How do I use this calculator?

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.

• Uncollectible sales: When a business is no longer confident that it will be able to collect what it is owed, the circumstances that allowed the transaction to be recognised for revenue purposes no longer exist.
• Annual sales: The revenue that a company derives from the sale of its product or service in a financial year.

What is bad debt?

Bad debt is an amount that has been written off by the business as a loss and categorised 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 to collect the debt becomes more costly than the debt itself.

Your Bad Debt to Sales Ratio is the percentage of bad debt impacting your business.

What is a "good" bad debt-to-sales ratio?

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.

Why should you know your bad debt-to-sales ratio?

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:

• Improve their collections process and their cash flow.
• Avoid unpaid invoices from customers by identifying the profile of customers consistently in the “bad debt” bucket and adjusting their credit terms accordingly.
• Improve profitability, as bad debts impact a company's profitability by being expensive to collect upon while eating into its cash flow.
• Improve an organisation’s credit rating by having a healthy business and growing cash flow, so their bad debt isn’t dragging down the business's creditworthiness.

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 its AR processes for growth and scalability.