Two denominators, two different questions
Bad debt as a share of credit sales tells you how much of what you sell you never collect. It is the number to track over time, because it is comparable between periods of different size.
Bad debt as a share of receivables tells you how risky the balance you are carrying right now is. It is the number to look at before deciding whether to extend more credit to somebody.
The replacement cost is the point
A write-off is not a loss of revenue, it is a loss of profit, and profit is the expensive kind. At a 20% net margin, $4,200 written off needs $21,000 of new work to replace. At 10% it needs $42,000.
Put next to the cost of sending a statement on a fixed day each month, or of getting the purchase order number onto the invoice so it can be matched, the arithmetic makes itself.
What a normal figure looks like
Under 1% of credit sales is typical for a business that checks who it extends terms to. Above 2% usually means either the credit decision or the chasing needs attention, and the aging report will tell you which: risk concentrated in one large old debt is a credit problem, risk spread across many small overdue invoices is a process problem.
Related calculators
- AR aging calculatorThe balance owed, split by how overdue it is
- CEI calculatorCollection effectiveness index, scored out of 100
- DSO calculatorDays sales outstanding, and what shortening it releases
Questions people ask
How do you calculate bad debt percentage?
Divide the amount written off in the period by credit sales for that period and multiply by 100. Dividing by closing receivables instead answers a different question, about the risk in the balance you hold now.
What is a normal bad debt percentage?
Under 1% of credit sales is typical where credit is checked before terms are granted. Above 2% usually points at either the credit decision or the collections process.
Why does the calculator ask for my margin?
Because a write-off costs profit, not revenue. Showing the sales needed to replace it at your own margin is the only version of the number that reflects what it actually cost you.
What is the allowance for doubtful accounts?
An estimate of receivables you expect not to collect, set aside before any specific invoice goes bad. Many businesses base it on their historical bad debt percentage, which is the figure this page produces.
When should I write an invoice off?
There is no universal rule, and the tax treatment varies by country, so take advice on the accounting. Commercially, most small businesses stop spending time on a debt long after the point where the time costs more than the debt.
Does a credit note count as bad debt?
No. A credit note cancels something you agreed was not owed. Bad debt is money you are owed and have given up collecting. Keeping them separate matters, because one is a pricing or quality signal and the other is a credit signal.