How to create the right dunning strategy for your organisation
Dunning, also known as collection management, is a vital process in credit control. It sees organisations follow set processes to chase outstanding payments, increasing the chances of payment retrieval. Customers not responding to reminders or evading payments are just two challenges credit controllers face when chasing payments. Ineffective systems require a great deal of data mining to determine which customers need to be chased. As a result, these factors make the collection of overdue payments a lengthy and difficult process, highlighting the need for a dunning strategy.
However, a recent report reveals that late payments are costing SMEs in the UK a total of £4.4 billion a year, an increase of £2 billion a year as recorded in 2018. Furthermore, the sum of the missed payments themselves total £23.4 billion, showing just how high the stakes of missed payments are. Businesses are thus in dire need of more efficient credit control procedures.
Dunning strategies take a structured approach to each stage of collection management. Creating an effective dunning strategy allows businesses to be better prepared to overcome these challenges. The right strategy determines how many times and with what form of communication to chase a customer before launching legal proceedings. More efficient teams, reduced overdue payments and increased cash flow are all results of such a strategy.
In order to develop the right dunning strategy for your organisation you should include the three stages and processes outlined below;
This stage should form the basis of every dunning strategy. The structured nature allows credit controllers to work in a predetermined, consistent framework to gain remuneration. For example, by sending an initial reminder five days after an invoice becomes overdue. If it remains unpaid, another reminder is sent out at 15 days and a final reminder after 30 days. If payment has not been made after the three reminders, then legal action should be started. By sticking to these dunning processes customers recognize the structured nature of your company. As a result, there is a reduction in the possibility of payment evasion, thus leading to a reduction in overdue balances. Additionally, this format enables companies to pinpoint where issues occur during the process.
Dispute management and internal collaboration
Once structured dunning is in place, you can move on to implementing dispute management processes. This will allow you to look into issues customers have raised with invoices and processes. This stage requires some collaboration with other departments within your business to get to the core of the customer’s problems. The sooner you resolve a dispute, the sooner you can get back to chasing payments. By adding this step to your existing dunning strategy, you will see a reduction in overdue balances and an improvement in your cashflow. You solve customer disputes faster and your invoices do not go unpaid for long periods of time.
Finally, utilise information from both internal and external sources to determine how to address and communicate with the customer. As customer engagement is increasingly important, it is vital to use the tools at your disposal to communicate at the right time. For example, if you have a long-lasting relationship with a customer it is crucial to address them in an appropriate manner to avoid souring the relationship. This will help avoid risks to cash flow and overdue balances posed by miscommunication.
For an effective dunning strategy, businesses must first ensure structure before integrating the other two elements. As a by-product of this three-tiered approach, the credit control department will gain a more centralised position within your organization. This contrasts traditional methods, which involves the credit control department only at the end of the relationship when an invoice is created, and payment is required.
With an established dunning process, it is possible to use information gained on customers’ payment habits and feed them into other processes within credit management, such as the Order to Cash chain. External data gathered through credit management can be used to determine whether customers are high or low risk. This information influences how you approach your customers. For example, the knowledge that a customer regularly avoids making payments can inform decisions on whether to release an order to them. Additionally, this data helps segment customers into homogenous groups, in turn determining other aspects such as payment terms or discounts. This information feeds back into the dunning strategy to determine when chasing for payment begins.
As we have shown, dunning is not one-dimensional. An effective strategy can benefit an entire business by increasing cash flow, lowering overdue payments and improving customer relations. It will also encourage credit controllers to place a greater emphasis on communication and address the interdepartmental disconnect regarding how to communicate with customers. There isn’t a one-size-fits-all approach to dunning. However, following the three-tiered approach allows businesses to see greater results and reduce the time spent on chasing payments.