The Dunning Process for Small Business

Dunning is the practice of collecting overdue invoices through a planned series of reminders, sent in a fixed order, instead of chasing each invoice as it comes to mind. This guide describes a process you can set up: its parts, what to record at each stage, the report that shows where every invoice stands, and the court procedures the process hands over to when the reminders end without payment.

The stages and intervals here are suggestions. They are not rules, and nothing in this guide is a measurement of what other businesses do. The court procedures are described from the texts that govern them, for England and Wales, Germany and Spain. Courts in the United States are not covered.

The four parts of a dunning process

A process is four decisions, written down once and then applied to every invoice.

• Schedule: the day after the due date on which each message goes out. The guide on how to follow up on an unpaid invoice gives one, with messages for days 1, 7, 14 and 30. Use it, or set your own intervals.
• Wording: one template per stage, so that every customer at the same stage receives the same message.
• Owner: one named person who sends the messages and decides the exceptions.
• End point: the day after which reminders stop and a formal step begins.

Everything counts from the due date, so fix it the same way on every invoice. The Invoice Due Date Calculator works it out from the invoice date and your terms.

What to record at every stage

Keep one entry per overdue invoice, and add to it each time something happens:

• the invoice number, the amount and the due date;
• the date and channel of every reminder, with a copy;
• any reply, any query the customer raised, and how it was settled;
• any payment date the customer gave;
• the interest accrued so far, which the Late Payment Interest Calculator computes.

The entry is not bookkeeping for its own sake. It holds what a formal step asks you for. In England and Wales, the Practice Direction on Pre-Action Conduct describes a letter that sets out the basis of the claim, a summary of the facts, what the claimant wants and, if that is money, how the amount is calculated, with the key documents disclosed. An application in the German order-for-payment procedure must state the claim with the principal and the ancillary claims listed separately and individually (§ 690 ZPO). A petition in the Spanish proceso monitorio states the origin and the amount of the debt and attaches documents, which can be invoices and delivery notes (articles 812 and 814 of the Ley de Enjuiciamiento Civil). A record kept from the first reminder supplies each of these.

The aging report

An aging report groups your unpaid invoices by how long they have been past due. A common layout, which is a convention and not a rule, has five columns: not yet due, 1 to 30 days, 31 to 60, 61 to 90, and more than 90.

Read the report against your schedule. On the schedule above, an invoice in the 31-to-60 column should already have had its formal letter. If it has not, the process skipped a stage, and the report has shown you where. For the single number that summarises how long customers take to pay, see the guide to days sales outstanding.

Decide the exceptions in advance

Sending the same message on the same day to every late account is repetitive work. If your invoicing software can send scheduled reminders, the day-1 and day-7 messages are the natural ones to hand to it.

Write down, before you need it, when a person takes over from the template. Three triggers you could use: the customer has queried the invoice, the customer has asked to pay in instalments, or the invoice is above an amount you choose. The point of fixing the triggers in advance is that the decision is then the same for every customer.

When the reminders end: the court procedures

A reminder sequence is your own correspondence. What follows it depends on the country, and the three procedures below are summarised from their own texts. This is a description of what those texts provide, not advice on which step to take.

England and Wales: a county court claim

GOV.UK states that you can apply to a county court to claim money you are owed by a person or business, online or by post, and that Scotland and Northern Ireland have different processes. Under rule 26.9 of the Civil Procedure Rules, the small claims track is the normal track for any claim with a value of not more than £10,000, subject to the special rules that paragraph (1) of the rule sets for personal injury and housing claims. The guide on what to do when a client won't pay covers the letter that comes before a claim.

Germany: the Mahnverfahren

The German code of civil procedure provides an order-for-payment procedure for claims to a specific sum of money in euros (§ 688 ZPO). It is handled by the local courts (Amtsgerichte), and the court where the applicant has its general venue has exclusive jurisdiction (§ 689). The steps, in the order the code sets them:

1. Application. On the applicant's request the court issues a payment order, the Mahnbescheid (§ 688).
2. Payment order. It carries a notice that the court has not examined whether the applicant is entitled to the claim, and it calls on the respondent to pay or to object within two weeks of service (§ 692).
3. Objection. The respondent can object in writing as long as no enforcement order has been issued (§ 694).
4. Enforcement order. If no objection is raised in time, the court issues a Vollstreckungsbescheid on application (§ 699), which has the same standing as a default judgment declared provisionally enforceable (§ 700).

Spain: the proceso monitorio

Articles 812 to 818 of the Ley de Enjuiciamiento Civil set out a comparable procedure. It is open to anyone claiming payment of a money debt of any amount that is liquid, determined, due and payable, and that is shown by documents (article 812). The initial petition does not require a procurador or an abogado (article 814). The court then requires the debtor to pay within twenty days or to file a reasoned opposition (article 815). If the debtor does neither, a decree ends the procedure and the creditor can request enforcement (article 816). If the debtor opposes, the matter is decided in the trial that corresponds to it (article 818).

For the day-counting that court deadlines use, see the guide to business days in court filings.

FAQ

What does dunning mean?

Dunning is the practice of collecting overdue invoices through a planned series of reminders, sent in a fixed order, instead of chasing each invoice as it comes to mind.

What does a dunning process consist of?

Four decisions written down once: a schedule that says on which day after the due date each message goes out, one template per stage, a named owner who sends the messages and decides the exceptions, and an end point after which reminders stop and a formal step begins.

What should I record for each overdue invoice?

The invoice number, amount and due date, the date and channel of every reminder with a copy, any reply or query and how it was settled, any payment date the customer gave, and the interest accrued so far.

What is an aging report?

A report that groups unpaid invoices by how long they have been past due. A common layout, a convention and not a rule, uses the columns not yet due, 1 to 30 days, 31 to 60, 61 to 90, and more than 90.

What is the German Mahnverfahren?

An order-for-payment procedure under §§ 688 and following of the German code of civil procedure for claims to a specific sum of money in euros. The local court issues a payment order on application without examining whether the claim is justified, the respondent has two weeks from service to pay or object, and without an objection the court issues an enforcement order on application.

What is the Spanish proceso monitorio?

A procedure under articles 812 to 818 of the Ley de Enjuiciamiento Civil for money debts of any amount that are liquid, determined, due and payable and shown by documents. The court requires the debtor to pay within twenty days or to oppose; if the debtor does neither, the creditor can request enforcement.

Which claims go to the small claims track in England and Wales?

Under rule 26.9 of the Civil Procedure Rules, the small claims track is the normal track for any claim with a value of not more than £10,000, subject to the special rules the same rule sets for personal injury and housing claims.