What Is Capital Recovery?
Capital recovery is a term that has several related meanings in the world of business. It is, primarily, the earning back of the initial funds put into an investment. When an investment is first made in an asset or a company, the investor initially sees a negative return, until the initial investment is recouped. The return of that initial investment is known as capital recovery. Capital recovery must occur before a company can earn a profit on its investment.
Capital recovery also happens when a company recoups the money it has invested in machinery and equipment through asset disposition and liquidation. The concept of capital recovery can be helpful to a business as it decides what fixed assets it should purchase.
Separately, capital recovery can be a euphemism for debt collection. Capital recovery companies obtain overdue payments from individuals and businesses that have not paid their bills. Upon obtaining payment and remitting it to the company to which it is owed, the capital recovery company earns a fee for its services.
- Capital recovery refers primarily to recovering initial funds put into an investment through returns from that investment, making it a break-even measure.
- It can also refer to recouping invested funds through the disposition of assets.
- The term can also refer to corporate debt collection.
Capital Recovery Explained
Capital recovery represents the return of your initially invested capital over the lifespan of an investment. At the initial point of investment, it is impossible to determine what the true return on the investment will be. That can't be determined until the investment is returned to you, ideally with a profit. Capital recovery can be referenced both in terms of long-term investments and with companies, divisions, or business lines.
A capital recovery analysis is typically done before a company makes a substantial new purchase. Initial cost, salvage value, and projected revenues factor into a capital recovery analysis when a company is determining whether and at what cost to purchase an asset or invest in a new project.
There are capital recovery companies that may specialize in collecting a particular type of debt, such as commercial debt, retail debt, or healthcare debt. If a company is going out of business and needs to liquidate its assets or has excess equipment that it needs to sell, it might hire a capital recovery company to appraise and auction off its assets. The company can use the cash from the auction to pay its creditors or to meet its ongoing capital requirements.
The Uses of Capital Recovery
When a company is thinking about purchasing a new asset or even a new business, capital recovery is a helpful factor in that decision-making process.
For example, let's say your ecommerce company is considering purchasing a new robotics system, similar to the one used by Amazon, that helps retrieve products from storage faster and therefore accelerates the shipping process and delivery to customers. The new system costs $200,000 to purchase and has a potential salvage value of $50,000, meaning the overall net cost will be $150,000. You estimate that you can generate an extra $400,000 in revenues over the next five years as a result of the robotics system. The $400,000 in revenues far surpasses the $150,000 in net costs needed to make the purchase.
All things being equal, should your company make this choice, it would likely recover all of its invested capital and ultimately make a higher profit because of the investment.