The practice of extending credit terms to clients is not a novel concept in today’s commercial world. Read about how to prepare dunning letters to improve your AR.
November 09, 2022 
In the business-to-business (B2B) sector, it is quite common to come across clients who do not settle their invoices by the due date. Thus, sending a gentle reminder is often a necessary practice employed by the affected companies.
The payment collection invoice letter delivered to the customer as a reminder of their past due invoice(s) is termed a “dunning letter.”
Dunning letters are often written and used by the firm’s accounts receivable unit to follow up on customers who are late on their payments, in which the main objective of their efforts is to minimise the number of client accounts that become delinquent.
Similarly, dunning letters are a useful resource to help accounts receivable professionals better manage their days sales outstanding (DSO) as part of ensuring that the company’s cash flow remains in a healthy state.
The practice of extending credit terms to clients is not a novel concept in today’s commercial world. In an ideal situation, the business would always have its customers paying their invoices in a punctual manner without much trouble. However, the real business world is by no means perfect, and it is completely normal for firms having to prompt their customers to settle their bills as soon as possible. With that, this millennia-old issue has sparked the development of various approaches to maximise the chances of successful debt collections. One of the methods that remain popular today, in specific, is by sending a dunning letter to the clients.
The smart credit control platform, Kolleno, is a remarkable digital tool to streamline the entire payment collection process. It provides comprehensive accounts receivable software on top of a collection solution to help companies get paid without encountering too much of a headache.
The term “dun” became a mainstream keyword in the 17th century, where it first began as an accounting phrase defined as a demand for debt repayment. Fast-forwarding to our society at the point of writing, many companies adopt dunning letters when implementing their payment collections procedure because of this piece of document specifics all the necessary information regarding the transaction. This, in turn, permits the recognition of a dunning letter as eligible evidence to be formally presented in court if such a situation arises. In particular, the dunning letter typically documents the following elements:
-An explicit message stating that their invoice is overdue.
-A copy of the original past due invoice documenting the company’s transaction with the customer, including the date of purchase, the products and/or services delivered, as well as the amount owed and/or interest levied.
-The preferred payment options followed by the ideal schedule and future steps.
-The potential consequences should the customers fail to abide by the relevant laws governing the payment collections procedure, such as the penalty fees incurred.
With that, companies are strongly advised to follow up with the customer by giving them a short call as part of confirming receipt and providing them with an opportunity to discuss any concerns they may have regarding the invoice. Fundamentally, the main objective for the firm is to attempt to secure the customer’s verbal commitment to settle the bill.
In essence, dunning letters can greatly assist companies with staying on top of their accounts receivable management process as well as preventing an increase in bad debts. These, in turn, enable the business to sustain a healthy cash flow for its long-term operations.
In short, a dunning letter is not equivalent to a month-end statement. This is because a statement is a document delivered to all clients who have unsettled invoices at the end of every month, where it lists every invoice they have yet to pay, even if the due dates are not nearing. Therefore, the statement ought to be viewed more as a simple document showcasing an overview of the customers’ accounts at a specific point in time.
Nevertheless, a statement could still be deemed to be a collection tool as clients receiving notices about invoices that they do not possess may lead to inquiries, thereby assisting the accounts receivable department in maintaining accurate records of sales transactions completed by the business.
Essentially, a delinquent account is defined as a client who has not made their payment within their allocated credit timeframe, which is usually between one and two months. In the majority of scenarios, the accounts receivable department would segment the various delinquent accounts based on the number of days they have been overdue, such as less than 30 days, more than 60 days, and over 90 days late.
There are several contributing factors to why certain clients would become late payers for the goods and/or services they have purchased; in which typical incidences would include:
-The poor communication of the customer credit terms and period within the invoice resulted in a misunderstanding by the client regarding the actual payment due date.
-Severe cash flow problems within the client’s company lead to their management needing to prioritise conserving capital.
-A genuine error on the client’s end for forgetting or missing the delivered invoice reminders.
-The selected payment methods are extremely inconvenient and/or difficult to use.
-The customer chooses to avoid paying their bills actively.
-The adoption of a paper-based and largely manual invoicing protocol may cause a delay in the sending of invoices to the customers and, subsequently, an overdue payment.
-The invoice was delivered to the wrong address, so the client never received it.
On that note, this thereby showcases that developing and implementing a streamlined payment collections process is key if the company intends to accelerate the speed of its invoice settlement step.
In general, there are several rules and regulations governing the degree of threat that companies would be allowed to convey through a dunning letter. Much of this would be dependent on the government jurisdiction where the client’s company is based at. Nonetheless, the general best practice is for businesses to avoid issuing excessively aggressive and strident dunning letters completely or to consult a lawyer before delivering them.
There are a number of ways in which corporations can format their dunning letters. During its earlier days, a dunning letter would be delivered via a traditional paper-based delivery process as part of demonstrating the cumulating urgency of the company’s demand. Plus, such a delivery method was also used to ensure the customer’s official receipt, especially if it is a registered mail or an overnight posting. Besides that, other methods of delivery include email, fax, or even an SMS because such electronic-based approaches allow much faster delivery. However, the problem associated with these tactics is that they offer no guarantee that the client has effectively received the message.
Moving forward, dunning letters are typically generated using computer software without human touch. In particular, the configured system uses a special text font to indicate if the customer has not made their payment within a specific timeframe. Meanwhile, if the payment has become significantly overdue, the system automatically generates a different set of text fonts to illustrate that. This subsequently makes it much more efficient for the accounts receivable professionals to categorise the different dunning letters to be delegated to a third-party collections agency to be managed.
