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Collections

Bad debt and write-off

Receivables judged uncollectable, provisioned against and eventually removed from the books.

Bad debt is money invoiced that will not be collected. Businesses provision for it in advance as a percentage of the ageing buckets, and write off specific invoices when recovery is abandoned.

Writing off is an accounting act, not an admission of defeat: the receivable leaves the balance sheet, and the cost lands in the income statement. The customer relationship may continue, usually on prepayment.

A rising bad debt ratio alongside flat DSO usually points at a segment or a sales-qualification problem rather than at the collections team.

Related terms

  • Ageing (AR ageing) Outstanding receivables grouped by how overdue they are, usually in 30-day buckets.
  • Collections The process of recovering invoices that are past due, from reminders through to escalation and write-off.
  • DSO (Days Sales Outstanding) The average number of days it takes to collect payment after invoicing.