What Is the Dunning Process for Accounts Receivable?

The dunning process is a structured series of communications businesses use to collect outstanding accounts receivable from customers with overdue invoices. The primary goal is to improve cash flow by systematically pursuing late payments and converting revenue into cash.

Designing the Dunning Framework

A dunning process begins with a framework that dictates how and when to communicate with customers. This plan serves as the foundation for all collection activities, balancing payment collection with preserving the business relationship.

Adhering to legal standards is part of this framework. While a business collecting its own debts is not governed by the main federal law for third-party collectors, other rules apply. The Telephone Consumer Protection Act (TCPA) restricts automated calls and texts, and the Federal Trade Commission (FTC) Act prohibits unfair practices. State laws may also impose additional requirements on collection communications.

Dunning Levels

The framework is built around escalating dunning levels. A common structure involves four stages, starting with a gentle reminder and progressing toward a final warning. The first level, sent shortly after an invoice is overdue, acts as a soft nudge. Subsequent levels increase in firmness, with the final level being a pre-collections warning that states the consequences of non-payment.

Timeline and Frequency

A clear timeline determines when notices are sent and can include a pre-dunning reminder before the due date. Once an invoice is past due, the first notice is sent within 1-3 days, with subsequent communications following every 7 to 10 days. A common approach involves sending three to four messages over a 28-day period.

Communication Channels

The choice of communication channel depends on the dunning level. Email is common for initial reminders, while physical letters can add formal weight to later notices. SMS messages are effective for brief alerts, and direct phone calls can be used for high-value accounts or when other methods are ignored.

Message Content and Tone

Each message must be precise, including the invoice number, outstanding amount, due date, and payment instructions. The tone shifts with the dunning level, starting as friendly and helpful. Follow-up messages adopt a firmer, more serious tone, and final notices are direct, outlining the impending consequences.

Required Data

An effective process relies on accurate data. This includes correct customer contact information and a complete record of all invoices, with their issue dates, due dates, amounts, and payment status. This information is managed within an accounting or Enterprise Resource Planning (ERP) software.

Executing the Dunning Cycle

With a framework in place, the execution of the dunning cycle is a systematic task. The process is triggered the moment an invoice is identified in the accounting system as being past its due date, which initiates the first step of the communication plan.

The cycle unfolds according to the established timeline and escalation path. If a customer does not pay after one notice, the process automatically escalates to the next level of communication. This sequence continues methodically through the defined levels until the invoice is paid.

The internal dunning cycle concludes after the final pre-collections notice has been sent and the specified waiting period has passed without payment. At this point, the account is flagged for manual review. This review determines whether the debt should be written off or handed over to an external collections agency.

Automating the Dunning Process

Technology can be used to perform the procedural steps of the dunning cycle, significantly reducing manual effort and improving efficiency. Accounting software and specialized dunning platforms can automate the entire collections workflow, transforming accounts receivable into a streamlined process.

Automation tools track invoice due dates and automatically send communications based on predefined triggers. The system also monitors for incoming payments and will automatically halt the dunning sequence for a specific invoice once payment is recorded. This prevents sending notices to customers who have already paid.

Setting up an automated system involves translating the dunning framework into a set of rules within the software. A user defines the dunning levels, the timing between communications, and the message templates for each stage. This ensures that no overdue invoice is missed and that the collections process is applied consistently across all customers.