What Is Dunning in Accounts Receivable?

Dunning is the systematic process businesses use to collect overdue invoices from customers. It involves a series of communications designed to prompt payment for goods or services provided on credit. This practice is a long-standing component of accounts receivable management, ensuring businesses receive money owed to them for financial health and operational continuity.

Understanding Dunning

Dunning is a structured communication strategy aimed at recovering outstanding debts and ensuring consistent cash flow. When a business extends credit, it creates accounts receivable, which are amounts owed for products or services delivered. The purpose of dunning is to convert these receivables into cash. Without a proactive approach, businesses risk accumulating bad debt, negatively impacting financial stability.

Businesses use dunning to manage accounts receivable effectively. Prompt collection of outstanding invoices helps reduce Days Sales Outstanding (DSO), a metric measuring the average time to collect receivables. A lower DSO indicates efficient cash conversion. This process helps identify late payers early, allowing businesses to adjust credit terms or involve collection agencies before debt becomes uncollectible. An organized dunning strategy ensures liquidity for daily operations, investments, and debt repayment.

The Dunning Process

The dunning process begins with gentle reminders and escalates as an invoice remains unpaid. The first step involves sending a friendly reminder shortly after the payment due date, within one to seven days. This initial communication is courteous and aims to prompt payment, assuming an accidental oversight. If payment is not received, a second reminder may be sent around 15 to 30 days past the due date. This notice is more urgent, reiterating the outstanding amount and original due date.

As the debt ages, a final notice or demand letter is sent, often 30 to 60 days past due. This communication is firmer, stating consequences of non-payment, such as late fees or referral to a collection agency. For instance, some businesses may include a late fee of 1.5% per month on overdue balances, as permitted by many commercial agreements. If these efforts are unsuccessful, the account may enter a pre-collections phase, where direct communication like phone calls occurs. Eventually, if the debt remains unpaid, the account could be turned over to a third-party collection agency or legal action may be considered as a last resort.

Communication Channels in Dunning

Businesses use various communication methods for dunning notices, adapting their approach based on the process stage and customer preferences. Email is a widely used channel for initial and subsequent reminders due to its efficiency and cost-effectiveness. These emails include the outstanding balance, original due date, and a direct payment link.

SMS messages are used for concise, urgent reminders. Texts are effective for short notices about upcoming deadlines or immediate payment requests.

Phone calls allow for direct interaction, enabling businesses to discuss payment issues, offer solutions, or understand reasons for delay. This channel becomes more common as invoices become overdue.

Physical mail, including formal letters, is used for more serious notices, such as final demands or pre-collections warnings, offering a tangible record. Many businesses utilize automated systems to send reminders across these channels, streamlining the dunning effort.