A/R Optimizer » Review & Quantify Accounts Receivable

Calculating Bad Debt

In order to successfully optimize your accounts receivable, you must first quantify the amount of bad debt in your company. Bad debt refer to accounts receivable that cannot be collected and are therefore written off as an expense. This can also refer to notes receivable, but for now, we’re going to refer to solely accounts receivable.

Typically, you would look at your historical results. For example, if you have previously generated sales of  $1 million, and you wrote off $50,000, then your historical bad debt to reference is 5%. This is a “quick and dirty” method, but if you would like to be more specific, you would need to identify which receivables are not recoverable. From the auditor’s point of view, this is preferable, but most companies just refer to their historical bad debt.

$50,000 x .05 = $2,500 in bad debt

Calculating DSO

Why do I need to calculate DSO? What is the purpose?

Daily Sales Outstanding (DSO) is the average age of your accounts receivables. It is a useful tool to evaluate performance in a company. The following formulas illustrate how to calculate DSO:

In doing these calculations, calculate the average days it takes to collect revenue after you make a sale. DSO can assist in creating new goals for a company, such as collection procedures. Use this also to review the progress your company has made after you’ve made improvements.