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Understanding a Dunning Notice

What Is a Dunning Notice?

A dunning notice is a communication that is sent out to remind clients that they have invoices that need to be paid. While they tend to be lenient in the initial few, the notices become more urgent as invoices remain unpaid for longer periods of time. Modern dunning has developed from physical letters to electronic reminders that are issued in various ways including emails, phone calls, push notifications, and text messages. Emails, push notifications, and text messages that include hyperlinks leading straight to a payment portal help to facilitate the process and encourage quicker payments.

Why are Dunning Letters are Important?

Ultimately, dunning letters are important because they can help reduce days sales outstanding (DSO, which is often determined on a monthly, quarterly, or annual basis. To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period, and then multiply the result by the number of days in the period being measured.

In order to continue operating, most businesses must effectively manage the accounts that have not paid, or risk losing substantial sums of money. In a perfect system, clients will pay the amounts due immediately upon receiving an invoice; however, this does not happen for multiple reasons including:

  • The customer may not have collected what they purchased
  • Their payment options may not be flexible
  • They may not be able to afford the product or service
  • They may have received an unclear invoice
  • Or they may have not gotten a invoice at all

Generally speaking, a DSO under 45 days is considered low.

How to Deliver Dunning Notices

Successful efforts can be taken to get payments in faster and ultimately reduce DSO. Issuing dunning notices is not as difficult as it seems, especially if your company has an automated dunning system. The business must focus on relaying essential information that urges a response. Once a template with core material is created, the company must decide among formats, mediums, stylistic features, functionality, and overall tone. They usually have a shift in tone as more notices are sent, but these pieces of information should be included in all dunning notices: amount due, invoice identification number, date of unpaid invoice, and any late fees associated with the invoice.

How to Track Effectiveness of Dunning Notices

Reduced DSO is a clear indication that the dunning notices are prompting customers to pay their overdue invoices. Dunning notices may be working on different clients for different reasons, but the important part is that your company is receiving a higher percentage of the accounts receivable. This slight addition of a dunning process to your existing system can make a big difference.

Unfortunately, there are cases where the resources applied to obtain the payment equals or is greater than the outstanding amount, and thus the business will likely quit the endeavor to focus on recent customers that are more likely to pay. To reduce the time and money spent on dunning notices, many companies are shifting to using automated systems like Payference.

Would you like to discover how businesses like yours can decrease DSO and accelerate payments?

Book a meeting to schedule your free consultation today.