Our historic bad debt reserve formula, applied quarterly, was a true up to the percentages in the various aging buckets. For example, 33% of 30 – 60 days, 50% of 60 – 90 days… Our aging has less to do with “terms” supplied to customer because we have a mix of retail and corporate accounts, then contracts negotiated with payment terms imbedded. Recent
We need a bad debt reserve allocation formula that incorporates revenue as well as aged receivables
Answers
We just changed from reserving based on % of aged AR to a combination of factors based on revenue and AR "health." We look at write-offs as % of revenue for the past 3 years and use an average and apply that to our current month's revenue to calculate the bad debt expense amount. We also still reserve specific accounts that we have indication that collections may be troublesome. Quarterly, we review the allowance and ensure the balance makes sense with our current AR portfolio and write-off trends. Hope this helps!
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