What is a bad debt?
As a means of minimizing the impact of poor debt on the functionality of the company, the Bad Debt Reserve is simply a means of creating a bank of reserve resources that help balance the collected bad debts. Usually this bad debt occurs when client invoices remain unpaid and there is no big chance of choosing excellent invoices. Here are several different scenarios in which bad debt can have a positive impact.
One of the most common applications of bad debt is located in the framework of receivables for the company. Basically, a factoring company buys a bank of invoices from corporation knowing that payments will focus on the new invoices owner. A large percentage of the nominal value of invoices for the client takes place, but in case of poor debts it retains the percentage to be earmarked. The percentage of detainees is often calculated on the basis of rage payments that have been exposed to past billing periods involving the same customers.Once all unpaid invoices are paid and clear for this period, the funds that have been reserved to cover poor debt costs are reserved, released and handed over to the Client of the Company.
Another example of the use of a bad debt reserve has to do with the depreciation of the wrong debt of the proper bankruptcy or the client from the business. Even if the Company is affected by bankruptcy protection and agreement to allow creditors to receive a small percentage of out of the outstanding debt, there is usually a significant amount of outstanding invoices that the seller must write off. Poor debt reserve helps to alleviate trauma that they must engage in detachment of excellent invoices as unprisible. It is also often possible to use the use of poor debt to cover these types of loss of annual tax return, which helps further relieve the financial loss of the company.
Even a small businessAnd it may sometimes have a client who is unable to honor the invoice for a reason. It may be particularly important for small businesses, as a large percentage of generated income tends to go to basic operations. If the income collected is much less than the generated invoices, the source of funds is to make the difference, decisive. Creating a bad debt reserve, which is roughly equal to at least thirty days of operating costs, is an excellent way to ensure the occurrence of poor debt and reduce the negative impact on the overall business activity.