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We need a bad debt reserve allocation formula that incorporates revenue as well as aged receivables

Our historic bad debt reserve formula, applied quarterly, was a true up to the percentages in the various aging buckets. For example, 33% of 30 – 60 days, 50% of 60 – 90 days… Our aging has less to do with “terms” supplied to customer because we have a mix of retail and corporate accounts, then contracts negotiated with payment terms imbedded. Recent accounting changes have resulted in excellent collections efforts and we have an immaterial amount in our over 90 days column. However, our market is extremely volatile and we want to continue a conservative reserve amount rather than take it down to near zero reserves as it would be with our current formula. Our thought is to combine a revenue % with the aging buckets to increase our reserve to a minimal level when collections ebb and flow. Anyone care to share a revenue and aging method combined?

Answers

Carrie Roesner
Title: Controller and VP
Company: Centro
(Controller and VP, Centro) |

We just changed from reserving based on % of aged AR to a combination of factors based on revenue and AR "health." We look at write-offs as % of revenue for the past 3 years and use an average and apply that to our current month's revenue to calculate the bad debt expense amount. We also still reserve specific accounts that we have indication that collections may be troublesome. Quarterly, we review the allowance and ensure the balance makes sense with our current AR portfolio and write-off trends. Hope this helps!

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