Doubtful debts calculator

If you have concerns over the ability of the debtor to pay, it’s prudent to establish a provision for the amount of the doubtful debt. Such a debt may become bad in due course, either in part or in full. Alternatively, you might collect all or some of the monies owed. However, in the meantime you’ll need to include a reasonable figure in your management accounts.

How much?

The amount to provide depends on the “profile” of your sales and debtors. You can provide for doubtful debts on either a case-by-case basis or as a general adjustment, depending on your business. By making a provision each month you should avoid surprises at the year-end. Typical profiles are:

Profile 1. If your business provides relatively “high value, low volume” business services or goods, you may be able to consider overdue amounts and provide for doubtful debts on a case-by-case basis. So reviewing your debtors ageing reports each month and discussing long overdue debts with the salesperson or consultant responsible for that client will allow you to gauge whether a provision is needed and, if so, exactly how much.

Profile 2. However, if your business provides relatively “low value, high volume” services or goods to private individuals. you won’t be able to be so selective in making your doubtful debt provisions. Use our Doubtful Debt Calculator if this applies to you.

Percentage

Your industry trade body may be able to provide benchmarks for customer debt write-offs. For example, if this is 2% of sales value, you should be making a provision each month so that your doubtful debt account amounts to 2% of year-to- date sales.

Alternatively look at the amounts written off for bad debts in prior years’ accounts. For example, if this amounts to 5% of your year-end debtor balance, you should make a monthly provision so that the balance sheet doubtful debt account amounts to 5% of the total debtor ledger.

Our doubtful debt calculator applies to both approaches.