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What is Dunning?

What is Dunning?

Dunning Definition

Dunning refers to the process of methodically communicating with customers to ensure the collection of accounts receivable. It involves sending a reminder (dunning letter) to customers or clients who have overdue invoices.

While done manually, companies can adopt an automated dunning process by using accounting software, such as an accounts receivable automation solution.

How Dunning Works

Key aspects of the dunning process include:

  • Reminder: These are typically structured in a series of escalating notifications. The initial reminders might be gentle, acknowledging that the payment might have been overlooked. If the invoice remains unpaid, subsequent reminders will become more insistent and direct.
  • Frequency and Tone: The frequency and tone of these communications can vary. Businesses often have a dunning policy that dictates how often and in what manner these reminders are sent.
  • Different Stages: The dunning process includes several stages, starting from a friendly reminder to more serious letters, which will include warnings about potential consequences of non-payment, such as discontinuation of services, involvement of collection agencies, or legal action.
  • Automation: Many businesses use automated systems for their dunning processes. These systems can automatically send out reminder notices at predetermined intervals.
  • Purpose: The primary goal of dunning is to recover owed money while maintaining a good relationship with the customer. It's a balancing act between being assertive enough to get the invoice paid and not so aggressive as to alienate the customer.
  • Final Steps: If the dunning process fails to secure payment, the business will then consider other options, like involving a collection agency or legal action.

Dunning Email Components

A dunning notice, designed to remind clients or customers about overdue payments, typically includes several key components to ensure it is effective, clear, and professional. Here are the fundamental elements involved:

  • Clear Subject Line: The subject should be straightforward, showing that the email is about an overdue payment or invoice. It should grab the recipient's attention without being aggressive.
  • Professional Tone: The tone of the email should be professional and courteous. While it's important to convey the seriousness of the matter, it's equally important to maintain a respectful tone to preserve the business relationship.
  • Personalization: Address the recipient by name to personalize the message. This shows respect and professionalism.
  • Company Information: Include your company‚Äôs name, contact information, and personal information, such as the name of the person responsible for accounts receivable. This makes it easier for the recipient to reach out if they have concerns.
  • Invoice Details: Clearly mention the invoice number, the date it was issued, payment information, net terms, payment method (with a partial payment or payment failure), outstanding payments, and the due date. You can also include a list of unpaid invoices, if there are many. This helps the recipient to identify the transaction in question.
  • Statement of Account Status: Politely show that the payment is overdue and specify by how many days.
  • Call to Action: Provide explicit instructions on how to make the payment. Include details such as payment methods, where to send payment, and any online payment options if available.
  • Invoice Copy: Attach a copy of the original invoice to the email. This helps to eliminate any confusion about what is being requested.
  • Non-Payment Consequences: If applicable, outline the consequences of continued non-payment, such as late fees, interest charges, or potential cessation of services. However, this should be done tactfully to avoid alienating the customer.
  • Offer to Discuss: Sometimes non-payment is because of a dispute or misunderstanding about the invoice. Offer an opportunity to discuss any issues the customer might have, showing your willingness to resolve any problems.
  • Thank You: Conclude with a polite thank you, acknowledging their attention to the matter and appreciating their prompt response.
  • Privacy Disclaimer: If required, include a standard privacy disclaimer at the end of the email.

Dunning for Subscription Based Businesses and Enterprise Companies 

Dunning, as a part of accounts receivable management, can differ significantly between subscription based businesses and enterprise businesses due to the nature of their billing models, customer relationships, and scale of operations. 

Subscription-Based Businesses

  • Recurring Billing: Subscription businesses usually involve recurring payment, often in monthly, quarterly, half-yearly or annual billing cycles. Dunning, in this context, often focuses on ensuring continuity of subscription payments.
  • Automated Payments: A subscription business sets up automated payment methods (like credit card payments or direct debits). Dunning processes here frequently address failed payments, such as expired credit cards or insufficient funds.
  • Smaller Invoice Amounts: Typically, individual subscription payments are smaller, but high in volume. The focus is often on automated, scalable dunning processes that can handle many overdue amounts.
  • Customer Retention Focus: For subscription models, keeping customers over the long term is crucial. Dunning communications often include elements aimed at retaining the customer, such as offering payment plans or reminding them of the value of the subscription.
  • Frequent Communication: Given the recurring nature of payments, communication with customers might be more frequent, focusing on maintaining updated payment information and proactively addressing potential payment issues.

