Profit Recovery is a business practice that involves an audit of a company’s accounts payable data to discover lost funds due to duplicate payments, overpayments, or failure to take credits or other deductions. A firm specializing in profit recovery conducts a rigorous review of each disbursement and, for a fee, pursues the return of invalid payments. The process of identifying and recovering such lost funds can be complex and requires that the hired firm make contact with vendors, negotiate and settle any disputes, and modify the company’s accounts payable system to address underlying issues.
The concept of capital recovery also applies to the earning back of initial investment in a project or purchase. A company must recoup the money it spent on machinery and equipment before it can begin to earn a profit from its investment. This analysis of the initial cost and salvage value is typically done before a substantial new purchase is made.
One reason why it is important for companies to utilize profit recovery processes is to avoid paying unnecessary taxes. These expenses can easily add up over time. The cost of the services of a professional recovery agency is often recouped multiple times over by the savings generated by their work.
Companies in industries with high volumes of purchases in a highly volatile environment may benefit from implementing profit recovery programs. Any company that has experienced significant accounting systems changes or a merger or acquisition should also consider utilizing the services of a profit recovery firm. These types of changes often introduce variations into the accounts payable system, leading to increased risks of duplicate, improper or incorrect disbursements.
In the United States, it is possible for a business to recover lost profits from the actions of another party, but the at-fault party must have acted with “reasonable certainty.” This standard is not a bright line rule and each case must be examined on its own merits.
The best profit recovery firms will focus on health care, audit fees, utilities, and other expenses where control processes are weak, systems have recently changed or where there has been an acquisition. They should also examine PO paper invoice files and EDI files for clues to overlooked errors. A profit recovery firm should also be prepared to review the cost structure of a company and suggest potential savings in areas like supply chain management, vendor compliance, and purchasing strategies. The firm should also help companies implement preventative measures that will reduce the number of credits to recover and the resulting fees paid. Those measures could include eliminating the use of PO paper and implementing EDI to improve communications between suppliers and the company.