How to Forecast Debt

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Forecasting debt is integral in managing a business. Any business that handles accounts receivable handles losses. Simple projections can better prepare you by calculating the likely debts that won't be received.

Obtain credit or risk scores of all significant consumer accounts. Certified businesses will have access to credit bureaus, thus allowing for usage of FICO scores. Credit scores can be obtained through the major credit agencies, such as TransUnion, Experian and Equifax subject to membership approval--which can be accessed through their websites.

Assign the risk scores to each customer in a database or spreadsheet. Sort the list from high to low scores.

Divide the list into four categories. For the quadrant with the worst (lowest) scores, label the group as "high risk." Subsequently, the four groups should be named "high risk," "medium high risk," "medium low risk" and "low risk" by order of lowest to highest scores.

Divide the percentage of bad debts by the total receivables for previous years' data if available through previous company records. If you do not have any previous data, simply estimate for each of the four categories. The more data available, the higher the likelihood for accuracy in the projection. By finding a company average, you can adjust the expected percentage of bad debts upward for higher risk categories and downward for lower risk. The first year might require ballpark estimates, but save this data to accumulate more accurate projections going forward. In the future, you'll have empirical bad debt estimates for each risk category.

Multiply the percentage of expected (or historical) bad debts for each category by the amount of the current receivables for the category. The total for each group is the amount of expected bad debts for the current accounts.

Tips

  • Larger sample sizes of previous data will intensify the forecast.

Warnings

  • Forecasts are not always accurate. Use aggressive estimates of bad debt to be conservative.

References

About the Author

Kyle Lamb has been publishing web, newspaper and magazine stories for seven years after experience in radio broadcasting and public address. Most recently, he spent two years covering Ohio State athletics for Scout Media, a subsidiary of Fox Interactive Media and News Corporation. He earned a broadcast journalism certification from the Ohio Center for Broadcasting in Cleveland, Ohio.

Photo Credits

  • debt defined image by Christopher Walker from Fotolia.com