Bad debt (or doubtful debt) refers to a receivable that is unlikely to be collected, either because the debtor is insolvent, disputing the claim or has disappeared. In financial due diligence, the analysis of bad debt provisions is a key earnings quality indicator: insufficient provisioning inflates trade receivables and overstates EBITDA, while excessive provisions may mask a deteriorating client portfolio. The ageing schedule of receivables — breaking down outstanding balances by days past due — is systematically reviewed to assess the adequacy of existing provisions and estimate the normalised working capital.

‍

Example: due diligence on a French services company reveals CHF 640,000 of receivables more than 180 days overdue, against a provision of only CHF 80,000 (12.5%). Industry norms suggest provisioning 80% of such receivables. The resulting CHF 432,000 under-provision is treated as a normalisation adjustment reducing the working capital reference, directly impacting the completion accounts price mechanism.

‍

Hectelion reviews bad debt provisions with granular ageing analysis in every financial due diligence engagement.