What is dunning? Dunning is the process of sending reminders and notices to customers who have overdue invoices. The goal of dunning is to encourage customers to pay their invoices on time and reduce the amount of outstanding accounts receivable.
This article provides a comprehensive guide to how dunning works in accounts receivable, including the different types of dunning letters or emails, best practices for sending dunning notices, and strategies for managing difficult customers.
What is dunning in accounts receivable? Dunning meaning and definition
Dunning is the process of sending reminders and notices to customers who have overdue invoices. The goal of dunning is to encourage customers to pay their invoices on time and reduce the amount of outstanding accounts receivable.
In accounts receivable, dunning refers to the practice of contacting customers to collect on late payments. This can be done through a variety of methods, such as phone calls, emails, letters, and even in-person visits. The goal of dunning is to remind customers of their outstanding invoices and encourage them to make payment as soon as possible.
Effective dunning involves a combination of firmness and professionalism. It is important to be assertive in requesting payment, but also to maintain a respectful and understanding tone. The goal is to encourage customers to pay their invoices without damaging the relationship between the two parties.
Why does dunning matter for your business?
Dunning is a critical process in accounts receivable that involves sending reminders and notices to customers who have overdue invoices. The goal of dunning is to encourage timely payments, reduce outstanding accounts receivable, and maintain positive customer relationships.
Below are some of the primary reasons why dunning is important for you business:
- Reduced accounts receivable: Dunning helps to reduce the amount of outstanding accounts receivable by encouraging customers to pay their invoices on time. This improves cash flow and reduces the risk of bad debt.
- Improved customer relationships: Effective dunning can help to improve customer relationships by reminding customers of their outstanding invoices and providing them with an opportunity to resolve the issue. This can help to prevent misunderstandings and build trust between the customer and the business.
- Increased efficiency: Dunning can help to increase efficiency by automating the process of sending reminders and notices. This frees up accounts receivable staff to focus on other tasks, such as credit checks and collections.
- Reduced risk of bad debt: Dunning can help to reduce the risk of bad debt by identifying customers who are at risk of defaulting on their payments. This allows businesses to take steps to mitigate the risk, such as requiring a deposit or offering a payment plan.
- Improved credit score: A good dunning process can help to improve a business's credit score by demonstrating that the business is able to effectively manage its accounts receivable. This can make it easier for the business to obtain loans and other forms of financing.
What is a dunning process and how does it work?
What is the meaning of dunning? A dunning report is a structured, systematic approach employed by businesses to recover overdue payments from customers. It involves a series of escalating communication efforts, including reminders, notices, and increasingly assertive actions, aimed at prompting customers to settle their outstanding invoices.
The primary objectives of a well-executed dunning process are to expedite the collection of receivables, minimize bad debt write-offs, and maintain positive customer relationships.
How a typical dunning process works:
Invoice issuance
The process commences with the issuance of an invoice to the customer upon completion of a sale or service. The invoice clearly outlines the payment terms, including the amount due, due date, and any applicable late payment fees or interest charges.
Initial reminder (soft dunning)
If payment is not received by the due date, the customer is sent a gentle reminder. This initial communication is typically courteous and non-threatening, often taking the form of an email or letter. It serves as a polite nudge, reminding the customer of the outstanding invoice and requesting prompt payment.
Second reminder (firm dunning)
Should the customer fail to respond to the initial reminder, a second, more assertive reminder is issued. This communication may highlight the consequences of continued non-payment, such as the accrual of late fees or interest, and may adopt a firmer tone.
Final reminder (pre-collection)
In the event that the second reminder proves unsuccessful, a final notice is sent. This communication is typically the last step before escalating dunning collections to collection action and may explicitly state the intent to pursue legal action or engage a collection agency if payment is not forthcoming.
Collection action
If all previous attempts at recovering the debt have failed, the business may resort to collection action. This may involve engaging a third-party collection agency, initiating legal proceedings, or writing off the debt as a loss.
What is a dunning letter?
A dunning letter is a formal written communication sent by a business to a customer who has not paid an invoice on time. The purpose of a dunning letter is to remind the customer of the overdue invoice and to request payment as soon as possible.
Dunning letters are typically sent in a series of escalating severity, with the first letter being a gentle reminder and subsequent letters becoming more assertive. The goal of a dunning letter is to encourage the customer to pay their invoice without damaging the relationship between the two parties.
How to manage the dunning procedure: Dunning process best practices
Dunning is the process of sending reminders and notices to customers who have overdue invoices. The goal of dunning is to encourage customers to pay their invoices on time and reduce the amount of outstanding accounts receivable.
Here are some best practices for managing the dunning procedure:
- Establish a clear dunning policy. Your dunning policy should outline the steps that will be taken to collect overdue invoices, including the frequency and tone of dunning communications.
- Start dunning early. The sooner you start dunning, the more likely you are to collect payment.
- Be consistent with your dunning efforts. Send dunning notices on a regular schedule, even if you haven't received a response from the customer.
- Use a variety of dunning methods. Send dunning notices by mail, email, and phone. You may also want to consider using a collection agency.
- Be professional and respectful. When communicating with customers about overdue invoices, it's important to be professional and respectful. Avoid using threatening or abusive language.
- Offer payment options. If a customer is unable to pay their invoice in full, offer them payment options, such as a payment plan or a discount for early payment.
- Track your dunning results. Track the success of your dunning efforts so that you can identify areas for improvement.
By following these best practices, you can improve your chances of collecting overdue invoices and reducing the amount of outstanding accounts receivable.
