Choose Your Words Carefully: How To Write an Effective Dunning Letter

Shaun Jex
Creating an effective dunning letter

According to a recent study, 93% of businesses experience late payments, and the average organization writes off 1.5% of its receivables. Those sorts of numbers emphasize the importance of having a strategy in place when customers can’t or won’t meet their obligations on time.

It is a sensitive process. You want to ensure that your company gets the money it is owed while maintaining the valuable relationships you have cultivated.

Creating effective dunning letters is an essential part of succeeding.

So, what exactly are dunning letters?

The term “dunning” is tied to the somewhat archaic 17th-century word dun, which referred to either a person who demands payment or the practice of doing so. 

Today, they are emails (or on occasion, traditional letters) sent to a customer when their account has gone past due. Dunning letters are also a useful tool that can help your Days Sales Outstanding (DSO) and by extension, your cash flow, remain healthy. 

Just how detrimental are late payments? Research indicates that they cost the construction industry alone US$100 billion annually

How often should they be sent?

There’s no strict rule as to how often the notices should be issued, but there are some standard practices. Typically, the first is sent when an account is 30 days past due, with the subsequent communications going out at 60, 90, and 120 days.

Of course, depending on your company's specific needs, this can be adapted as needed. Sending too few or spacing them too far apart may increase the odds that the issue will be forgotten about. However, you will want to schedule them in a way that won’t be considered undue harassment. To protect your organization, it is important to know any and all applicable regulations governing collections to ensure that your letters and follow-up do not violate them. 

What should they contain?

The contents of the letter will vary depending on how far behind the account has fallen. The first notification should be a simple, cordial note stating that payment is overdue and needs to be resolved as soon as possible. It is even worth including a brief mention that if payment has been made, then the customer should disregard the message. This is particularly relevant if your business still accepts manual payments such as checks. They may have been mailed, but have not arrived yet.

At 60 days, and with each communication thereafter, the tone should become more assertive, requesting that the issue be resolved immediately and clearly explaining the potential consequences of not doing so. 

If it remains unresolved, you may wish to inform the customer that a formal collections process will begin. If legal action will be pursued — typically at the 120-day point — this should be clearly stated in the text. 

Because dunning letters could be used in court, there are certain details that they should always include, such as an attached copy of the original bill – which should include invoice number, date, and total amount due, as well as information on any fees or interest charged as a result of the delayed payment. 

Providing a variety of options and instructions on how the customer can quickly make their payment will also increase the likelihood of the problem being resolved.

Are there any other steps required?

A good rule of thumb is to reach out to the customer by telephone the day after each letter is sent. Speaking directly to a client can help ensure that the original invoice was actually received, that any confusion or disagreement regarding the bill is addressed quickly, and will help keep the subject top of mind.

You will also want to keep a detailed record of each communication made. As an added note, using standardized templates for each letter is advisable. Not only will this ensure consistent messaging, but will make the process more efficient.

It may also be helpful to add contacts, such as the customer’s account or sales representative, to these emails. Doing so will provide greater internal transparency, and ensure that the account is receiving consistent messaging between departments. The individual sales representative can also reach out to the customer to facilitate a resolution or obtain information regarding why payment is late.

Can automation help?

Using automation software such as Yaypay can help simplify the process. Invoices can be sent out monthly or weekly, depending on the terms you offer, and dunning letters can be delivered at regular, pre-scheduled intervals after an account has gone past due.

"AR automation helps structure a customer communication strategy in which messaging is frequent, informative, and well-timed. Through automation, you can ensure that communication is tailored to your customers based on any number of differentiating factors, such as region, product line, risk or business size." - Anthon Venus, CEO, YayPay

The solution keeps a detailed record of all communications and provides customers with an easy, self-service portal so that payments can be made from anywhere at any time. 

To learn more about steps to protect your company’s cash flow, check out YayPay’s whitepaper: Protecting Your Cash Flow Through Comprehensive Cash Management

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