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Bad-Debt Loss Ratio: The bad-debt loss ratio is a measure of how much money a business cannot collect from its customers compared to the total amount of money owed to the business. It helps businesses understand how much money they are losing due to customers not paying their bills.
Definition: The bad-debt loss ratio is a financial metric that measures the percentage of uncollectible debt to a business's total receivables. It is calculated by dividing the amount of bad debt by the total amount of accounts receivable.
Example: Let's say a company has $100,000 in accounts receivable, but $5,000 of that is considered bad debt that is unlikely to be collected. The bad-debt loss ratio would be 5%, calculated as follows:
Bad-Debt Loss Ratio = (Bad Debt / Total Accounts Receivable) x 100%
Bad-Debt Loss Ratio = ($5,000 / $100,000) x 100%
Bad-Debt Loss Ratio = 5%
This means that for every dollar the company is owed, it can expect to lose 5 cents due to bad debt.
Explanation: The bad-debt loss ratio is an important metric for businesses to track because it helps them understand how much of their accounts receivable they are likely to collect. A high bad-debt loss ratio can indicate that a company needs to improve its credit policies or collection procedures. On the other hand, a low bad-debt loss ratio can indicate that a company has effective credit policies and collection procedures in place.