TYPICAL NATIONAL BAD DEBT WRITE-OFF STATISTICS

Companies that grant credit may experience a typical write-off percentage for a year as follows:

• LOW – .065% (.00065 x Total Sales)
• IDEAL – .2% (.002 x Total Sales)
• GOOD – .3% (.003 x Total Sales)
• HIGH – .5% (.005 x Total Sales)
• DANGER – 1.0% (.01 x Total Sales)

The dollar equivalent of the bad dept write off percentage is expressed by the respective numeral equivalent multiplied by Total Sales as shown between the parentheses above.

LOW, IDEAL, GOOD, HIGH, DANGER – These typical percentages are national averages. It is more important to place weight amongst industry comparisons assuming that such figures are available. Bad debt allowances have a tendency to be higher than the national norm when overall industry margins are high. Sometimes this serves as justification for greater allowance of write-offs. If write-off percentages land in the lowest quartile of the statistics, then credit is too tight. An exception would be a startup company, a company with low sales volume or a company that is financially strapped.

BAD DEBT WRITE-OFF EFFECT ON NET PROFIT – There is a negative dollar-to-dollar direct relationship between bad debt write-offs and net profits. All companies must make a profit at the end of the day or face extinction. Write-offs occur after all expenses have been paid. Preventing a write-off will positively contribute dollar for dollar to the net profit line, which suggests that great effort and care must be taken in recovering every penny possible after in-house collection procedures have been exhausted. After thirty days Past Due Terms with in-house collection efforts depleted, the customer must be thought of as a debtor. The debtor can never be thought of as a new customer unless there is a profound change enabling the customer to pay on regular terms.