Legal Definitions - bad-debt loss ratio

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.