Enterprise Businesses

  • Larger, Irregular Invoices: Enterprise businesses often deal with larger invoice amounts and less predictable payment schedules. Dunning in this context is more tailored to individual accounts.
  • Customized Payment Terms: Enterprise invoices often have varied payment terms negotiated with each client. Dunning processes need to account for these individual agreements.
  • Relationship-Based Approach: Dunning in an enterprise context will involve more direct, personal communication, especially for high-value accounts. The approach is often more about negotiation and problem-solving.
  • Legal and Compliance Factors: Given the larger sums involved, legal and compliance considerations are often more prominent. There will be more stringent procedures and documentation involved in the dunning process.
  • Diverse Customer Base: Enterprise businesses will deal with a more diverse range of clients, including other businesses of varying sizes. This requires a more customized approach to dunning, considering different industries, business practices, and cultures.
  • Integration with Sales and Account Management: Dunning processes in enterprise businesses are often closely integrated with sales and account management efforts, ensuring a coordinated approach to maintaining customer relationships.

Dunning Benefits

Here are the advantages involved by adopting a successful dunning process: 

  • Improved Cash Flow: By ensuring that payments are made on time, dunning helps maintain a healthy cash flow. This is crucial for the financial stability of a business, as it relies on cash flow to meet its own obligations, such as paying suppliers, employees, and other operational expenses.
  • Reduction in Bad Debt: Regular dunning can significantly reduce the likelihood of accounts becoming bad debts. By actively pursuing every overdue payment, companies can recover funds before they become uncollectible.
  • Time and Resource Efficiency: Automated dunning processes save time and resources that would otherwise be spent on manual follow-ups. This allows staff to focus on more productive tasks that add value to the business.
  • Customer Relationship: While it can seem counterintuitive, dunning management can actually contribute to better customer relationships, leading to customer retention. Clear and professional communication about payment expectations can prevent misunderstandings and establish a basis for mutual respect and long-term collaboration.
  • Data Collection and Analysis: Dunning processes often generate valuable data on customer payment behaviors, which can be analyzed to improve credit management strategies. This data can help in identifying trends, such as which customers consistently pay late, allowing for more tailored credit policies.
  • Legal Protection and Compliance: A formal dunning process ensures that all actions taken to recover debts are in line with legal requirements and industry best practices. This is important if the matter escalates to legal action.
  • Reputation Management: By handling overdue payments professionally, a business can maintain its reputation in the market. This is important for attracting new customers and keeping existing ones.
  • Predictability in Revenue Recognition: Revenue recognition predictability happens with well-executed receivables follow-up sequences. This is vital for accurate financial planning and analysis.

Dunning Challenges

The dunning process, while crucial for managing accounts receivable and maintaining cash flow, can present several challenges:

  • Customer Churn: One of the primary challenges is balancing the need to recover debts with the need to maintain positive customer relationships. Aggressive or poorly handled dunning can damage relationships and lead to involuntary churn.¬†
  • Cultural Sensitivities: Different cultures have different norms and sensitivities regarding accounts receivable collection. What is considered a polite reminder in one culture might be seen as too aggressive or too passive in another.
  • Scaling the Process: For businesses with many customers, scaling the dunning process effectively can be difficult. Managing a high volume of overdue accounts requires resources and systems that can handle the workload without sacrificing quality.
  • Data Management and Accuracy: Ensuring that the data used in the dunning process is accurate and up-to-date is essential. Incorrect information can lead to disputes and further delay payment.
  • Response Management: Handling responses from customers, whether they are disputes, promises to pay, or requests for more information, requires time and effort. Efficiently managing these responses is crucial for the effectiveness of the dunning process.
  • Automation vs. Personalization: While automation can help in managing a large volume of dunning activities, it can sometimes lack the personal touch needed to handle sensitive situations effectively. Finding the right balance between automated and personalized communication is a challenge.
  • Measuring Effectiveness: Assessing dunning effectiveness can be challenging. Businesses need to track the right metrics to understand whether their approach is working or needs change.
  • Training and Staffing: Employees involved in dunning need to be well-trained in customer service, negotiation, and the legal aspects of debt collection. Finding and training the right staff can be challenging and costly.
  • Technological Integration: Integrating dunning software with existing accounting and CRM systems can be complex, requiring time and resources to ensure seamless operation.
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