Dunning letter definition
/What is a Dunning Letter?
A dunning letter is a notification sent to a customer, stating that it is overdue in paying an account receivable to the sender. Dunning letters typically follow a progression from polite reminders to more strident demands for payment, if the customer continues to be non-responsive in paying. The first few letters that are sent to a customer should be polite, on the theory that the customer has simply overlooked payment, and the company wants to retain its goodwill for future business.
However, as more time passes, the company begins to change its assumption of doing further business with the customer, and so tends to downplay the amount of customer goodwill that it wants to retain in favor of being paid now. Irrespective of the tone of the letter, it always states the amount due, the date of the unpaid invoice, the number of the invoice, and any late payment fines or interest penalties.
At some point following the normal payment date, the effectiveness of issuing dunning letters will decline, so that a company discontinues their use and relies upon personal contacts, attorneys, and collection agencies instead.
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How to Track Dunning Letter Performance
A good way to track the effectiveness of a dunning letter is to issue it to a representative sample of customers with overdue accounts, and then measure the average number of days required to collect payment from them. This outcome can be compared to the results from another cluster of customers who were not sent the dunning letter.
The credit department staff may periodically change the timing or content of dunning letters, if they feel that some variation will improve the rate of collection. This can be accomplished with A-B testing, where two versions of a dunning letter are issued, and the effectiveness of each one monitored; if one version results in more or faster customer payments, that version becomes the new default letter format to be used.
Types of Dunning Letters
A dunning letter can take a variety of physical forms. It was originally a letter that might be sent by regular mail, registered mail, or overnight delivery in order to convey the increasing urgency of the request, as well as to create a record of receipt (in the case of registered mail or overnight delivery). However, a dunning letter can also be sent as a fax, e-mail, or even a text message. These electronic delivery methods can go astray (especially a fax), and may not be as effective as the more traditional paper-based method.
Dunning letters are frequently generated by a computer, with no human input at all. The system is configured to use a particular text if payment has not been made within a certain number of days, and to then use a different text for letters generated after a longer time period has passed without payment. It can be more efficient to farm out the task of creating and issuing dunning letters to a third party.
There are rules governing the level of threat that can be included in a dunning letter, depending upon the government jurisdiction in which the customer resides, so you need to avoid excessively strident dunning letters.
The Difference Between a Dunning Letter and a Statement
A dunning letter is not the same as a month-end statement. A statement is sent to all customers having unpaid invoices at the end of the month. The statement includes all invoices that have not yet been paid, even if they are not yet due for payment. The statement is not considered to be harassment, but rather a simple statement of account as of a point in time. However, it is still considered a collection tool, since it may result in customer inquiries about invoices that they do not have in their records, and which they therefore would not have paid.
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