Bad debt

Definition

Bad debt is an amount owed to a business that is judged unlikely to be recovered. Most commonly it is a sales invoice a customer has failed to pay despite chasing, but it can also be a loan a lender concludes will not be repaid. Once a debt is deemed irrecoverable, it is removed from the accounts through a write-off, recognising the loss.

In plain terms

You delivered the goods, raised the invoice, and the customer has gone quiet, disputed it, or become insolvent. After reasonable efforts to collect, you accept the money is not coming. That unpaid amount is bad debt. It is different from a doubtful debt, which you suspect may not be paid but have not yet given up on — businesses often hold a provision for doubtful debts as a cushion, then write off the genuine bad debts when hope runs out.

Why it matters to your business

Bad debt is a direct hit to profit, but the deeper damage is to cash flow. You have already incurred the cost of supplying the work, possibly paid suppliers and staff, yet the income never lands. A run of bad debts can turn a profitable order book into a cash crisis. That is why credit control — checking customers, setting limits, chasing promptly — is not admin overhead but a core defence for your working capital.

• Reduces profit when written off
• Strains cash flow most of all
• Best managed through tight credit control

How to limit bad debt

Prevention beats recovery. Run credit checks before extending payment terms to a new customer, set sensible credit limits, and invoice promptly with clear due dates. Chase overdue accounts early and consistently. For businesses with significant trade debtors, invoice finance can convert unpaid invoices into immediate cash and, in some forms, transfer the risk of non-payment. Where a customer slides into insolvency, register your claim quickly — though recoveries are often modest.