How good is bad debt? An analysis of Fortune 1000 companies! (2024)

We recently ran a poll on LinkedIn to gauge what users thought the average bad debt-to-sales ratio was.

Surprisingly, about 80% of respondents believed it to be around 1% or more, with the majority settling on 5%.

The reality we uncovered by delving into the bad debt ratios of a hundred Fortune 1000 companies was a tad different.

Bad debt – a tiny but menacing threat!

Bad debt, though seemingly small, is a lurking menace! The bad debt to sales ratio measures the slice of revenue a company loses because customers aren't settling their invoices.

In 2022, the average bad debt to sales ratio for enterprise businesses was a mere 0.16%. The crème de la crème (top performers) reported an even more impressive 0.02% or lower, while the stragglers (bottom performers) hit 1.10%.

While these percentages may seem like a drop in the ocean, in cold, hard numbers, they can be staggering. For example, a$1 billioncompany can lose up to$11 millionas bad debt. If it improves its ratio by even10%, it can save around$1 million.

The ideal bad debt to sales ratio isn't a one-size-fits-all figure

The risk of bad debt is different for different industries. We further dissected our data to understand how bad debt ratios varied for industries. Below are our findings, including a comparison of how the averages have moved YoY.

The tech sector faced a slight uptick in uncollectibles due to wobbly macroeconomic conditions, impacting customer payments.

Healthcare & life sciences saw an increase owing to the lingering effects of COVID-19-related moratoriums suspending collections in 2020 and 2021.

The utility sector, dealing with soaring energy prices and economic downturn fallout, also experienced a substantial jump in bad debt.

Higher bad debt expected in 2023

Businesses are bracing for higher uncollectibles in 2023.

Compared to 2021, they've upped their allowances for bad debt in 2022. Theallowance for credit lossis an estimate of the accounts receivable value that the company is unlikely to recover.

In 2022, the average allowance for credit loss to accounts receivable ratio hit 2.3%, a tad higher than 2021's 2.2%.

This trend is especially noticeable in the tech and utility sectors, grappling with a weakened economy. The manufacturing, healthcare, and CPG industries have maintained the same allowance for credit loss to AR ratio in 2021 and 2022.

Tips to tackle the rising bad debt

Along with higher interest rates, rising bad debt will pose a challenge for businesses globally in managing their cash flow in 2023 and 2024.

Here are some tips to tackle it:

• Limit credit risk concentration: Diversify credit risk and track AR concentration with different customers.
• Periodic credit risk check-ups: Use third-party data, credit risk modeling, and past payment data to evaluate customers' financial conditions and update credit risk scores.
• Strong credit controls: Secure letters of credit and bank guarantees to ensure creditworthiness.
• Credit risk prediction and management: Employ real-time credit risk monitoring and robust models to predict customer payments and delinquency.

Curious for more insights? Dive into our complete research on bad debt here. It's a journey through the financial landscape you won't want to miss!