Dunning management: Importance, processes, and best practices

Your DSO keeps climbing, and your finance team is spending hours chasing payments instead of focusing on strategic work.

I know firsthand that poor dunning management slows collections, ties up working capital, and forces your team into reactive mode when they should be driving business value.

The reality: businesses lose an average of 9% of their monthly revenue to failed payments, while companies with systematic dunning processes collect payments 54 days or more faster and see DSO reductions of up to 60%.

While technology and team size matter, having a strategic approach to collections should not be an afterthought.

What is dunning in accounts receivable?

Dunning is how businesses remind customers about overdue payments. It aims to get invoices paid on time and reduce the money owed. This can be done through phone calls, emails, letters, or even in-person visits. The goal is to remind customers about their unpaid invoices and encourage them to pay quickly.

However, relying solely on manual dunning processes can be time-consuming and inefficient.  Businesses often struggle with the sheer volume of overdue invoices, leading to missed opportunities for follow-up and a slower cash flow. 

Why does dunning matter for your business?

Dunning is a critical process in accounts receivable that involves sending reminders and notices to customers who have overdue invoices. The goal of dunning is to encourage timely payments, reduce outstanding accounts receivable, and maintain positive customer relationships. 

Below are some of the primary reasons why dunning is important for your business:

• Reduced accounts receivable: Dunning helps to reduce the amount of outstanding accounts receivable by encouraging customers to pay their invoices on time. This improves cash flow and reduces the risk of bad debt.
• Improved customer relationships: Effective dunning can help to improve customer relationships by reminding customers of their outstanding invoices and providing them with an opportunity to resolve the issue. This can help to prevent misunderstandings and build trust between the customer and the business.
• Increased efficiency: Dunning can help to increase efficiency by automating the process of sending reminders and notices. This frees up accounts receivable staff to focus on other tasks, such as credit checks and collections.
• Reduced risk of bad debt: Dunning can help to reduce the risk of bad debt by identifying customers who are at risk of defaulting on their payments. This allows businesses to take steps to mitigate the risk, such as requiring a deposit or offering a payment plan.
• Improved credit score: A good dunning process can help to improve a business's credit score by demonstrating that the business is able to effectively manage its accounts receivable. This can make it easier for the business to obtain loans and other forms of financing.
• Reduced DSO: One of the most significant impacts of effective dunning is the acceleration of cash collection. A dunning management software, helps to reduce DSO. 

For example, some Chaser users have seen their DSO decrease by 60%, from 60 to approximately 24 days, and an average 75% reduction in DSO, leading to payments received 54+ days sooner. This directly improves your cash flow and financial health.

What is dunning process automation?

The primary objectives of a well-executed dunning process are to expedite the collection of receivables, minimize bad debt write-offs, and maintain positive customer relationships. Automating this process significantly reduces the manual effort involved and improves efficiency.

How a typical dunning process works with automation:

Invoice issuance

The process commences with the issuance of an invoice to the customer upon completion of a sale or service. This is often integrated with accounting systems, automatically outlining payment terms, including the amount due, due date, and any applicable late payment fees or interest charges.

Initial reminder (soft dunning)

If payment is not received by the due date, the customer is sent a gentle reminder. Dunning software automates this initial communication, typically a courteous and non-threatening email or letter, serving as a polite nudge reminding the customer of the outstanding invoice and requesting prompt payment.

Second reminder (firm dunning)

Should the customer fail to respond to the initial reminder, a second, more assertive reminder is issued. Automated workflows within the dunning software can be configured to highlight the consequences of continued non-payment, such as the accrual of late fees or interest, and adopt a firmer tone.

Final reminder (pre-collection)

In the event that the second reminder proves unsuccessful, a final notice is sent. This communication is typically the last step before escalating dunning collections to collection action and may explicitly state the intent to pursue legal action or engage a collection agency if payment is not forthcoming.

This can be automatically triggered based on predefined rules in the dunning software.

Collection action

If all previous attempts at recovering the debt have failed, the business may resort to collection action. Automated dunning systems can integrate with third-party collection agencies or accounting systems to facilitate the write-off of the debt as a loss, minimizing manual data entry and reconciliation.

Dunning management software or manual processes (which is right for your business)

The difference between dunning management software and manual processes for businesses primarily revolves around efficiency, accuracy, financial health, and customer relations. 

While manual processes are basic and can suffice for very small-scale operations with few invoices, dunning management software provides a powerful, automated, and comprehensive solution that addresses the core pain points of late payments, improves efficiency, and strengthens the financial health of businesses.

