When you receive a shortpay, in many AR systems you have a choice:

1. Partially pay the invoice, leaving the balance open on the original transaction
2. Close the original transaction and create a deduction for the balance.

Partially paying the original transaction is obviously a good choice if your customer is truly just making a partial payment with the intent of paying off the remaining balance later. But in most other cases, I would argue that closing the original transaction and creating a deduction is the best option. Let’s look at why.

Customer’s reasons for short pay and advantages of creating deduction

Aside from true partial payments, most customers consider the original invoice closed when it’s intentionally short paid. Most often, the shortpay will be the omission of tax and/or freight, or a compliance penalty. Creating a separate deduction transaction in your system offers several advantages:

1. It separates “clean” AR from “disputed” AR. This helps with cash forecasting, reporting, measuring the performance of your collectors and creating organizational focus
2. It allows you to route situations and disputes that require specialized knowledge or access to specific information to the individuals best suited to handle them
3. Deductions allow you to enforce the association of reason codes with the shortpay. Most systems also allow the “splitting” of deductions, so that, for example, a $100 shortpay to an invoice done for multiple amounts and reasons can be split into several deduction transactions to accurately reflect that reality

Deduction management

When creating a deduction, it’s critical to retain the association between the deduction and the original invoice. Some systems will simply append a character or two to the original invoice number, others will assign a new reference number, but will store the old number in a linking field.