Cost reduction or cost cutting is nothing new to the corporate world. Every company in any industry today is incorporating a cost management approach in company planning, monitoring systems, and decision making for company development. While this approach proves to increase cash flow, another method that can prove profitable is the cost recovery method. This type of approach, however is usually overlooked as a measure of delivering increased profits. Most companies are too busy finding means to improve processes and returns, pushing the sales force to meet almost if not entirely unbelievable targets that a serious attention to cost recovery system which entails looking back through old files virtually appears as a waste of time. However, you will be surprised to find hidden wealth in your old records due to internal mistakes, overlooked payments, errors committed by your vendors, tax advantages, etc.
Cost recovery is a method of revenue recognition where no gross profit is recognized until all merchandise cost has been recovered. In large corporate settings, cost recovery can be achieved through processes deployed by an internal or external audit team. The auditors can review a variety of areas such as facilities management, utilities, real estate leases, service agreements, supply agreements, shipping or delivery service, telecommunications, health care, vendor contracts, and the like to locate errors and/or fraud. The audit result will be the basis of management in forming policies, solutions or procedures to avoid further mistakes and thereby recover and reduce cost. Companies can also get products and services provided by cost recovery firms. Many cost recovery agencies have emerged today catering professional services to various industries and helping organizations improve profit performance using different methodologies. Here's how to understand how the cost recovery system is applied:
- Cost recovery begins with the assessment of all accounts payable, current services, purchasing contracts, lease contracts, equipment contracts, etc. Examining records on these areas will help you go over duplicate payments, over payments, variances on payments, misapplied charges, missed discounts, overpaid taxes and more. One of the most common areas where you can find huge savings is your company's utility bills that include electricity, water, heating and cooling, etc.
- After determining the areas where you are losing money and where you can benefit from cost recovery, solutions need to be established and implemented. Solutions could be in the form of changes in management practices, automation of business processes using software, equipment or other tools, organization of business procedures, cost reduction, cost segregation, etc. If there is a need to change certain methods of operations, companies have to carefully execute modifications that would particularly improve the efficiency of the business procedures, enhance reliability of financial reports, and effectively manage cost in each area of operation. Solutions have to be perennially employed in order to maintain monitoring and management of company expenses.
Methodologies offered by third party or external cost recovery services or professionals vary according to their expertise. While many of these firms provide a range of services, some focus on tax management or strategies, full cost recovery, project recovery, network recovery, and state recovery among others.