Dunning
Dunning covers all the organised steps a company takes to collect overdue customer receivables – from a friendly payment reminder through escalating dunning notices to handing the case to a collection agency or a court-based dunning procedure.
Dunning refers to all the organised measures a company uses to collect open, already-due receivables from customers in arrears. It begins when a debtor has not settled an invoice after the agreed payment term has expired, and ranges from a polite payment reminder through several dunning levels all the way to handing the case to a collection agency or the court-based dunning procedure.
As part of accounts receivable management and the order-to-cash process, dunning pursues a twofold goal: it aims to realise outstanding payments as quickly as possible and thus safeguard the company’s liquidity, without straining the customer relationship unnecessarily. A structured, traceable approach with clearly defined deadlines and escalation levels is the foundation for this – ideally automated as far as possible through the ERP system.
At a glance
- Dunning = systematically collecting overdue customer receivables
- Typically multi-level: payment reminder, 1st–3rd notice, collection agency/court dunning procedure
- Part of accounts receivable management and the order-to-cash process
- In Germany, default sets in no later than 30 days after the due date and receipt of the invoice (§ 286 BGB)
- In the ERP, dunning runs as an automated dunning run over the open items
How does dunning work?
Dunning starts from the open items in accounts receivable: every unpaid outgoing invoice past its payment term is a candidate for a dunning notice. In practice the process is organised across several levels. After an initial, often still cost-free payment reminder, one or more notices follow with increasing firmness, a concrete payment deadline and – once the customer is in default – possibly dunning fees and default interest. If even the final dunning level fails, the receivable is handed to a collection agency or enforced through the court-based dunning procedure with a subsequent enforcement order.
Each level is tied to deadlines. Between notices there is usually a waiting period of seven to fourteen days in which the customer can respond. Clean allocation of incoming payments is essential: anyone who has already paid must not receive a further notice. That is why dunning reconciles the open items against the actual account receipts before every run.
The typical dunning levels
A common model comprises four levels: the payment reminder (level 0, a friendly note at no cost), the first notice (a specific, short additional deadline), the second notice (with a dunning fee and the announcement of further steps) and the final notice (threatening collection or court proceedings). The number of levels is not prescribed by law – companies define them themselves. What matters is that the escalation stays clear, consistent and understandable for the customer.
Payment default and default interest
What becomes legally relevant is not the dunning notice itself but the default. Under § 286 BGB, a debtor is in default no later than 30 days after the due date and receipt of the invoice – with consumers only if they were made aware of this. From default onwards the company may charge default interest: five percentage points above the base rate against consumers, nine percentage points in commercial transactions. In B2B dealings a flat default charge of 40 euros under § 288 (5) BGB is added on top.
Why dunning matters
Revenue is only truly earned once the money is in the account. As long as customers do not pay, open receivables tie up capital that the company lacks for purchasing, wages or investments. Effective dunning shortens the span between invoice and incoming payment, lowers the average collection period (days sales outstanding) and thereby directly improves liquidity.
At the same time it limits default risk. The longer a receivable goes unpaid, the greater the danger of a final loss – for instance through customer insolvency. Consistent yet tactful dunning signals payment discipline without jeopardising the business relationship. Professional dunning is therefore less a tiresome obligation than a central lever of working-capital management.
Dunning in the ERP system
In an ERP system or inventory management solution, dunning runs largely automatically. The basis is the open items in accounts receivable: from the invoice date, payment term and incoming payments the system identifies which receivables are overdue and assigns them to the stored dunning levels. A dunning run then checks all due transactions in one batch and generates the appropriate dunning letters.
Individual text blocks, deadlines, dunning fees and interest rates are stored per dunning level. The clerk can review the dunning proposal before dispatch, exclude individual customers (for example in the case of instalment payment or a complaint) and then send the notices by email, as an e-invoice attachment or by letter. Dunning blocks, credit limits and the ageing analysis of receivables also run off the same debtor data. The prerequisite for an error-free dunning run is a current, cleanly reconciled payment status – ideally via the automatic bank reconciliation.
Distinction: dunning, collection and court dunning procedure
Dunning in the narrower sense is the out-of-court, in-house collection of open receivables through a company’s own notices. If this remains unsuccessful, more far-reaching instruments follow. With a collection agency, the company hands the receivable to a specialised service provider that takes over the recovery – still out of court, but with external pressure.
The court-based dunning procedure, by contrast, is a formal, state procedure under the Code of Civil Procedure. On application, the dunning court issues a dunning order; if the debtor does not object, an enforcement order follows as the basis for compulsory enforcement. So while commercial dunning forms the early, relationship-preserving stage, the collection agency and court dunning procedure are the escalation stages once the amicable route fails.
DACH specifics and compliance
In the German-speaking region, dunning is clearly framed in law. In Germany, §§ 286 ff. BGB govern default, default interest and the B2B flat default charge; the court-based dunning procedure is regulated in the Code of Civil Procedure and handled centrally via the states’ electronic dunning portal. Austria and Switzerland have their own regulations that differ in detail, for example on default interest rates.
Dunning notices and the associated documents are also subject to the GoBD: the dunning history must be documented in a traceable, complete and unalterable way and archived in an audit-proof manner. It is also important that a dunning notice is not legally mandatory for default to arise – default occurs automatically for a due date fixed by the calendar or, at the latest, under the 30-day rule. The dunning notice then mainly serves documentation and voluntary settlement before more cost-intensive steps are initiated.
Example
Dunning run at a B2B wholesaler
A mid-sized wholesaler sells predominantly on account with a 14-day payment term. A three-level dunning process is stored in the ERP: a payment reminder after the payment term expires, a first notice after a further ten days with a 5-euro dunning fee, and a second notice after another ten days threatening collection.
Every Monday, accounting starts the automatic dunning run. The system reconciles the open items against the incoming payments from the bank account, assigns the overdue invoices to the dunning levels and creates a dunning proposal. A customer with an ongoing complaint is excluded manually. The remaining notices go out by email – the whole process takes a few minutes instead of half a working day of manual checking.
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