what kind of documentation do you provide your vendors? This is an issue that if not given adequate attention can create huge problems and mountains of non-value added work for accounts payable departments. When a reader wrote asking what we recommended and what others were doing we decided it was worth a query in our weekly ezine. We had our own thoughts on what should be done but realize the best practice strategy might not be practical for everyone—and we were correct. Readers wrote in in droves explaining what they do and why. This is one issue with divergent practices and we’ll present solutions to both sides. This month we have the theoretical best practice, which we readily concede will not work for many, along with reader

recommendations on how they pay short. Next month, we’ll take a look the other side of the picture. The Theoretical Best Practice Ideally, the invoice should be returned to the vendor with an explanation of why you want/need to change the amount and a request that the invoice be reissued in the correct amount. In this manner, there are no concerns about mismatches and paper trails. However the reality is, not many organizations will be able to get new invoices issued. And even more to the point, many organizations are extremely reluctant to take this approach. So, for many, the tactics recommended by our savvy readers are their only course of action in addressing this issue. The Tried and True Tactics Here’s how our readers handle the matter when they short pay an invoice. 1) “If we ever have to short pay a vendor, I always contact the highest person I can in the company (the controller or credit manager) and make sure the short pay-

AP Now & Tomorrow 2009 To Short Pay or Not: What’s Best When It Comes To Incorrect Invoices? Our Readers Speak Share Their Expertise and Experiences

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DECEMBER 2008 ments are agreeable. I then explain that if they dispute/refuse to issue credit memos the payment will be delayed until resolved. This always works but credit memos are far preferable to this type of negotiation.”

‘CM.’ The original invoice is entered and the credit memo we c r e a t e ’ in h o u s e ’ is a ls o e n tered. The in-house credit memo has the record of the information on why the short pay was required and who authorized.”

2) “Paying the full invoice and waiting for a credit that may never arrive is not an option in our department. We offer two alternatives to our vendors:

3) “We short pay invoices but put a note in the text field that prints on the check. Our most common short pays are freight and taxes. Most of our purchase orders state to ship collect and list the method to ship. Also, as we are in manufacturing, many purchases are nontaxable and the PO will state that. Vendors will still charge the tax. We don’t pay it and a note prints on the check to state that.”

a) The preferred method is to have the person who authorizes payment on the invoice call the vendor and tell them we’ve received their invoice and want to pay it as soon as possible. They can then discuss the problem with the invoice and ask the vendor to either issue a corrected invoice or immediately send over a credit memo (via fax or e-mail) to be entered at the same time as the invoice. The invoice will not be entered without the credit memo. If a new invoice is to be sent, the vendor knows the incorrect invoice will not be submitted to accounts payable. b) Vendors usually want to be paid as soon as they can, so most often a credit memo is issued. Sometimes a company will not issue a credit memo but will authorize short paying. In that case a credit memo is created ‘in house’ using the same invoice number preceded by

4) “We short pay invoicing if the reason is a manufacturers defect or a vendor error in billing (i.e., an over charge). We usually take discounts when paying a vendor’s bill so short paying allows us to get a discount on everything except the unpaid balance in question.” 5) “We usually will enter a separate bill for the short pay with the original invoice number but add a notation before the number, i.e. CWR123456 The original invoice will have just the 123456 and we pay the invoice amount less the short pay. This allows us to keep an open bill for the unpaid amount on the books. When we are short paying an invoice we always make sure that the vendor is alerted as to why we are short paying and with whom we are working

Accounts Payable Now & Tomorrow (ISSN: 1557-3567) is published monthly for $329 per year by CRYSTALLUS, Inc., 171 Haut-Brion Ave., Newark, DE 19702. © 2009 Crystallus Inc. All rights reserved. A one-year subscription includes 12 monthly issues plus regular e-mail transmissions of news and updates. Periodicals postage paid at Newark, DE and additional mailing offices. Reproduction without permission is prohibited. Accounts Payable Now & Tomorrow does not render legal, accounting or other professional services. Legal and other expert assistance should be sought from competent professionals.

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ACCOUNTS PAYABLE NOW & TOMORROW™ with to get the issue resolved. If we get word that this was an issue on our side we immediately pay the unpaid balance with no discounts taken. “When we are paying bills weekly, we see that if we have not received the credit from the manufacturer this bill goes unpaid until either the issue is resolved and or the credit has been issued. Once a month we contact vendors requesting an update on the credits expected for the list of short pays. “When the credit does come in, we remove the notation at the front of the invoice number (going from CWR123456 to 123456) that was originally put on the bill and pay it as usual. The vendor sees the original invoice number that was underpaid and they can apply the payment appropriately. “This is a win/win situation for both our accounting department as well as the vendor. We usually do not underpay an invoice unless there is an actual documented problem on the vendor’s side.

