Glossary · Receivables metrics
Bad debt ratio
The bad debt ratio is the share of credit sales that end up written off as uncollectable, usually measured over a year.
The bad debt ratio tells you how much of what you invoice you never get. It is the clearest cost of extending credit, and the number credit policy is meant to keep low.
Some businesses calculate it against total receivables rather than sales. Either works, as long as you compare like with like over time.
A rising ratio is a late signal: by the time debts are written off, the decisions that caused them — who got credit, how long accounts were left before escalation — were made months earlier. Watch it next to the aging report, which shows the same problem earlier.
Formula
Bad debt ratio = bad debts written off ÷ credit sales in the period × 100
Example
A firm with €1,200,000 of credit sales writes off €9,000 in a year. Its bad debt ratio is 9,000 ÷ 1,200,000 = 0.75%.