In the past, the company knew all of its customers either personally or by reputation. By purchasing credit insurance, the company not only protected itself against future losses from bad debt, but it also was able to leverage that protection as it pursued growth with new customers.Īnother company that was growing rapidly, Johnstone Supply, grew concerned about its exposure to potential bad debt expense as its customer base expanded. To make matters worse, the company had also dedicated considerable staff time and resources trying to collect on those bad debts with no success. One company changed its approach to bad debt management after two major clients defaulted on their bills, leaving the company facing tens of thousands of dollars in losses. There are many examples of companies dealing with bad debt expense. Because this bad debt expense must be charged against the company's accounts receivable, bad debt expense reduces the amount of accounts receivable on the company’s income statement. Bad debt expense reflects the amount of accounts receivable that a company is unable to collect now and may not be able to collect in the future. When a customer defaults on its bills or is in danger of doing so, the company extending credit to that customer faces a bad debt expense. How Do You Calculate Bad Debt Expense For Accounts Receivable?. Although some level of bad debt expense is often unavoidable, there are steps companies can take to minimize bad debt expense. Any company that extends credit to its customers is at risk of slower or reduced cash flow if any of that credit turns into bad debt expense. Cash flow is the lifeblood of any business so anything that reduces cash flow could jeopardize business success or even its survival.
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