Accounts Payable & Receivable › Collections & Bad Debts
How do you calculate and interpret the bad-debt-to-sales ratio?
AdvancedAnswer
Bad-debt-to-sales = bad-debt expense / total (credit) sales, showing what fraction of sales is lost to non-payment. A rising ratio signals loosening credit standards, worsening customer quality, or economic stress; a low, stable ratio indicates sound credit control. It's benchmarked against industry norms and the company's risk appetite.
Bad-debt-to-sales = 90,000 / 6,000,000 = 1.5%.
A jump to 3% prompts a credit-policy review.Real-world example A climbing bad-debt-to-sales ratio triggers tighter credit limits and a review of recent onboarding decisions.