“Once they get used to you sticking to your guns on issues they are happy because they know that there really is an issue that needs assistance. We have sometimes noticed management gets involved because of the under paids to correct this issue at hand. “To get a credit we usually work with another department for the credits so the accounting department does not know what is going on (this is why we let them know why we are underpaying the invoice the day that it should be paid). This alerts them when there are a large number of short pays that might need management knowledge.” 6) “I record the invoice at the full amount, then record an internally-generated credit memo. I document on the paper invoice and in the credit memo 'comment' area in the system why we are short paying the invoice. Then I send a copy of the invoice (with the documenta-

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DECEMBER 2008 tion written on it) to the vendor with the short-pay check. I’m not sure how that would work if the invoice and/or payment were electronic, but it works quite well for old-fashioned paper transactions.” 7) “We always post the invoice at full invoice price and block for payment. When, after approval, an adjustment has to be made, we post a separate debit memo explaining the reason for the adjustment and referring back to the invoice, unblocking the invoice for payment. The system then processes the two items together when making payment as separate line items on the check or remittance advice. This way, the vendor sees the full invoice amount as one line and the adjusting entry with explanation.” 8) “We pay the invoices in full and then enter a debit memo against the invoice, thus we are only paying what we agree to but we have an audit trail of the entire invoice and why we are

short paying. We also send the vendor a copy of our debit memo with their checks so they can review why we are short paying.” 9) “We are a university and are tax-exempt. Many times when we receive invoices they include state sales tax. We do not pay the sales tax and we adjust the invoice accordingly. We then submit a copy of our tax exemption certificate along with the check.” 10) “We short pay our invoices and mail a copy of the invoice to the company with the check, showing the item that we short paid and write any notes that we may have pertaining to the short pay. This helps us eliminate some confusion with the companies as to why we short paid the invoice. In most cases this takes care of the billing issues.” The advice offered above by our readers provides numerous approaches for those not willing to return an invoice for correction. One of them should work in your shop. AP N&T

About the Accounts Payable Now & Tomorrow Newsletter This white paper was created based on research conducted for the Accounts Payable Now & Tomorrow newsletter. Subscribers received it as a bonus to their regular monthly issues. They also occasionally receive sample chapters from books written by our editorial director and published by John Wiley & Sons. Accounts Payable Now & Tomorrow is a monthly print publication. It can also be received electronically in pdf format. It contains the most current advice from the trenches based on our reader surveys, interviews with some of the best practitioners, and the latest changes in all related specialty areas such as T&E, 1099s, 1042-S, sales and use tax, OFAC, VAT, electronic payment alternatives etc. In addition to commentary from our editorial director, Mary S. Schaeffer, we feature a changing lineup of guest columnists, short book reviews, and the latest industry updates. It costs $329 per year. For $120 more, subscribers can receive both print and electronic versions. For additional information or to start a subscription use the coupon on the last page or go to

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DECEMBER 2008

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Consultants Corner: The Other Side of the Coin: Those Who Never Short Pay

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and products. Our vendors frequently bill incorrectly, either the unit price, freight, quantity etc.. Although the salesperson asks that we "just short pay the invoice" we strictly avoid this practice. The sh ort paymen t agreemen t made by the salesperson is seldom if ever relayed to the vendor's accounts receivable staff and that leaves two puzzled clerks: their collector and our accounts payable person. Credit memos can stop this problem immediately if the vendor can issue them. Credits sometimes are subject to higher management approval, and the company always w a n t s t h e ir m o n ey w it h in terms, thus the request to short pay. I as a supervisor, have to do a great deal of explaining when I present any wire payment request with short paid invoices to directors and auditors. Short payments do not leave a clean financial paper trail.”

t’s a dilemma that virtually every accounts payable department faces: what to do when a correction needs to be made to an invoice. Do you short pay it and hope like crazy you can provide enough documentation so the vendor knows what you paid or do you hold firm and wait for a corrected invoice? This is one area where accounts payable professionals are divided. In the prior article we looked at tactics used by those among our readers who short pay their invoices. This month we have advice from the other side: those who refuse to pay the invoice until it is corrected. Here’s how these professionals handle the matter when invoices contain errors. ♦

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“We have a policy to never short pay an invoice. We have found if the situation is not cleared up at the time the issue is discovered, it just comes back a year later. I understand it takes time to request the credit and the follow up required, but we have found this to be easier and takes less time then pulling all the information together a year later when a request is received from the vendor for the balance due.” “Our company is a manufacturer and we purchase large volumes of steel, pipe, and high-dollar raw materials

