What Is Capital Recovery?

Esther Ejim

Capital recovery refers to the process of recovering the initially invested capital from an investment over the course of the lifespan of that investment. No profit can be determined from the investment until the capital recovery process is complete. This is because the investment cannot be said to be profitable until the initial capital sown into the investment has been realized, and afterward any other money can be counted as profit.

Tractor purchases by farmers and agricultural business fall under the capital recovery process.
Tractor purchases by farmers and agricultural business fall under the capital recovery process.

Capital recovery may happen sooner rather than later, depending on the approach of the investor toward the recovery of his or her capital. This means that it is up to the investor to take the necessary steps to recover the initial capital sown into the business. In order to achieve this, the investor has to take proactive steps toward capital recovery. An example of such a step is hiring professional collection agents to help the investor recover money owed on delinquent accounts. For instance, a physician who starts his own private practice may resort to engaging the services of professional collection agencies to help him recover the money he is owed by patients who are tardy with their payments. This is a conscientious effort on the part of the physician, who is an investor in his private practice toward capital recovery.

The concept of capital recovery is an important financial concept because it relates to the management of the inflow and outflow of finance with regards to an investment. By recovering capital, the investor keeps the cash flow going so as to keep the business in operation. A company without a good cash flow cannot meet its obligations in terms of rent, employee salaries and other operational costs.

In the United Sates, the Internal Revenue Service (IRS) allows businesses to recoup on their investment on the cost of items like office machinery, tractor units, cattle, appliances, furniture used in connection with residential estate activity, and vessels like barges. It also allows for capital recovery on other items like farm buildings, solar energy or geothermal property, and certain rent-to-own properties. The IRS offers this in the form of tax deductions with the aim of encouraging production and stimulating the economy.

Another method of facilitating capital recovery is to hire professional auditors to examine the inflow and outflow of cash in order to discover avenues through which an organization is losing money. This measure is applicable to large corporations that have a lot of cash inflow and outflow. An audit company will discover any “phantom employees,” overcharging by vendors, and other activities that could be causing the company to figuratively hemorrhage money instead of working toward recovery and profitability.

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