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Finance

Is there a standard method of estimating bad debt rates?

I'm starting a new business and need to account for bad debt in my business plan. I was hoping for a ballpark estimate for a small business based on gross revenue or something similar. At this stage, I have no clue how much to budget in the bad debt line item.
- Guest Writer
Entrepreneur, Business Planner and Angel Investor
Opinions expressed by Entrepreneur contributors are their own.
This is a good question, one of the most important things to be asking, but unfortunately there isn't some standard amount that I'm aware of.

Most business plans ignore bad debt altogether. I don't think anybody could come up with a standard because it would depend on what business you're in and where, what kind of customer relationships you manage to keep, how well you fulfill the promises you make, the economy and so many other factors.

My advice would be to call up three or four similar businesses, preferably in areas in which they don't compete with you (maybe just look five states away) and ask them. That's hard, of course, because most people wouldn't take your call. But it might help.

Tim

Future Financial Challenges and Opportunities for Small Businesses