What method is used to evaluate the adequacy of the bad debt reserve? ie. specific account review or a formula based on aging buckets? If formula what % is applied to the various aging buckets?
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Posted 2 years ago #
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What I usually do is take 50% of over 90 days and 100% of over 180 days. Although everyone buckets are different the premiss is still the same.
Posted 2 years ago # -
Another option is a combination of historical and specific accounts. Start with a review of your historical losses as a % of sales and add any accounts that are probable bad debts now. You may also want to set aside some $$ for potential preferences on any pending bankruptcy.
Posted 2 years ago # -
Our approach to reserves for bad debt is to go over all accounts over ninety days out, and assign a collectibility percentage based on historical data. We're still fine tuning this, but each department gathers on a quarterly basis, and each manager goes over the 90+ accounts, reviewing each and giving a reason for our decision.
Currently, we have seven benchmarks, based upon size of debt, whether secured, disputed items, legal status and so forth. Incidentally, we assign accounts we are referring to legal a straight 50%, regardless of amount or other considerations, and that is the largest reserve for an item we use. Bankruptcies are considered legal issues, so are assigned the flat 50%, regardless of the defensibility of purported preferences.
Posted 2 years ago # -
Our approach is a combination of historical and specific account reserve. We identify specific customers we have determined are at risk and will reserve at 50% or 100% of their total due. The percentage depends on several factors including deposits, ongoing open account and personal guarantees among others. Excluding the specific reserve, we use historical 2 year data of "general" write-offs and take that percentage against our total AR balance. Reserving for specific customers eliminates looking at aging buckets since these customers tend to be across the board and the general reserve has proved more than sufficient for the unexpected.
We also modified our agings and statements to show aging buckets for 1-15 and 16-30 days past due. That has really helped to improve our collections. The smaller aging bucket has eliminated customers ignoring 1-30 as believing they are only a few days late.
Posted 2 years ago # -
I use a three part process. I create a general reserve that takes into consideration historical bad debt write offs. The second part of the process involves creating a reserve for active accounts considered high risk. The third reserve is for accounts that have been placed for collection, or are in bankruptcy, receivership, have signed an assignment for the benefit of creditors, or are on an extended payout plan.
I have never had a serious challenge from an outside auditor using this methodology.
Hope this helps.
Michael Dennis
Posted 2 years ago # -
Are there any benchmarks available for AR Bad Debt write-offs per year as a % of Sales/Revenue
Posted 2 years ago # -
There must be but I am not familiar with them.
In the past, I have used the bad debt write off percentages for publicly traded competitors to establbish this type of benchmark.
Michael Dennis
Posted 2 years ago # -
The usual benchmarks I've seen have been between 0.5-1.0% of total sales for the year. The primary factor for the range being so wide is usually the industry. In forest products, a historically very conservative industry, the target for bad debt was usually 0.1-0.2% of sales, far less than I've seen in other industries, and this target was usually met or beaten by the members of my industry group.
The biggest factor right now is the economy, which means that currently there is really no prediction on bad debt percentages. Long-time stable companies are vanishing in very short order, as I'm sure we've all seen, so setting a target based on historical norms and data is fine, but it's not (necessarily) going to be a predictor of how much success you'll have reducing bad debt.
Posted 1 year ago #
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