How to handle short-pays and deductions in B2B accounts receivable
A payment arrives, and it's lower than the invoice. Sometimes the remittance has a reason code. Sometimes it has a vague note like “pricing” or nothing at all. Either way, the difference is now a question your team has to answer, and it won't answer itself.
To handle a short-pay, apply the cash you received, then put the unpaid difference on its own open item with a reason code so it doesn't disappear into unapplied cash. Research it against the PO, the invoice, proof of delivery, and the price agreement. If the customer was right, issue a credit memo. If they weren't, send them the evidence and ask for repayment. If you can't win it or it isn't worth the effort, write it off under a clear policy and record why it happened.
What's the difference between a short-pay, a deduction, and a dispute?
Teams use these words loosely, but they lead to different next steps. The distinction is mostly about whether the customer has paid anything and whether they've told you why.
| Term | What happened | What it usually needs |
|---|---|---|
| Short-pay | The customer paid less than the invoice amount. The reason may or may not be stated. | Find the reason first. Check the remittance, the customer's portal, and any recent emails. |
| Deduction | The customer paid but took a specific amount off, usually with a reason code or claim number. | Match the claim to its backup and decide whether it's valid. |
| Dispute | The customer is contesting the invoice and is holding some or all of the payment. | Resolve the underlying issue, such as a wrong price, missing PO, or delivery problem, before payment moves. |
In practice, every unexplained short-pay becomes a deduction once you know the reason, and many deductions started as disputes nobody resolved before the payment run. The research is the same in all three cases: what was ordered, what was delivered, and what was agreed.
How should you code the difference when the payment comes in?
Don't leave the difference sitting in unapplied cash, and don't leave the whole invoice open as if nothing was paid. Both hide the problem. Unapplied cash makes the customer's balance wrong, and a fully open invoice makes it look like the customer paid nothing.
Most ERPs let you apply the payment and carry the shortfall as a separate item tied to the original invoice. SAP's documentation on reason codes for payment differences, for example, describes clearing the original item and creating a new residual item linked to it, with a reason code that stays visible on the customer's line items. Other systems use different names, but the idea is the same.
- Apply what was paid to the invoice it was meant for.
- Create one open item per deduction, not one lump sum, so each can be researched and closed separately.
- Attach the customer's reason code, claim number, and remittance detail to the item.
- Assign an owner and a due date. If the customer has a dispute deadline, the due date is that deadline minus the time you need to build the case.
What are the common types of deductions, and who needs to act?
Most deductions fall into a handful of categories. In the 2018 customer deduction survey published by the Credit Research Foundation, which covered 203 mostly manufacturing and distribution companies, the top reasons by count were shortages, pricing, and advertising, promotion, and rebate claims, followed by allowances and damage. Use the table to decide where each one goes.
| Deduction type | What to check | Who needs to act |
|---|---|---|
| Pricing | Compare the invoiced unit price with the PO and the price agreement in effect on the order or ship date. Check whether a price change was communicated and accepted. | AR researches; sales or pricing confirms the agreed price; the customer's buyer updates the PO if it's out of date. |
| Shortage | Compare quantity invoiced, quantity shipped on the bill of lading, and quantity signed for on the proof of delivery. Note any exceptions written on the POD. | AR pulls the documents; warehouse or logistics confirms what shipped; the carrier may own a freight claim. |
| Damage or unsaleable | Look for damage noted at delivery, photos, the customer's inspection report, and whether a return authorization was issued. | Customer service or quality reviews the claim; logistics handles carrier liability. |
| Promotional or trade | Match the claim to a signed promotion agreement, the promotion period, the agreed rate, and the eligible products. Check for duplicates of claims already paid. | Sales or trade marketing confirms the deal; AR checks for overlap with prior credits. |
| Compliance or chargeback | Read the customer's vendor guide for the specific rule cited, such as labeling, ASN accuracy, or delivery windows. Check your shipment records against it. | Logistics or operations confirms what happened; AR disputes inside the customer's window. |
| Early-pay discount taken late | Compare the payment date with the discount terms on the invoice. A 2/10 net 30 discount taken on day 25 wasn't earned. | AR decides whether to bill it back, based on your policy and the account. |
| Tax | Check whether the customer is claiming an exemption and whether you have a valid exemption certificate on file. | AR or tax requests the certificate, or rebills tax correctly if it was charged in error. |
Retail customers often send their own deduction codes and require disputes through a portal. Map their codes to your categories once, so that the same type of claim goes to the same owner every time.
How do you research a short-pay?
Every case follows roughly the same path. The goal is to get to a decision with evidence, not to collect every document you can find.
- Read the remittance. Find the claim number, reason code, and amount for each deduction. If the remittance doesn't explain it, check the customer's portal and recent emails before you ask.
- Pull the core documents. That's the PO, your invoice, the bill of lading and signed proof of delivery, and the contract, price agreement, or promotion agreement that applies.
- Get the customer's backup. For claims like damage, compliance, or promotions, the customer should have a document supporting the amount. Ask for it if you don't have it.
- Compare the specific point in question. For a pricing deduction, compare prices on the relevant date. For a shortage, compare quantities across invoice, BOL, and POD. Don't re-audit the entire order.
- Decide valid, invalid, or partly valid. Write one sentence explaining why, and attach the document that proves it.
- Take the action. Issue a credit memo, request repayment, or write it off under policy. Record which one and close the open item against it.
- Tag the root cause. Note what caused the deduction, such as an outdated PO price or a short-shipped line, so you can see patterns later.
How do you tell a valid deduction from an invalid one?
