Dunning Process
1. Meaning of Dunning
The term “dunning” comes from the 17th-century English verb “dun,” which meant to demand payment of a debt. Today, it describes the structured efforts made by companies—via letters, emails, phone calls, or even legal notices—to recover unpaid bills or invoices.2. The Dunning Process
The dunning process usually follows a sequence of steps, starting with friendly reminders and escalating to more formal collection actions if the debt remains unpaid. Common stages include:- Polite reminder: Sent shortly after the due date to notify the customer of the missed payment.
- Second notice: A firmer message highlighting the overdue balance and potential late fees.
- Dunning letter: A formal letter that may include warnings of credit impact or suspension of services.
- Final demand: A strongly worded notice before legal action or collection agencies are involved.
3. Dunning in Accounts Receivable
For businesses, dunning is not just about collecting money but also about maintaining customer relationships. An effective dunning strategy balances firmness with professionalism, encouraging timely payments without alienating clients. In banking and subscription-based businesses, dunning is essential to reduce churn and minimize losses from unpaid accounts.4. Dunning Letters
A dunning letter is a written notice sent to remind customers about overdue invoices. These letters may vary in tone depending on how long the payment has been outstanding. For example:- First letter: Friendly reminder with invoice details and payment options.
- Second letter: Polite but more urgent, including warnings of late fees.
- Third letter: A final notice before involving external collections.
5. Dunning vs. Dunning-Kruger Effect
It is important to note that dunning in finance is not related to the Dunning-Kruger effect, a psychological concept describing how people with low ability often overestimate their competence. While both use the word “dunning,” their meanings are entirely different.6. Importance of Dunning Management
Implementing a structured dunning process benefits organizations by:- Improving cash flow and reducing bad debt.
- Automating repetitive tasks in accounts receivable.
- Enhancing customer experience with timely reminders.
- Ensuring compliance with legal and financial regulations.
7. Example of a Dunning Process
Consider a SaaS company with a client who misses a $200 monthly subscription payment:- Day 3 after due date: Friendly reminder email.
- Day 10: Second notice warning about service suspension.
- Day 20: Dunning letter sent with details of penalties.
- Day 30+: Account suspended or sent to collections.
Key Takeaways
- Dunning is the process of pursuing overdue payments in accounts receivable.
- It typically includes reminders, dunning letters, and final demands.
- Automation tools make dunning more efficient and scalable.
- It should be distinguished from the unrelated Dunning-Kruger effect.
📄 Sample Dunning Letter Template
Dear [Customer Name],
We are writing to remind you that the payment for invoice [#12345], issued on [Invoice Date], in the amount of $[Amount], is now [X days overdue].
According to our payment terms, the due date was [Due Date]. Please arrange payment immediately to avoid late fees or service interruption.
- Bank Transfer
- Credit/Debit Card
- Digital Payment Link
- InvoiceFly’s secure online payment portal
If you have already sent the payment, kindly disregard this notice. If you are experiencing any issues, please contact our accounts receivable team at billing@[yourcompany].com.
Thank you for your prompt attention to this matter.
Sincerely,
[Your Name]
[Your Job Title]
[Your Company Name]
FAQs Dunning (Process)
The term “dunning” comes from the old English verb to dun, which means “to demand payment of a debt.” In business and accounting, it refers to the structured process of reminding customers about overdue payments through notices, letters, or other communications.
A typical dunning process might look like this:
- Day 3 after due date → Friendly reminder email.
- Day 10 → Second notice with a warning of possible late fees.
- Day 20 → Formal dunning letter stressing the importance of payment.
- Day 30 → Final demand or referral to a collection agency.
This sequence helps businesses recover payments while maintaining professionalism.
It’s called the dunning process because the word dun historically meant to demand money owed. Over time, the term evolved into “dunning” and became widely used in finance and accounts receivable to describe the steps taken to collect overdue invoices.
The main purpose of dunning is to ensure businesses receive payments on time, reduce bad debts, and maintain healthy cash flow. Beyond financial benefits, it also establishes a formal and consistent approach to collections, balancing firmness with customer relationship management.
In banking, dunning refers to the notices or communications sent to customers who have overdue loan payments, credit card bills, or overdraft fees. Banks often have automated dunning systems to send escalating reminders before involving collections or reporting delinquencies to credit bureaus.
Although unrelated to finance, the Dunning-Kruger effect is often confused with dunning. It describes a cognitive bias where individuals with low knowledge or ability in a subject overestimate their competence. For example, a person with little financial knowledge who believes they can outperform professional investors is displaying the Dunning-Kruger effect.
Payment dunning refers specifically to the act of sending reminders to customers about overdue payments. It may include emails, SMS notifications, dunning letters, or even in-app alerts in subscription-based services. The goal is to recover payments promptly without damaging the customer relationship.
A dunning letter is also known as a collection letter or payment reminder letter. These letters vary in tone and urgency, progressing from polite reminders to strong final demands before legal action or third-party collections.
In finance, the “theory of dunning” simply refers to the practice and methodology of structured payment collection. However, in academia, “Dunning’s theory” often refers to John H. Dunning’s Eclectic Paradigm in international business, which explains why companies engage in foreign direct investment. It’s important to distinguish between these contexts.
