Profit Recovery is the process of identifying overdue invoices that should have been paid and then working to recover those funds from unresponsive customers. A collections agency can help companies improve cash flow, reduce bad debt expense and boost overall profitability by collecting the revenue that would otherwise be lost to non-payment. For many small businesses, hiring an agency is a significant investment that can pay for itself several times over in increased profits and improved cash flow.
Profit recovery involves identifying the percentage of overdue accounts receivable that are likely to be collected, taking into account the likelihood of non-payment and the amount of time that will pass before the accounts are collected. This percentage, known as a recovery rate, is then used to help estimate how much the company will be able to recover in total from unpaid accounts. In addition to helping identify potential recovery amounts, a recovery rate can also be used by companies to set rates and terms for future credit transactions.
A company can use its recovery rate to set credit terms, for example, by requiring a higher deposit or reducing the amount of time that is required for payment. It can also be useful in setting pricing for specific types of products or services. In the case of a business that sells on credit, a recovery rate can be used to determine how much to charge for a product or service, based on its expected profitability.
Understanding a profit recovery ratio is crucial for any company that has debt. The ratio is a measure of a company’s success in repaying its debt, and it can be applied to all types of debt, including mortgages, loans, or credit cards. A high profit recovery ratio is indicative of a sound debt investment and can help to ensure that a company’s debt is being repaid as quickly as possible.
To calculate a profit recovery ratio, start by dividing the total value of the investment by its total cost. Then, multiply the result by 100 to convert it to a percentage figure. A percentage is a more easily understood measure of profit than a dollar amount, and it can be used to compare the performance of different investments.
While it is important to take into consideration a recovery rate when choosing an investment, it is just as important to consider the risk involved in a particular transaction. Sometimes, business requires tough choices, and that may mean selling a product even if it isn’t certain the company will be repaid. In these situations, the cost recovery method of recognizing revenue can be beneficial because it defers recognition of gross profit until the company has earned back the money it spent on goods and services. This way, net income stays closer to operating cash flow.