Dunning, or collection management as it’s sometimes known, is a vital process in credit control. It sees organisations follow set processes to chase for outstanding payments, making the chance of receiving payment more likely. Credit controllers face a number of challenges when chasing for payment, such as customers not responding to reminders and evading payment for long periods of time, while some rely on ineffective systems which require a great deal of data mining to determine which customers need to be chased. These factors can make collection of overdue payments a lengthy and difficult process. However, with a recent report revealing that late payments are costing SMEs in the UK a total of £2 billion every year, with the sum of the missed payments themselves totalling £14 billion, the stakes of missed payments are high and businesses are in dire need of more efficient credit control procedures.
By creating an effective dunning strategy, which takes a structured approach to each stage of collection management, businesses are better placed to overcome these challenges. The right strategy will enable credit control teams to determine factors such as how many times a customer is chased before legal proceedings are launched and what form of communication to take with the visible results of more efficient teams, reduced overdue payments and increased cash flow.
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 as the structured nature allows credit controllers to work to a predetermined framework to gain remuneration. For example, this could take the format of sending an initial reminder five days after an invoice becomes overdue. Then, if it remains unpaid, another reminder should be sent out at 15 days and a final reminder should be sent after 30 days. If payment still hasn’t been made after the three reminders, then legal action should be started. By following this process of chasing for payment, customers will come to the realisation that processes within your company are structured, meaning they can’t evade payment, 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 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 heart of a customer’s problem and allow you to resolve the issue quickly as the sooner the dispute is resolved, the sooner you can get back to chasing for payment. By adding this step to your existing dunning strategy, you will see a reduction in overdue balances and an improvement in your cashflow as it doesn’t allow customer disputes to linger and for invoices to go unpaid for long periods of time.
Finally, by using the data you hold on the customer from both internal and external sources, you can determine how the customer wants to be addressed and the best ways in which to communicate. As customer engagement is becoming increasingly important, it is vital to use the tools at your disposal to create the correct communication at the right time. For example, if you have a long-lasting relationship with a customer it is crucial to address them in the right manner to avoid souring the relationship. This will help you avoid risks to cash flow and overdue balances posed by miscommunication.
For an effective dunning strategy, businesses must first ensure they enforce structured dunning before integrating the other two elements as the strategy matures. As a by-product of this three-tiered approach, the credit control department will gain a more centralised position within your organization, rather than only becoming involved 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, and decisions can be made as a result. For example, the knowledge that a customer regularly avoids making payments can inform decisions over whether to release an order to them. Additionally, this data can be used to segment customers into homogenous groups which can be used to determine aspects such as payment terms or discounts. This information could then be fed back into the dunning strategy to determine when chasing for payment begins.
As we have shown, dunning isn’t one-dimensional, and 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 disconnect between the way different departments communicate with customers. While there isn’t a one-size-fits-all approach to dunning, by following the three-tiered approach, businesses will see greater results and reduce the time spent on chasing customers for payment.
By Edwin Gabriëls, Consultant, Onguard