How to Calculate Recovery Rate
In business, recovery rate represents the percentage of an amount extended that a business has recovered. Any business that extends cash through loans or credit should be interested to know what their recovery rate is. Understanding recovery rate can help a business set rates and terms for future credit transactions.
Determine what set of data you want to measure the recovery rate for. You may want to measure the overall recovery rate of credit extended to customers or you may want to measure the recovery rate after the bill is sent to internal collections. After deciding on a target group, set a time period. You may choose to measure recovery rate in terms of weeks, months or years.
Add up the total amount of cash extended to the target group during the predetermined time period. Next, calculate the total amount of payments the group made on the credit cash extended to them. Divide the total amount of payments by the total amount of the debt to find the recovery rate. For example, if your company extended $7,000 worth of credit to customers in one week and received $1,000 in payments, the recovery rate for the week is 14 percent.
Use the recovery rate to project future results and assign credit terms. Take the reciprocal of the recovery percentage to estimate how long it will take to collect the credit extended. For example, the reciprocal of 14 percent is seven, so the business can estimate it will take seven weeks to recover the credit. If recovery rates are lower than expected, increase interest rates and shorten payment cycles to decrease the risk of lending.