Collection teams are responsible for recovering overdue payments from customers. Their tasks include contacting debtors, negotiating payment plans, and ensuring rules are followed. Their success depends on balancing being firm and understanding, as they deal with complex financial situations with professionalism and persistence.
To do this effectively, they rely on strategic tools and methods, and one of the most important tools is the Dunning process.
This guide is designed to help collections teams succeed. It covers everything from the basics of dunning to key best practices, giving teams the tools they need to collect debts faster.
What is Dunning?
Dunning is a method that collection teams use to collect payment from customers. It includes steps to avoid missed payments in advance and to resolve payment issues after they happen. The term “Dunning” comes from the 17th-century word ‘dun,’ which meant ‘demand of payment for debt’.
Collection teams use different ways to remind customers to pay their bills on time. They start with friendly reminders and may move to stronger actions, like phone calls, site visits, or legal notices, if the bills remain unpaid for a longer time.
For example, a company called “Tech Solutions” sold a computer to a customer, but the customer hasn’t paid the bill yet. After 30 days, Tech Solutions sends a polite email reminding the customer to pay. If the customer still doesn’t pay, Tech Solutions sends another reminder a week later, and possibly a final notice with a warning of late fees or service suspension. This process is called dunning.
The dunning process is a step-by-step method used to remind and collect payments from customers. Here’s a simple explanation of how it works:
1. Initial Communication:
The process usually starts with polite reminders to customers about upcoming payments. These reminders can be sent through emails, WhatsApp messages, or letters to encourage them to pay on time.
2. Escalation of Communication:
As payments continue to be overdue, the communication becomes more assertive. This may involve sending follow-up emails and letters or making phone calls to remind customers of their outstanding payments. The tone gets firmer to stress the importance of paying the debt.
3. Alternative Payment Arrangements:
Sometimes, businesses offer different payment options to help customers manage their debts. This might include plans where customers can pay in parts or other flexible ways to make it easier for them to pay what they owe.
4. Increased Urgency:
If the first attempts don’t work, the dunning process moves to a more serious stage. This may include sending final reminders or stronger messages, warning about the possible consequences of not paying the debt.
5. Legal Action:
If all other options fail, taking legal action may be the final step. This could mean hiring a collection agency or going to court to recover the unpaid debt. However, both sides usually try to settle the issue peacefully before it gets to this point.
It’s important to stay professional and respectful throughout the process. Even when facing challenges, collection teams should try to maintain a good relationship with the customer, as strong customer relationships help ensure long-term success.
4 Step Guide to an Effective Dunning Process
Step 1: Identify Account Category
The first step is to create an accounts receivable aging report and review the customer’s past payment habits. This will show the unpaid invoices, the amount each customer owes, and how they have paid in the past. Look at the reports and divide the customer accounts into three groups:
1) High risk – Accounts that are delinquent and require immediate follow-up action.
2) Medium risk – Accounts that require follow-up action after a course of time.
3) Low risk – Accounts that require negligible follow-up action.
Step 2: Strategize Outreach
The next step is to plan dunning outreach based on different account types. The strategies will vary depending on the business. Below are some industry best practices you can follow.
1) High risk – Prioritize delinquent accounts for customized and multi-thread follow-ups. Some businesses may opt to target customers with the highest outstanding amounts, while others may focus on those with the most extended overdue periods.
2) Medium risk – Initiate the follow-up with friendly reminders about the outstanding payments. Emphasize the importance of timely payment and highlight any consequences of continued delay. Implement a combination of automated and personalized reminder communications at frequent intervals.
3) Low risk – While low-risk accounts may require less frequent follow-up, maintaining regular communication is still essential. Send occasional friendly reminders or updates on account status without being intrusive. Automate the reminder communications so you can focus on complex and critical accounts.
Step 3: Create Dunning Letters
Once the strategies are decided, the next step is to draft dunning letters. The content of these letters will depend on your outreach strategy. For medium and low-risk accounts, you can use dunning letter templates to send follow-up messages.
Here’s an example of a dunning letter:
Get our dunning template by filling out the form below. You’ll receive 7 reminder email templates to help you speed up payment recovery.
For creating personalized dunning letters for high-risk accounts, you can refer to our guide on “Dunning Letters: An In-depth Guide With Examples and Subject Lines“. To ensure effective communication, send follow-ups via multiple channels such as email, WhatsApp messages, and mail.
Step 4: Follow Up on Previous Communication
As mentioned earlier, low-risk accounts don’t need frequent follow-ups, but medium to high-risk accounts require more regular and proactive communication. Set up a clear schedule for collection calls, emails, or messages to keep these accounts updated on their outstanding payments and the possible consequences of not paying.
Make sure you handle direct communication with customers in a way that doesn’t harm the relationship. Clear communication is important—talk to customers, understand why they can’t meet their obligations, and offer solutions. For example, if a customer is short on funds, you can work with them to set up a plan for partial payments.
Here are some easy-to-use collection call scripts you can use when talking to a customer.
What is Automated Dunning and How Can It Help Collection Teams?
Automated dunning is a transformative approach that streamlines the debt collection process for collection teams. It uses pre-set workflows and communication steps that automatically start based on certain conditions or customer groups.
Solutions such as Peakflo Collection Task Management are key to improving the efficiency of collection teams during the dunning process. Let’s explore the features and benefits of automated dunning:
1. Scheduled Communication
Automated dunning lets collection teams set up and automate messages to customers at specific times. This includes sending reminders, notifications, and follow-up messages without needing to do it manually.
2. Personalization and Segmentation
Advanced automated systems can tailor communication based on customer details and actions. Creating a collection workflow for different customer groups, based on their payment history or unpaid amounts, makes communication more effective.
3. Escalation Triggers
Automated systems can be configured to escalate the intensity of communication to the right stakeholders in the customer’s organization. This ensures a more effective approach to payment recovery.
4. Multichannel Communication
Leveraging multi-channel communication, including email, WhatsApp, SMS, Zalo, Line, and Viber, ensuring that customers are reached through their preferred channels. This increases the likelihood of timely responses.
5. Data Analytics and Reporting
Monitor process health with in-built and customizable AI-powered reports. Collection teams can understand debtor behavior, spot trends, and evaluate how well their strategies are working. This data-driven method helps make constant improvements.
Collection teams need to focus on strategic tasks instead of dealing with the overwhelming manual burden of sending hundreds of follow-ups. Embrace Peakflo’s Accounts Receivable Solution to streamline your processes and reclaim valuable time for strategic decision-making.
The era of manual follow-ups is over; it’s time to let automation lead the way to success.
