This bad debt to sales ratio calculator determines the percent of invoices not paid, allowing you to analyse your collections process and identify any inefficiencies that can be improved upon.
Bad debt is an amount which has been written off by the business as a loss, and categorized as an expense, because the debt owed to the business cannot be collected. This generally occurs when the debtor declares bankruptcy or when the cost of pursuing further action in an attempt of collecting the debt becomes more costly than the debt itself.
Your Bad Debt to Sales Ratio is the percentage of bad debt impacting your business.
The lowest bad debt to sales ratio doesn’t necessarily mean it is ideal for the business. 1% of your invoices going bad might seem ideal however, if a business is not taking some losses, then it is not selling (and profiting) optimally. A 1% bad debt ratio indicates overly cautious credit terms and missed sales. If a company sells $500k with 1% bad debt, it writes off $5k. By loosening credit terms and broadening credit limits will increase net even with a quintupled bad debt loss. It is not always ideal to want a ratio too low.
Understanding a business and its cash flow is key to its success. Bad debt to sales ratio helps companies evaluate how their AR process is performing, as well as their overall business health. Understanding bad debt to sales ratio allows businesses to:
Along with understanding your DSO and AR Aging reports, Bad Debt to Sales Ratio offers another view into a business’s health and operations, providing valuable data to help it improve their AR processes for growth and scalability.
Download our Ultimate AR Collections Benchmarks Report to learn more tips on how to improve your Bad Debt to Sales Ratio and every other key metric you’ll need to become a revenue hero. You can also book a consultation with one of our AR experts to discover the power of Smart AR and you could reduce your DSO by 30% on average.