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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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7–17. Issue Dunning Letters Automatically

Some companies have so many small accounts to collect that they cannot possibly take the time to call all of them to resolve payment disputes. This is an especially common problem for very small accounts receivable, where the cost of a contact call may exceed the amount of revenue outstanding. In other cases, there is some difficulty in contacting customers by phone, usually because all collection calls are automatically routed to the voice mail of the accounts payable departments. In these cases, a different form of communication is needed.

The best way to contact either unresponsive customers or accounts with very small overdue balances is the dunning letter. This is a letter that lists the overdue amount, the invoice number, and date, and requests payment. There are normally several degrees of severity in the tone of the dunning letter; the initial one has a respectful tone, assuming that there has been some mistake resulting in nonpayment. There is a gradual increase in severity. The final letter is the most threatening and usually requires immediate payment within a specific number of days or else the account will be turned over to a collection agency, the customer will be converted to cash-on-delivery for all future sales, or some similar dire warning. As it is impossible to craft a separate dunning letter for every customer situation (given the cost of doing so), a collections department must create a standard set of dunning letters ...

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