Bad debt is revenue you booked but will never collect. The bad debt percentage compares those losses with your credit sales. This calculator nets out recoveries and applies the rate to projected sales to estimate next period's loss.
The formula
Net bad debt = bad debt written off - recovered amount
Bad debt % = net bad debt / total credit sales x 100
Projected bad debt = projected credit sales x bad debt %
If total credit sales are zero, the percentage is zero.
Worked example
A business reviews one year:
- Bad debt written off: $3,000
- Recovered after write-off: $0
- Total credit sales: $300,000
- Projected credit sales next period: $350,000
Net bad debt: $3,000 - $0 = $3,000
Bad debt percentage: $3,000 / $300,000 = 1%
Projected bad debt: $350,000 x 1% = $3,500
How to read the result
The percentage shows how much of each credit sale you lose. A small rate can still hurt if your margins are thin. A 1% loss on credit sales can erase a large part of the profit.
Consider these points:
- Use enough history. One period can mislead. Compare several periods.
- Match sales to losses. Losses often relate to sales from earlier periods. Keep this in mind when sales change fast.
- Projection is simple. It assumes the same rate. Raise it if you plan to sell to riskier customers.
- Prevention beats recovery. Credit checks, deposits and clear terms lower the rate.
Write-off and reserve rules differ by country, so check your treatment with an accountant. The guide on bad debt explains write-offs in more detail.
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Frequently asked questions
- How do you calculate bad debt percentage?
- Subtract recovered amounts from the bad debt written off. Divide the result by total credit sales and multiply by 100. For $3,000 of bad debt on $300,000 of credit sales, the rate is 1%.
- What is a good bad debt percentage?
- Lower is better. A normal level depends on your industry, customers and terms. Compare the rate with your own past periods. A rate that rises over time needs a closer look at credit checks.
- Should I subtract recoveries?
- Yes, for net bad debt. Money you collect after a write-off reduces the true loss. Enter it in the recovered field. Leave the field at zero if you recovered nothing.
- How is projected bad debt calculated?
- The calculator applies your bad debt percentage to projected credit sales. It assumes the same rate continues. Treat it as a starting point for an allowance and adjust for known risks.
- Is bad debt tax deductible?
- Rules differ by country and by accounting method. Some places allow a deduction only after the debt is written off. Ask an accountant about your local rules before you rely on this.