A deduction is valid when the customer's records and your agreement support it. It's invalid when your documents show the customer received what you invoiced, at the price you agreed, under the terms you both signed.
| Finding | Example | What to do |
|---|---|---|
| Valid | You invoiced a price that wasn't effective yet, or the POD shows a noted shortage. | Issue a credit memo against the open item and fix whatever caused the error. |
| Invalid | The POD is signed clean for the full quantity, or the promotion ended before the order date. | Send the evidence and request repayment. Keep the open item until the money arrives. |
| Partly valid | The customer deducted for 40 damaged units, but the inspection report supports 25. | Credit the supported portion and request repayment of the rest, with the reasoning for each. |
| Can't determine | The customer hasn't sent backup and you can't confirm either way. | Request the backup in writing, set a follow-up date, and escalate if the deadline approaches. |
Invalid deductions are a real share of the total. The same CRF survey found that a median of 6 to 10 percent of deduction dollars were invalid and charged back to customers, and that respondents ultimately recovered a median of 60 percent of those invalid dollars. The rest is money a company was owed and didn't collect.
Example: one payment, two deductions
This example is illustrative. You invoice a distributor $48,600 for 1,200 cases at $40.50 a case. The customer pays $45,225. The remittance lists two deductions: $2,160 for pricing and $1,215 for a shortage.
You apply the $45,225 and open two items: $2,160 coded as pricing and $1,215 coded as shortage. For pricing, you find that the customer's PO shows $38.70 a case, and your price increase to $40.50 took effect two weeks after this order shipped. The customer is right: 1,200 cases times $1.80 is $2,160. You issue a credit memo and flag the billing error.
For the shortage, the customer is claiming 30 cases, or 30 times $40.50. The bill of lading shows 1,200 cases shipped, and the proof of delivery is signed for 1,200 with no exceptions noted. That deduction is invalid. You send the POD with a repayment request and keep the $1,215 open until it's paid.
Two deductions on one payment led to two different outcomes. Treating the whole $3,375 as one lump would have meant either crediting money you're owed or chasing money you aren't.
What to send the customer when you need backup or repayment
Make the request specific enough that the customer's AP or deductions team can answer it without searching. Include the invoice number, the deduction amount, their claim or reason code, and the document you're relying on. Here's a message you can adapt:
Subject: Deduction on invoice [number], claim [number]: backup request
Hi [name], thanks for payment [reference] on invoice [number]. The payment included a deduction of [amount] under claim [number], coded as [reason]. We couldn't match it to our records. [Our signed proof of delivery shows the full quantity received, attached / Our price agreement shows the invoiced price was in effect on the order date, attached.]
Could you send the documentation supporting the deduction, or arrange repayment of [amount] if it was taken in error? If this needs to go to someone else on your team, could you point me to the right person? Thanks, [name].
For follow-ups when a customer goes quiet, our past-due invoice email templates cover new AP contacts and missed payment promises. If the short-pay came from a portal rejection rather than a deduction, our guide to Coupa invoice rejections walks through that case.
Are there time limits on disputing a deduction?
Often, yes, and they're set by the customer, not by you. Large retailers and many distributors publish dispute windows in their vendor agreements or supplier guides, and the window can differ by deduction type. Once it passes, the customer may refuse to review the claim at all. Read each major customer's terms and record the window with the account.
In the CRF survey, most companies said they usually completed their research within the customer's window. About a quarter said that for some customers they often didn't, and 6 percent said that in those cases they usually just wrote the deduction off.
Source: Credit Research Foundation, 2018 customer deduction survey
The practical rule: work deductions in order of deadline, not in order of arrival. A small claim that expires in five days comes before a large one with three months left.
When should you write off a deduction?
Write off a deduction when recovering it would cost more than it's worth, or when you've lost the right to dispute it. Set both conditions in a written policy rather than deciding case by case.
- Set a small-balance threshold below which deductions are written off without research. In the CRF survey, 67 percent of companies automatically wrote off deductions below a set value, and the median threshold was $10 to $25.
- Set a maximum age. The same survey found that 48 percent of companies had no time limit for how long a deduction could stay open, which tends to leave old items on the ledger long after anyone can recover them.
- Require a reason code on every write-off, the same as on every credit memo. A write-off without a cause can't help you prevent the next one.
- Decide who approves write-offs above the threshold, and whether they're charged back to the department that caused them.
How do you stop the same deductions from coming back?
Resolving deductions recovers money. Preventing them saves the research. Once you tag a root cause on every closed item, a monthly review usually shows that a few causes account for most of the volume.
- Report deductions by customer, type, and root cause, not just by age. A rising pricing count usually means a price change didn't reach the customer's PO.
- Send repeat causes to the team that owns them. Shortages may point to picking or carrier issues, and compliance chargebacks to labeling or ASN data.
- Confirm price changes in writing with the customer's buyer, and ask them to update open POs before the effective date.
- Keep each customer's vendor guide, dispute window, and deductions contact with the account, so whoever picks up a claim knows the rules.
When deduction research becomes a daily job
One short-pay takes a few minutes to research. Fifty a week, each needing a PO from email, a receipt from the ERP, and a rate from a contract, is a job in itself. Small deductions are the ones that tend to age until someone writes them off.
Alder helps with disputes, deductions, and short-pays. When a payment doesn't match the invoice, it flags the difference, pulls the PO, the receipt, the contracted rate, and the related email thread, and gives your analyst a recommended decision with the evidence attached. Your team makes the call, and anything sent to a customer waits for your approval. If short-pays are piling up, book a demo and bring a few recent examples.