Bad Debt

Bad debt is an accounts receivable balance that is deemed uncollectible after reasonable collection efforts have been exhausted, representing a direct reduction in revenue and a charge against the income statement — either through the direct write-off method (recording the expense when a specific account is identified as uncollectible) or the allowance method (estimating uncollectible amounts based on historical experience and recording an ongoing reserve). Under GAAP, the allowance method is required for companies following accrual accounting, with the reserve typically calculated using aging-based analysis: 1–30 days past due at 1–2% reserve, 31–60 days at 5–10%, 61–90 days at 15–25%, and 90+ days at 50–80%. Industry-wide, bad debt expense averages 1.5–2.5% of total credit sales, though this varies dramatically by sector — B2B professional services experience 0.5–1.5%, while construction and healthcare can exceed 4–6%. For a company with $5 million in annual credit sales, even a 2% bad debt rate represents $100,000 in lost revenue that flows directly to the bottom line. Proactive bad debt management strategies include rigorous credit evaluation before extending terms (using D&B risk scores, trade references, and financial statement analysis), automated dunning sequences that escalate communication frequency and urgency as invoices age, early payment incentives (2/10 net 30 terms that motivate prompt payment), and credit insurance policies that cover 75–90% of losses for $0.25–$0.75 per $100 of insured receivables. Quadient AR's collections automation and credit risk monitoring tools help organizations reduce bad debt write-offs by 25–40% through systematic early intervention and data-driven credit limit management.