What happens if dunning doesn’t work?
If you've sent a dunning letter and still haven't received payment, there are a few things you can do:
- Call the customer. Sometimes, a personal touch can go a long way. Calling the customer can help you to determine why they haven't paid and to work out a payment plan.
- Send a stronger letter. If a phone call doesn't work, you can send a stronger letter. This letter should be more assertive and should include a deadline for payment.
- Hire a collection agency. If the customer still doesn't pay, you may need to hire a collection agency. A collection agency will work on your behalf to collect the debt.
- Take legal action. As a last resort, you may need to take legal action against the customer. This should only be done if you have exhausted all other options.
Here are some additional tips for collecting overdue payments:
- Be professional and courteous at all times. Even if you're frustrated, it's important to maintain a professional and courteous demeanor. This will help to keep the customer from getting defensive and will make it more likely that they'll pay you.
- Be persistent. Don't give up on collecting the debt. Keep sending reminder letters and making phone calls until you receive payment.
- Document everything. Keep a record of all communications with the customer, including letters, emails, and phone calls. This documentation will be helpful if you need to take legal action.
Improve your dunning process with Chaser
In addition to its many other benefits, Chaser also offers a wide variety of features that can streamline your dunning process.
Such as:
- Automated reminders can be sent using SMS, email or an automated phone message. This multi-channel approach helps you reach your customers through their chosen communications channel, removing any hint of intrusiveness from your automated dunning.
- All messages sent by Chaser are fully editable to reflect your branding and tone of voice. You can use different messages for different customers, reflecting each customer's specific relationship and payment history. Despite being fully automated, all messages will appear to be sent from your personal or company email.
- Recommended chasing times make use of AI analysis of payment behaviour to recommend optimal chasing times. This system allows you to send you automated dunning reminders at the most effective time, increasing the chances of you getting paid.
- Chaser’s core features are fully automated, freeing up time and saving you money. Instead of grinding through mind numbing payment retries or sending endless payment reminders, your skilled finance team can be looking at ways to help your company grow.
Cut down on revenue loss and limit involuntary payment churn with Chaser.
Key takeaways
- Dunning is the process of sending reminders and notices to customers who have overdue invoices. The goal of dunning is to encourage customers to pay their invoices on time and reduce the amount of outstanding accounts receivable.
- Dunning should begin early and be consistent. The sooner you start dunning, the more likely you are to collect payment. Send dunning notices on a regular schedule, even if you haven't received a response from the customer.
- Use a variety of dunning methods, such as mail, email, phone, and collection agencies. This will increase the chances of reaching the customer and collecting payment.
- Be professional and respectful when communicating with customers about overdue invoices. Avoid using threatening or abusive language.
- Offer payment options to customers who are unable to pay their invoice in full. This may include a payment plan or a discount for early payment.
Automate your dunning payment
Automating your dunning payments can help you save time and improve your cash flow. Here's how to do it:
- Choose a dunning automation software. Chaser’s cutting edge credit control platform can help you automate your dunning process. Chaser is easy to use and that integrates with your accounting software.
- Set up your dunning rules. Once you have integrated Chaser with your accounting software, you need to set up your dunning rules. These rules will determine when and how dunning notices are sent to customers.
- Monitor your dunning process. Once your dunning process is automated, you need to monitor it to make sure it is working properly. You should also review your dunning reports regularly to identify any areas for improvement.
By automating your dunning payments, you can improve your cash flow and reduce the amount of time you spend chasing down late payments.
FAQs
What is the purpose of a dunning letter?
What is a dunning letter meaning? Dunning notices are formal written communication sent by a business to a customer who has not paid an invoice on time, with the purpose of reminding the customer of the overdue invoice and requesting payment as soon as possible.
Why is it called a dunning letter?
What does " dunning notice" mean? A dunning letter is named as such because it is a formal, written communication sent to a customer who has not paid an invoice on time.
What are dunning fees?
Dunning fees are additional charges imposed by a creditor on a customer who fails to pay an invoice by the due date. They are intended to compensate the creditor for the administrative costs associated with collecting the overdue payment.
What are the 4 stages of dunning letter?
The four stages of dunning letters are the initial reminder, second reminder, final reminder, and collection action. Each stage becomes more assertive and may involve additional fees or interest charges.
What is a dunning notice?
What's a dunning letter? A dunning notice is a formal written communication sent by a business to a customer who has not paid an invoice on time. The purpose of a dunning notice is to remind the customer of the overdue invoice and to request payment as soon as possible.
What is dunning for automatic payments?
Dunning for automatic payments is the process of sending automated reminders and notices to customers who have not made their scheduled payments. This process aims to encourage customers to pay their invoices on time and reduce the amount of outstanding accounts receivable.
What is the difference between payment reminders and dunning letters?
Payment reminders are gentle notifications sent to customers when an invoice is past due, while dunning letters are more assertive communications sent after multiple payment reminders have been ignored.
How to send dunning letters?
Dunning letters should be sent in a series of escalating severity, starting with a gentle reminder and becoming more assertive in subsequent letters. The goal is to encourage payment without damaging the customer relationship.
How to track dunning and collections?
To track dunning and collections, monitor the dunning process to ensure its efficacy and review dunning reports regularly to identify areas for improvement.
What does dunning level mean?
Dunning level refers to the severity of a dunning letter. It typically ranges from a gentle reminder to a more assertive demand for payment. The level of severity is often determined by the age of the invoice and the customer's payment history.