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“We always pay the vendor's invoice exactly as they send it to us. If we need to pay a different amount, we create a separate document to correct the invoice (called an adjustment memo). The adjustment memo details all the reasons for the adjustment (cost difference, quantity difference, etc.) and also charges a fee for the invoice error. The adjustment memo carries the same terms and conditions as the original invoice/purchase order, so it will remit on the

DECEMBER 2008

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same payment as the invoice resulting in a net payment of the amount that our company authorizes.” ♦

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“Our company pays the invoice in full so that we can take full advantage of any terms discounts and posts a debit for the amount that we should be credited at the same time. If we do receive the credit before the invoice is actually paid we are able to reverse the debit memo. If we do not receive the credit then the debit is deducted off of the check when the invoice is paid. The debit memo is given the same number as the invoice number for easy tracking purposes.” “I almost said that I never pay invoices short but really never except once. I always put the whole invoice in and then wait for the credit or I leave the invoice out with a note on it ‘waiting for credit.’ Our system allows us to put an invoice on ‘hold’ which

Bad Invoice Practices ♦

Not tracking where invoices are at all times

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Allowing game playing to go on between different departments

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Not demanding that vendors indicate a PO number or the name of a purchaser on an invoice

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Paying from statements when that is not the policy for that vendor

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Paying credits rather than taking them

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Not having one policy regarding where invoices should be directed

Source: Controllers & CFOs Guide to Accounts Payable

puts an H on the aging and when you are in payment selection it doesn’t appear under the vendor. Also it allows us to make a partial payment. In the case where I did pay short, the invoice (for resurfacing the parking lot) was entered for the full amount but when I selected it for payment I was able to change the dollar amount allowing us to hold back $5000 until necessary repairs were made.” ♦

“If we receive an invoice in which not all the products were shipped or there was a problem with the order, we do not pay it right away but instead wait for a credit memo to be sent showing the adjustment. We then pay the origin al inv oice an d apply th e separate credit memo to the same check.”

Now that you’ve heard readers sound off on both sides of this issue, you can devise a policy that will work in your organization and industry. Unfortunately, what we might like to do in a perfect world, doesn’t necessarily match what goes on in our accounts payable operations. Most of us would probably like to demand a corrected invoice. However, this is not always possible or practical, especially if many invoices require adjustment—or the supplier will put your organization on credit hold as a result of the delayed payment. It’s the job of flexible managers to make this situation work for the conditions at their organization, regardless of their personal

DECEMBER 2008

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Book Excerpt: Electronic Invoicing A short excerpt on electronic invoicing is included as it allows solving invoice discrepancies to happen faster, sometimes even before the due date.

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lectronic invoicing, also referred to as e-invoicing and electronic billing, has made a big dent in the way invoices are handled in the corporate world. As you will see, it also helps end some of the petty problems discussed earlier. Technically speaking, the soup-to-nuts concept is referred to as electronic invoice presentment and payment (EIPP). It refers to the concept of an invoice being sent electronically, received electronically, and the ultimate payment being made electronically most frequently through the ACH. e-Invoicing encompasses many different formats and approaches. At its simplest, emailing an attached Word, Excel, or PDF document should be considered electronic invoicing, as the document has arrived electronically at the customer. Similarly, a company that pays its employees using direct deposit is making electronic payments. In each of the examples mentioned, the companies involved are participating in EIPP, albeit in a minor way. As you have probably figured out, e-invoicing has a positive impact in numerous ways. In addition to the elimination of paper, companies like einvoicing because:

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Mistakes are reduced, as there is no need to rekey information.

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The workflow to route invoices for approval is easier.

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Costs are reduced.

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Blaming accounts payable for others’ own shortcomings in processing paper becomes difficult.

Unfortunately, e-invoicing has not been adopted by everyone immediately. Some of the reasons it has not been embraced as much as might be anticipated include: ♦

Cost

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Implementation time

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Budget constraints

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Internal resistance to change

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Lack of ease of use

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Difficulty in signing up partners

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Fear

By supporting the use of einvoicing wherever possible, you will have taken a giant step toward eliminating some of the problems in accounts payable as well as the friction points with other groups within the company. The benefits, as described earlier, make it an approach that should be encouraged. Invoices can be: ♦

Picked up at the supplier’s Web site (seller-centric)

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Delivered by the supplier to the purchaser’s Web site (buyer-centric)

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Picked up at a consolidator site (consolidator model)

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