Now that you have decided to extend credit to your clients, you are hoping that they will pay diligently every month according to the credit terms that you agreed with them.

In the real world though, this does not happen all the time, with all clients. The importance of the credit application procedure was discussed in a previous blog called Selling on Credit and What It Really Means. The management of the credit extended has now become a crucial component of the process. Not only do you need to monitor the amount of credit extended (remember your credit limits?), but also how the debt is paid by your customers.

It is very important to understand the implications for you and your customer when an invoice falls due but no payment is forthcoming.

The business process used by organisations the world over to manage the collection process is called the Dunning process. The acronym is derived from Delinquent User Notice. It merely a systematic communication process that needs to be carefully implemented in order to elicit payment form the debtor without having to take drastic steps like legal action.

Although the idea is to avoid legal action, the Dunning process is in effect the very first steps of the pre-legal process that needs to be in place before the legal process of collection can take over. By following the Dunning process diligently, you are shortening the time frame for legal collection.

The process starts with communicating to the debtor within 2 days of the overdue event, preferable by e-mail. The communication trail is important when the process gets to the legal process. It should be a carefully worded letter that should convey to your client that the payment has fallen due but nothing has been received. There could be very good legitimate reasons for this, so keep it light and see what the response is. Your relationship with your customer is very important to your business, so it will be worth your while to accommodate any requests for extensions.

The first formal letter is sent 7 days past due. Now the collection process is in the pre-legal stage and this is followed up by the Final Demand letter 14 days past the due date. If you neglect to follow this process your attorney will have to do this before any action can be taken.

The language used from the start of the process ranges from polite reminders to a serious request towards the final demand that is issued to the client. The key to the process is the systematic approach that should be followed and may even be automated in your accounting or CRM management program.

The successful collection of overdue invoices has become as crucial aspect of being in business today and the systematic implementation of a process as described above will greatly contribute to the success of your business.