Bad Debt Ratio

Bad Debt Ratio is a significant key performance indicator in the Financial KPIs category. It measures the proportion of a company's receivables that it no longer considers collectible. This ratio is a critical indicator of a company's credit policy's effectiveness and the quality of its customers.

A high Bad Debt Ratio can imply poor credit granting decisions or an ineffective collection effort, both of which can negatively impact a company's financial health. Conversely, a low Bad Debt Ratio suggests that the company's credit policies are effective and that its customer base is financially stable.

Calculation

The Bad Debt Ratio is calculated using the following formula:

Bad Debt Ratio = (Bad Debts / Total Credit Sales) x 100

• Bad Debts: These represent the amount that the company has written off as uncollectible.
• Total Credit Sales: This is the total sale that the company made on credit.

The resulting number is expressed as a percentage and represents the proportion of credit sales that are expected to be uncollectible.

Remember, an optimal Bad Debt Ratio varies between industries and depends on the nature of the business. Therefore, while a low Bad Debt Ratio is generally preferred, it's crucial to benchmark this KPI against industry standards.