1. You lose more than the written off amounts


Write-offs ÷ Net profit margin = Additional sales needed to offset the write-offs

Once you write off an account, it has a ripple effect on your entire business. It is not just the balance that is written off, it is the time of the marketing staff getting the deal, the time of the sales staff closing the deal, the time of the accounting staff recording the account, and the time of the collection staff chasing the payment.

Moreover, many businesses overlook the fact that many times, the cost of bad debts exceeds the written off accounts. Its impact is twofold: hurting the bottom line with the loss of the monies that you are owed, and restraining the growth of the top line.

For example, you write off four small past due trade receivables with a total balance of $2,000 and your business has a net profit margin of 5%. To estimate how much sales your business would need to compensate for the bad debts, divide your net profit margin by your write-offs.

Write-offs ÷ Net profit margin = Additional sales needed to offset the write-offs

In this example, writing off results in your business losing $2,000 and, at the same time, having to make $40,000 more in sales in order to recover from the loss of profit on the $2,000 write-offs.

This is why bad debt expense does not only have to do with the defaulted amount, but it also has a detrimental impact on your cash flow and impedes the profitability of your business.

Read key factor #2: Accomulation of credit risks