Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Bad Debt Recovery

What it is:

Bad debt recovery is when a company is able to collect a payment that was previously classified as a bad debt

How it works (Example):

Let's assume that Company XYZ sells $1,000,000 worth of goods to 10 different customers.  Company XYZ records $1,000,000 in revenue on its income statement and $1,000,000 in accounts receivable on the balance sheet (we are assuming the customers have 60 days to pay). 

Company XYZ discovers that one of its customers, Big Store, is not doing very well. Big Store stops paying its bills and doesn't pay Company XYZ for $100,000 worth of goods. Company is not confident that Big Store will ever pay, so it categorizes the $100,000 as a bad debt.

Now, assume that Company XYZ hires a collection agency to try to recover the $100,000 Big Store owes. If the collection agency is able to collect some or all of the $100,000, it has successfully managed a bad debt recovery.

Why it Matters:

Most companies have some sort of bad debt expense because, invariably, one customer or another will fail to pay. That puts companies that specialize in bad debt recovery in constant demand.