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Bad debts ratio calculation


Credit Management has two main objectives that complement each other:

  • Accelerate cash receipts from customers with a professional collection process.
    The DSO and the overdue invoices / accounts receivable ratio to measure your performance in this crucial sector for any business.
    This goal is embodied in reducing your working capital requirement (WCR which you can see in the balance sheet of your company).
bad debts ratio
  • Avoid unpaid invoices from customers.
    This objective is particularly important as bad debts impact your company's profitability and net result. The bad debts are materialized in the profit and loss statement (losses or provisions for doubtful debts) and in the balance sheet. The net result increase (if positive) or decrease (if negative) equity of the company.
To assess your performance on this crucial point, we propose to measure the bad debts ratio.

  • My DSO Manager

    Bad debts in My DSO Manager

    The collection process of My DSO Manager allows to identify receivable which cannot be collected due to insolvency of customer or other reasons.

    A specific status and a comment are applied to invoices concerned.

    Then, you just need to do an extraction of items which are qualified with this status to perform your bad debts review. See the demo.

Bad debts ratio is calculated as follows

Bad debts for the period*
+ Accruals for doubtful and old debts for the period
- Recovery of accruals for doubtful and old debts for the period
/ Turnover for the period.

* This period may correspond to a month, quarter or year depending on your company.
The bad debts rate must remain permanently below 1%. Otherwise, you must make significant progress in securing your business.
In order to have a fair indicator, it is necessary that the losses and provisions are taken in accordance with accounting rules and tax laws. Bad debts value must be the reflect of the real situation of your receivables.

Next: strategy in credit management
 


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