When your customers are late with their payments, inaction can cost your business dearly. By employing dunning efforts — communications focused on collecting owed money — you can better protect your company and your bottom line.
In a jointly-run survey focused on subscription-based businesses, PYMNTS and FlexPay found that, on average, respondents lost 9% of their revenue every year to failed payments. However, those companies that specifically tracked and attempted to collect on these failed payments experienced “dramatically less” revenue loss than the average.
This blog will explore the importance of dunning, what it is, and how to do it right.
Automated dunning processes
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What does dunning mean?
In accounting, the term dunning specifically refers to any conversations a seller might have with their customers focused on getting these buyers to pay their due or past due bills. Typically, these discussions — which progressively increase in intensity as time passes and deadlines are missed — are initiated by a company’s accounts receivable (A/R) staff but may be sold to outside collection agencies if the debt remains unresolved.
How does the dunning process work?
There are no formal guidelines as to what steps might be included when dunning, particularly since different techniques are and should be used depending on the industry, geography, amount owed, customer relationship, and overdue status related to the debt. However, most processes will follow a structure along the lines of:
- Step 0: Send an invoice — while technically not a part of dunning, collection efforts can’t begin until you’ve notified your customer of their outstanding obligation.
- Step 1: Provide an initial, gentle reminder (commonly over the phone) of the upcoming due date.
- Step 2: Follow up with a formal, preferably automated email (or letter) requesting payment.
- Step 3: If no payment is received, deliver frequent, progressively more assertive requests for payment through multiple channels, accelerating efforts in the case of a past-due invoice.
- Step 4: Contact an external collection agency to apply pressure to delinquent customers.
- Step 5: Notify the client that you plan to take legal action.
- Step 6: Pursue litigation.
- Step 7: Write off the uncollected sum as bad debt if none of the preceding steps prove fruitful.
What is a dunning letter?
As its name would suggest, a dunning letter refers to the individual reminder notices sent throughout the dunning process, particularly the text-based ones: traditional letters, emails, faxes, and text messages. Ideally, these notices are sent with receipt confirmation to verify that those customers who are not paying on time have been appropriately notified.
Why proper dunning matters for businesses
- Accelerate payments: Routine reminders keep outstanding payments from slipping through the cracks and taking longer, especially among your more disorganized clients.
- Collect more money: If you actively pursue payment for outstanding debts, you will convince more buyers to pay for the goods or services you delivered.
- Limit bad debt: For every overdue debt you can collect, you can avoid adding bad debt to your general ledger, a metric that creditors, investors, and vendors consider when choosing to with your business.
- Mitigate risk: As you track who is and isn’t paying — critical for effective dunning efforts — your business will be in a much better position to quickly identify and address problem accounts or respond to market fluctuations.
- Protect your reputation: While your dunning efforts should be consistent and thorough, being overly aggressive can damage or place unnecessary stress on these customer relationships.
Simplify planning: Establishing more reliable cash flow management and improved payment monitoring means that decision-makers will have better information when developing forecasts or general business plans.
What is dunning management?
Rather than focusing on communications about current or soon-to-be delinquent payments, dunning management is an automated payment recovery method triggered when a credit card transaction fails.
Common among businesses running subscription services, this effort typically begins with a notification of the failure — similarly to traditional dunning letters — and then proceeds with tasks targeted at resolving the underlying issue.
Are payment failures a common challenge for your business? Explore dunning management in more detail in our blog: Dunning Management: What It Is and Why It Matters
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Dunning process best practices
While there is no bullet-proof dunning strategy will ensure that all of your invoices will be closed out on time. But there are some straightforward, relatively easy steps you can take to drive efficiency and overall process success.
1. Communicate clearly
With each dunning message, the reader should be left with zero confusion on what is expected of them. Every communication should clearly outline where the relevant invoice resides in the payment process and should detail the following:
- Amount owed
- Date of delivery
- Directions to submit a payment
- Due date for payment
- Goods or services covered by the original invoice
- Payment formats accepted by your business (e.g., credit card, check, wire transfer)
2. Have empathy
Anything from a personnel change to a supply chain challenge to simple human error might cause any of your customers to miss a single payment. Rather than sacrificing a current or potential long-standing business relationship for a small cash-related bump in the road, center any communication you send with compassion, and don’t forget that it is another human who will be receiving your messages. With an appropriate tone, it’s possible to be firm and considerate when requesting payment. Similarly, the force of your requests should escalate gradually.
3. Embrace automation
A critical aspect of effective dunning is to be consistent in your touches. Delayed, infrequent, and inaccurate messages can undermine the strength and seriousness of your request. However, by automating these chasing efforts — and removing the opportunity for human errors — you can better ensure that the right message is being sent at the right time, every time.
4. Offer alternatives
If a customer is delaying their payment until they have the necessary cash, you might be waiting for some time. Instead of only sending reminder notices, consider negotiating with the delinquent business to set up a payment plan or other option.
5. Track what works
No dunning process will be perfect, so you should constantly consider and reconsider improvements you can make. Of course, knowing what changes are helping, hurting, or having no impact can be challenging if you aren’t properly monitoring your collection efforts. However, you can isolate what is and isn’t working by tracking and reporting on relevant financial metrics. Typically, you’ll want to monitor:
- Accounts receivable turnover (ART)
- Average days delinquent (ADD)
- Bad debt to sales ratio
- Collections efficiency index (CEI)
- Collection costs
- Day sales outstanding (DSO)
6. Use multi-channel touches
Phone calls can be missed. Emails can get caught in spam filters. Letters can wind up misplaced. Don’t assume that your communication method is the best choice for a given customer or time. Instead, embrace a multi-channel strategy with more than one contact at the buyer organization.
Automate the dunning process with Invoiced
Meticulously timed and coordinated reminders will help keep your A/R efforts running smoothly; accounts receivable automation makes this feasible. When technology and human effort combine to make these critical touchpoints happen, you can be more confident that everything will proceed as planned.
Invoiced’s Accounts Receivable Automation software has embedded smart chasing technology that can do the follow-up for you, communicating across emails, letters, texts, and more — at the account level, the invoice level, or both.
To learn how Invoiced can streamline your dunning efforts, request a demo today.
