Definition
Bad debt is accounts receivable that are unlikely to be collected. It reduces profit and can create sudden cash strain if not forecasted.
How to use it
- Track bad debt rate by segment, payment terms, and cohort month.
- Age receivables and flag accounts that pass your collection threshold.
- Use credit checks, deposit requirements, or shorter terms for higher-risk segments.
- Review write-offs vs allowance so expected losses are visible before cash gaps hit.
Common mistakes
- Treating bad debt as a one-time event instead of a recurring rate.
- Mixing cash timing with revenue recognition (watch the AR ledger).
- Ignoring concentration risk in a few large customers.
Measured as
Measure Bad Debt with the same date, unit basis, and accounting or policy definitions used in the rest of your model.
Misused when
- Treating bad debt as a one-time event instead of a recurring rate.
- Mixing cash timing with revenue recognition (watch the AR ledger).
- Ignoring concentration risk in a few large customers.
Operator takeaway
- Track bad debt rate by segment, payment terms, and cohort month.
- Age receivables and flag accounts that pass your collection threshold.
- Use credit checks, deposit requirements, or shorter terms for higher-risk segments.
- Tie Bad Debt to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Cash conversion cycle: turn working capital into runway if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Bad Debt belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Cash conversion cycle: turn working capital into runway: A practical guide to the cash conversion cycle (CCC): how AR/AP timing changes cash, how to reduce days outstanding, and why runway depends on working capital.