Dunning management best practices

A well-managed dunning process is essential for maintaining healthy cash flow and strong customer relationships. While dunning management software automates much of the heavy lifting, successful implementation still requires strategic planning and adherence to best practices.

Establish a clear dunning policy

A dunning policy is essential for managing accounts receivable, detailing steps for collecting overdue invoices. It should define communication frequency (daily, weekly, bi-weekly) and adjust based on delinquency.

The tone of communications must escalate from polite to firm, while remaining professional and legally compliant. The policy also needs to specify communication channels (email, phone, mail) and identify responsible parties for each collection stage.

Start dunning early

Timeliness is paramount in dunning management. Initiating the dunning process promptly significantly increases the probability of successfully collecting overdue payments. Delays can lead to a decrease in collection rates, as outstanding invoices become harder to recover over time.

Be consistent with your dunning efforts

When implementing a dunning management strategy, consistently schedule dunning notices. Regular follow-ups, even if a customer hasn't responded, ensure overdue accounts are addressed and increase payment recovery likelihood.

Use a variety of dunning methods

Managing overdue payments effectively means using various communication methods. Mail is a traditional, reliable, and official way to send notices, with certified mail offering delivery confirmation.

Email is a cheap, fast, and common option that allows for automated messages and tracking. Phone calls offer a personal touch, allowing for discussions and understanding of customer situations.

If internal efforts fail, hiring a collection agency is a good last resort, providing specialized debt recovery resources, but choose a reputable one carefully.

Offer payment options

If a customer is unable to pay their invoice in full, offer them payment options, such as a payment plan or a discount for early payment.

When customers can't pay invoices, businesses should offer flexible options to help them, instead of punishing them. This helps recover debt and keep customers happy.

Here are some key strategies:

• Payment plans: Break large invoices into smaller, manageable installments.
• Early payment discounts: Offer a discount if customers pay sooner.
• Temporary deferrals: Allow delays in payment for customers facing extreme hardship.
• Partial payments: Accept smaller payments towards the total amount.
• Credit card options: Provide the ability to pay by credit card.
  
  

Setting up automated sequences

Automated dunning sequences are crucial. Design them with careful timing, frequency, and escalation, considering customer segmentation (e.g., payment history, invoice value) for tailored approaches.

Start with a gentle reminder before the due date, escalate after, and allow sufficient time between communications.

Measuring success and optimization

To ensure your dunning process is effective, continuously measure its success and identify areas for optimization. Key performance indicators (KPIs) to track include:

• Days Sales Outstanding (DSO): A reduction in DSO indicates faster payment collection.
• Collection rates: The percentage of overdue invoices successfully collected.
• Response rates: How often customers respond to your automated reminders.
• Time saved: Quantify the hours saved by automating tasks previously done manually.
• Aged debt analysis: Track the age of your outstanding invoices to identify trends and potential issues.

Use the insights gained from these metrics to refine your automated sequences, messaging, and overall dunning strategy. Regular review and adjustment are key to maximizing the efficiency and effectiveness of your dunning efforts.

What happens if dunning doesn’t work?

If you've sent a dunning letter and still haven't received payment, there are a few things you can do:

• Call the customer: Sometimes, a personal touch can go a long way. Calling the customer can help you to determine why they haven't paid and to work out a payment plan.
  
  
• Send a stronger letter: If a phone call doesn't work, you can send a stronger letter. This letter should be more assertive and should include a deadline for payment.
  
  
• Hire a collection agency: If the customer still doesn't pay, you may need to hire a collection agency. A collection agency will work on your behalf to collect the debt.
  
  
• Take legal action: As a last resort, you may need to take legal action against the customer. This should only be done if you have exhausted all other options.

Improve your dunning process with Chaser

If your finance team is burning 15+ hours per week on manual dunning tasks, missing follow-ups, and watching your DSO climb past 60 days, Chaser eliminates the operational drain that's keeping your team from strategic work.

Stop losing revenue to timing guesswork: Chaser analyzes payment patterns to send reminders when customers are most likely to pay, increasing response rates by 40%.

Eliminate the manual dunning cycle: Multi-channel reminders via email, SMS, and auto-call maintain your brand voice while freeing up your team. Customers never know it's automated.

Get real-time visibility into cash flow: Automatic reconciliation with your accounting system means you always know which payments are coming when. No more chasing paid invoices.

Accelerate collections by 54+ days: Users typically see DSO reductions of 75%, with payments coming 54+ days faster. That's working capital freed up for strategic investments instead of being tied up in receivables.

Ready to see your DSO drop and get your team focused on strategy? Book a demo.

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