Foster Faster Collections with Effective Reminders
Increase the Impact of Statements and Dunning Notices in Your Collection Strategy
For most small businesses, collections are reactive. When a customer goes past due, they then go into action — typically with a call, though it is also likely that unless a sizeable amount is involved a call is not made right away. In the meantime, routine collections are driven by passive activities, often just a monthly statement. It’s an improvement when statements are backed up by written notices. When dunning notices, however, are used sporadically, rather than as a strategic component of the company’s overall collection policies and procedures, they are not going to be as effective as they could be.
Small businesses need effective ways to remind customers what is owed. Most businesses will send out a monthly statement generated by their accounting software to all customers that have a balance on account at the end of a given month or who have paid their balance in full since the previous statement. More and more this is being done via email rather than using the postal service, primarily because emailed statements require less labor and they get to their destination 3 to 5 days sooner.
There are several benefits derived from sending customer account statements:
Statements remind customers as to what is past due and coming due
Statements provide a paper trail for reconciling what a customer owes
And most importantly, statements facilitate customer payments, especially with those customers that are inclined to pay by statement rather than invoice
Statements are a good place to start your collection efforts, but their effect is limited. Following up statements with strategically deployed dunning notices will generate a bigger impact.
Dunning notices, which should be automated as much as possible, serve the same purpose as month end statements. They should summarize all the customer’s invoices that have reached their due date and request payment. Depending on your level of automation, dunning notices can be generated daily, weekly, or just once or twice a month.
Dunning notices are most effective when used as a supplement to the month end statement. While statements provide a history of invoice, credit, debit and payment activity on an account, dunning notices focus on past due balances. As such, dunning campaigns put all your past due customers on notice, allowing you to concentrate your collection calls on the relatively few accounts that have larger past due balances and older debts.
Read on to learn six best practices that will make your statement and dunning notice regimen more effective.
Make Statements and Dunning Notices Part of a Strategic Collection Policy
If you are already sending statements and dunning notices, it is a good idea to step back to determine how to make them more effective. If you haven’t yet implemented one or the other, there is no time like the present to incorporate them in your collection strategy.
Keep in mind that your goal is to create an effective collection strategy. That requires your collection activities to be both cost and time efficient as well as consistent. You don’t want to make the mistake of only getting involved with collections when there is a crisis. When that happens, other activities are interrupted and more valuable time gets allocated to collections than when collections are handled as part of somebody’s routine.
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Here are some best practices to help you realize the greatest utility from sending month end statements and periodic dunning notices to your customers:
Follow a consistent time table: Statements, of course, should provide a snapshot of each customer’s account as of the last day of the month. They should be sent as soon as possible, preferably the first day of the subsequent month. So that customers don’t go a full month without getting a reminder of any past due balances, dunning notices should be sent in the interim. A single past due notice on the 15th of the month is effective, but two notices on the 10th and 20th will be more effective. Studies have shown that letter series generate fewer responses with each subsequent mailing and especially after the second, so weekly dunning notices are not worth the effort. However, if you have automated collection software tools that generate dunning notices based on a trigger event (e.g., going past due) then you can program the system to send periodic reminders after that juncture (e.g., 3 and 15 days beyond the due date).
Personalize the dunning notices and statements if possible: Personalized correspondence is more likely to provoke a response than a form letter. Dunning notices generated by an automated collection software solution typically provide you with the opportunity to review the notice in a text editor before it is emailed. The system should already personalize the notice with the contact person for your customer’s account, but what you want to do is add a “PS” and/or highlight in yellow or some other color the past due items and total. This only takes maybe 30 seconds for each notice, but it will get the receiving party’s attention and send the message that somebody, not just a machine, is monitoring their account. Highlighting works as well on statements, if you are able to do it. Statements are often generated in a PDF, format which should allow you to use the annotation features in your PDF reader.
Vary the templates you use for the dunning notices: Statements should follow the same format from month to month. That allows the recipient to more easily understand them. Dunning notices, in contrast are merely listing and totaling up the past due items, which is very straightforward. The use of different wording with each of your notices, serves the same purposes as personalization. Also, the second reminder you send, should be stronger than the first in order to reinforce a sense of urgency. The recommendation is to use at least 3 different sets of dunning notice templates. That way the most times any recipient will see the same dunning notice format is 4 times per year.
Use dunning notices to target your smaller customers: For most companies, 80 percent or more of your revenue will come from the top 20 percent of your customers. Dunning notices to these firms should be in support of your collection calling efforts. For the 80 percent of customers that account for 20 percent or less of your revenue, dunning notices and statements should be your primary collection tools. Any of these smaller customer that exhibit a pattern of not being responsive, and that therefore require collection calls in order to get them to pay, should have their credit line revoked — have them pay in advance or with a credit card to eliminate your collection expense and allow you to focus your collection efforts on your larger customers.
Send the dunning notice even if you intend to call the past due account: The extra reminder will not cause any harm. Your collection process suffers, however, when you don’t make the call as planned, so let the dunning notices do their job.
You don’t necessarily need to send statements to every account: You do want to send statements to every past due account. Some customers want to get statements and use them to drive their payments, so send one to them whether they are past due or all current, or even if they have paid in full as of the last cycle. If the account isn’t past due, and pays by invoice, not statement, don’t bother sending them a statement if their account is current. Most accounting software solutions give you flexibility in this regard between the customer set-up features and the accounts receivables report generator or some other similar set-up function. The key is to send statements to the accounts where they will do the most good, and don’t waste time with the others.
Please feel free to share this newsletter with your small business customers . . . it just might help them pay you sooner!
Don’t have collection software? Here’s how you can still automate your dunning notices.
Most small companies don’t have collection software solutions that make it very easy to automate and email dunning notices. Most small companies, however, do have accounting software, and most of the time that software will have a report generator feature. Using a report generator, it should not be difficult to create a report in CSV or XLS format that both lists and totals past due invoices by account. You can then use Microsoft Word or some similar word processing tool’s “mail merge” function to turn your list into a series of notices you can personalize.
Doing all the above does not require IT support, and is easily within the capabilities of most people comfortable with using personal computers. Once you create the past due report and the templates for your notices, it is a simple matter to generate the notices, personalize them and email them. Of course, you can also mail a dunning notice or statement if the situation warrants (and in those cases personalize the documents by hand), but emails take less time and are less costly.
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Final Thoughts…
Over time, you will undoubtedly realize that some customers do not respond to end of month statements and/or past due dunning notices. In those cases, don’t bother sending them. What you will have to do, then, is formulate a collection strategy, most likely involving a phone call, that elicits a positive response.
That’s a good illustration of why small businesses need to look at the issuing of end of month customer statements and dunning notices within the context of a larger collection strategy. What has been outlined in this article is essentially the initial month of the typically collection strategy, especially for smaller dollar past due balances. However, the dunning process outlined will go a long way towards minimizing subsequent collection efforts. A key part of that is letting your customers know that you expect payment when due, place close attention to every past due invoice, and will not tolerate any abuse of your good will in extending credit.