Five years after the official end of the Great Recession, corporate profits are high and stock prices continue to rise, but most Americans haven’t felt the benefits. The top 0.1% of income recipients are reaping almost all the gains, and good jobs keep disappearing. The reason is simple: the current recovery has not trickled down.
Profit recovery is a method of accounting that allows revenue to be recognized when the costs of goods sold have been recovered through payments received from customers. This method can be employed in situations involving installment sales, where the company is selling products for more than its initial investment in them. It can also be useful for analyzing the profitability of investments, such as stocks and mutual funds.
The underlying problem is that the cost recovery method violates the realization principle, which requires that revenue be recognized when a product is transferred to a customer in exchange for payment. This principle is often ignored in a business environment that relies heavily on installment sales.
Using a profit recovery audit firm can help companies uncover unrealized revenues. These firms conduct a thorough review of the company’s accounts payable data files, looking for duplicate payments, overpayments or other deductions that might not have been realized through normal audit processes. They then pursue the recovery of these funds, typically for a fee.
A profit recovery firm can be a valuable asset for any business, but it is important to understand how these firms operate and the types of issues that they can find. Using the services of a firm that is not properly trained in this type of work can lead to inaccurate or misleading findings, which may result in erroneous write-offs.
To minimize the expense of profit recovery, consider investing in prevention tools to reduce the amount of credits to recover and fees paid to a recovery agency. For example, eliminating PO paper invoices and implementing automation to reduce duplicate processing are both effective strategies. It is also important to maintain full oversight of supplier communication channels, whether the business uses its own in-house recovery team or a third-party recovery service provider, so that relationships are not compromised.
If your organization is struggling to realize its financial potential, profit recovery can be an invaluable tool for identifying problems and correcting them before they become significant financial losses. Getting started with the proper foundations and making the right changes will ensure that your business is operating at peak performance. Ultimately, a strong recovery rate will lead to improved profit margins and overall company health.