Having cash in the bank is a vital requirement to run a successful business. Being able to pay your vendors, employees, and other company debts on time can ensure that a organization can continue doing business. Sometimes a business’ runway is short, and if it is venture-backed, may need to raise another round of funding, or if not, take a loan in the form of issuing bonds, or an accounts payable line of credit through the bank. In more dire circumstances, not having enough cash can cause the company to file bankruptcy, or the company may fold as secured creditors aim to recoup some of their losses.
Since having cash in the bank is so important, so too is having a methodical collections process that is documented and can be adhered to. This process is known as a Dunning Process, from the word ‘dun‘ which means ‘to demand payment of a debt’.
Defining the Quote to Cash Process
To grossly simplify the Quote to Cash process for an enterprise software company, it typically looks like this:
- A Sales Quotation is signed by the customer.
- A matching Purchase Order from the customer is created.
- An Order is booked internally.
- An Invoice is generated and sent to the customer.
- The Customers pays the invoice per the agreement.
Payment terms that are agreed upon by two corporations or entities, with a matching Purchase Order and Signed Quotation, should be what is required to book an Order. These two forms of paperwork become the enforceable contract if any disputes arise. Likewise, having a bulletproof (lawyer reviewed) Terms of Service that is associated with the signed Quotation, along with a non-payment clause within those terms, will make sure that you are able to collect on your Account’s Receivable.
During the booking stage of an order, there are checks and balances that can be performed during this time. Some checks and balances can be put into place here, with the Order’s team asking questions like:
- Does the Quote & accompanying PO match the customers ship to & bill to address?
- Are the payment terms and dates of the contract the same?
If there is an issue, then Orders can reject the booking, and have it go back to the Sales Rep to fix any mistakes. These checks and balances can be paper-based or through an online audited system such as a CRM or ERP.
Now that the order is booked, and an invoice has been sent – what happens when a customer doesn’t pay? If the previous Order Processing steps had no inconsistencies, the customer account could fall under a Dunning Process. As an example of an inconsistency that could arrise would be if there were Net 45 terms on the Purchase Order, and Net 30 on the signed Quote – typically a larger firm will pay per the issued PO, and not what was agreed upon in the accompanying quote. This is why the checks and balances are important during booking an order.
What is a Dunning Process?
As we went over previously, a dunning process is the ‘demand of payment of a debt’. What a process looks like in practice can be more along the lines of gentle reminders of a past due invoice, such as emails or phone calls to confirm the payment status of that invoice. Once an invoice becomes 60+ days past due, it can become delinquent, which can have the tone of the communication become more firm in the reminder of an overdue payment. Depending on the product or service that a company provides, a material breach of the contract can occur after this point, which can be enforced with the help of an outside legal collection agency. These debt collectors take over the accounts receivable, and attempt to collect what is owed. Sometimes, additional charges such as late fees (or dunning fees) can accumulate on the debt.
Example Dunning Process:
A sample dunning process for a SaaS organization can look something like this:
Past Due: Invoice Due Date + 7 days.
Accounting/Finance can give a week for transmittal of payment by a check to a physical address from a customer. If the invoice is more than 7 days past due, an email reminder can be sent to the accounting or account’s payable email address on file, and a phone call to the department to inquire on the payment status is warranted. Typically, the majority of customers will fall into this bucket if they fall in the Collection’s process. Sometimes issues arise that can be found, such as incorrect ship to or billing address or names, no PO # addressed on the invoice, or not submitting the invoice in the correct manner.
Delinquent: Invoice Due Date + 30 days.
Once an invoice is more than 30 days past due, it then becomes delinquent. Another phone call or email to the account’s payable team is recommended, as is looping in the internal sales rep as well as the champion contact at the customer. Here you may find out cashflow issues from the customer, or other problems may arise.
Severely Delinquent: Invoice Due Date + 60 days.
After an invoice becomes more than 60 days past due, it is then in danger of being sent to a legal outside collection agency to follow up on. If your company provides software as a service, sometimes prohibiting access may be warranted to expedite payment (Be sure to reference your company’s TOS and confirm if this action is allowed).
The process as a customer moves through the stages from Past Due to Delinquent, or from Delinquent to Bad Debt (sent to a collection agency), can be decided by and agreed upon by the Finance and Sales teams. Likewise, you’ll want to have input from your Legal team as well. Sometimes this process can be fluid, and exceptions to the rule can be made. If the process is documented, your organization will may also have the ability to automate certain aspects using a CRM or ERP tool.
I want to make a note: It is typically unlawful to harass or threaten customers who have a debt with a company, and I would never condone such behavior. If you do use an outside legal collection agency, be sure to have a reputable company that will represent your position lawfully. Customers are the key to a company’s success, and should be treated that way.
Automation of the Dunning/Collections Process
In a future article, I will go over the automation of a dunning process using Salesforce.com. Depending on how your organization’s business systems are set up & what your organization sells, certain tools or elements may manage your order booking, invoicing, and collections of accounts. Business tools such as a CPQ (configure/price/quote), CRM, or ERP system can manage this Collection’s process interdependently.
Now that we have the fundamentals of what a Dunning Process is, this future article focuses on how to manage and automate the Collections Process from a Salesforce.com perspective.
Is there a documented Dunning process at your organization? If so, how does that compare to the example outlined in the article? Please leave your thoughts in the comments below!