Regardless, suppose the credit management unit discovered a need to make minor variations to the format of the dunning letters, such as the letter’s content or the credit period to be awarded. In that case, they will be able to make the changes very easily via the computing system. For instance, if a company has performed simple A/B testing to determine which version of a dunning letter results in a higher number of successful customer debt repayments, the management could thereby make the necessary amendments to generate an updated default dunning letter presentation to be deployed.
All payment collections teams must maintain an accurate record of their respective clients’ payment schedules so that they can maximise the amount of revenue realised for the company. Even though no cookie-cutter solution can be applied to every business’s collection process, there are several general practices that any firm could consider adopting. This begins with:
The best time to notify customers about their overdue invoices would be as soon as possible. To do that, corporations will need to actively monitor the client accounts on a regular basis to identify any upcoming late payments as quickly as possible.
Essentially, businesses need to determine a schedule in which they will send out the invoices to their customers, including the frequency of sending off the invoice reminder emails. For instance, certain firms may prefer to send a gentle weekly reminder across a 30-day timeline, while others may opt to remind their clients once a month over a three-month period. Not to mention, the firm will also need to select a cut-off timepoint to either write off the invoice as a bad debt or outsource the collection task to a third-party agency.
It is advisable for companies to create a few different dunning letter templates based on the varying stages of the payment request from the client. In essence, firms will need to determine the appropriate situations for them to progressively increase the strictness in terms of their writing tone for their dunning letters.
Upon confirming that the client is running late on their payments, firms can now kickstart the process of sending dunning letters. However, it is important for them to select suitable messaging channels ahead of time to streamline the entire procedure.
Business owners often worry about the suitable times for them to employ a stricter writing tone when they are drafting dunning letters, which is completely understandable given that they hope to display the necessary professionalism when managing such a difficult situation.
With that, the general rule of thumb for businesses is to select a tone based on the specific stage in which the customer is late on paying for their invoice. As an example, if a client is only one day behind paying their bill, sharing a gentle and friendly payment reminder should be sufficient to prompt the customer. On the contrary, if the customer is already 90 days late on their payment, it would thereby be more acceptable for the company to select a stern writing tone in order to request a payment as soon as possible.
Possessing a solid grasp and in-depth understanding of the firm’s days outstanding sales can positively influence how the payment collection process is structured.
To accomplish this feat, businesses would require a centralised, single source of truth to contain every information relevant to the company’s accounts receivable performance. This, in turn, permits the firm to gauge a high-level overview of its effectiveness in collecting debt repayments. Fortunately, there are many accounts receivable software out there to empower businesses to do so, in which such as software-as-a-service (SaaS) solutions:
-Offers a real-time overview of the company’s invoice collection process.
-Allows companies to contact customers prior to their invoices’ official due date.
-Identify interesting patterns that may suggest common contributing factors to late invoice settlements.
In the long term, recording a decrease in the firm’s DSO rate would be a positive indication of the efficacy of these efforts.
The accounts receivable department managing the payment collection process via a manual approach usually lacks a unified system to determine which clients need to be reminded about their upcoming invoice deadline. This consequently leaves the company having to make a rough estimation of their outstanding payment balance at the end of every month.
Given the often-heavy workload associated with this process, there are several ways for the team to tackle this issue. Firstly, the company could choose to recruit more people for the accounts receivable department. However, the issue with this option is that this approach may not necessarily improve the company’s DSO. This is especially true if the underlying system is still time-consuming and manually driven. Alternatively, the company could opt for restructuring the entire payment collections team by appointing a specific employee as the dunning manager and their direct reports. Nevertheless, this still does not directly address the underlying manual process associated with the distribution of dunning letters.
This thereby leads us to the third option, as previously hinted, which is the automation of the entire dunning letter distribution and payment collection process via adopting an accounts receivable software solution. By using such an approach, companies will be able to work much more efficiently and increase their ability to collaborate well with their clients to streamline the entire collection process. Furthermore, this strategy may enable the business to customise its communication approach with its customers to provide a more personalised touch to the conversation. Moreover, these software solutions would typically allow companies to monitor their DSO and account receivable performance via a single unified dashboard so that the finance professionals will not need to calculate the details manually whenever needed.
A noteworthy example of such automation software would be Kolleno. This smart credit control platform simplifies the entire debt collection process by bringing the communications, accounting, and payment systems into a unified platform.
Overall, drafting and sending dunning letters is a tricky yet inevitable process that all companies will eventually need to face as part of their journey to success. Thus, practising certain strategies to prevent the emergence of delinquent accounts would be the most effective way moving forward to minimise the necessity for a dunning letter to be written.
In the meantime, the rise of technological innovations has vastly helped smoothen the payment collection process for business owners, permitting dunning managers to properly tailor and schedule the delivery of their dunning letters to specific customers. As a result, such an approach can save plenty of time, money, and mental stress.
Having mentioned that, Kolleno is a smart credit control platform providing sophisticated accounts receivable software to help businesses streamline their entire payment collection process, including the generation of dunning letter templates to be delivered to the relevant client.
A dunning letter is a formal document mailed to the client to inform them of an overdue payment for a previous sales transaction that they need to settle with the company as soon as possible.
Dunning letters got its name from the term “dun”, which was first coined in the 17th contrary. This term, in short, essentially translates to the demand for debt repayment.
Generally speaking, dunning letters would usually contain the basic details such as the amount owed by the client, the date of the unsettled invoice, the unpaid invoice number, as well as the penalties associated with late payments and/or interest.
