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  • Writer's pictureMeurig Chapman

The use of recovery curves in collection and write-off management

Recovery curves are invaluable tools in collection and write-off management. By using recovery curves effectively and regularly updating them, organisations can enhance their collection processes, reduce write-offs and ultimately strengthen their financial health.

In the realm of finance and debt management, the ability to recover overdue payments is crucial for maintaining a healthy bottom line. Collection and write-off management are key components of this process, and one powerful tool that aids in these efforts is the use of recovery curves, providing organisations with insights into the effectiveness of their debt recovery strategies, enabling data-driven decision-making, efficient resource allocation, and improved forecasting.

Understanding recovery curves

A recovery curve is a graphical representation that shows the percentage of outstanding debt that is recovered over time. It provides a visual depiction of the collection performance for a specific portfolio of debts. Recovery curves typically display the recovery rate on the vertical axis and the time since the debt became delinquent on the horizontal axis.

Recovery curves are constructed based on historical data and collection efforts, and they help organisations track and forecast the effectiveness of their debt recovery strategies. These curves are dynamic and can vary depending on factors such as the type of debt, the industry, and the collection methods employed.

The importance of recovery curves in collection and write-off management

Recovery curves serve as a valuable tool for strategic decision-making in collection and write-off management. By analysing the curves, organisations can gain insights into the effectiveness of their current collection strategies and make informed adjustments.

Recovery curves help in optimising resource allocation. They allow organisations to allocate collection resources more efficiently by identifying which accounts are more likely to yield higher recoveries and which may be candidates for write-offs.

Recovery curves provide a benchmark for monitoring collection performance. Organisations can compare their actual collection results to the expected recovery rates predicted by the curves.

Deviations from the expected curve can highlight areas that require attention.

Recovery curves enable organisations to forecast future recoveries based on historical data. This forecasting is essential for budgeting, financial planning, and assessing the overall health of the organisation’s accounts receivable.

Recovery curves influence write-off policies. Organisations use these curves to set criteria for when to write off accounts as uncollectible. Accounts with a low probability of recovery may be written off sooner to avoid spending additional resources on collections.

Utilising recovery curves effectively

To harness the benefits of recovery curves effectively in collection and write-off management, organisations can follow these best practices:

Ensure that the data used to construct recovery curves is accurate and consistent. Inaccurate or inconsistent data can lead to misleading conclusions and ineffective strategies.

Segment your debt portfolio based on various criteria such as age, type of debt, and customer profiles. Construct separate recovery curves for each segment, as different accounts may exhibit varying recovery patterns

Analyse historical collection data to understand the behaviour of debtors over time. Identify patterns and trends in recovery rates and use this information to inform future strategies.

Continuously update recovery curves to reflect changing collection dynamics. As collection strategies evolve and market conditions shift, recovery curves should adapt accordingly.

Conduct scenario analysis to assess the impact of different collection strategies on recovery rates. This allows organisations to make informed decisions about which strategies to prioritise.

Integrate technology and data analytics tools into collection processes to monitor and adjust strategies in real-time. Modern collection software can provide insights and predictions based on recovery curves.

Ensure that collection teams are trained in the interpretation and use of recovery curves. Effective communication of insights derived from the curves is essential for implementing data-driven strategies.

Benchmark your organisation’s recovery curves against industry standards and best practices. This can provide valuable insights into areas where improvement is needed.

Case study: Recovery curves in action

Let’s consider a case study to illustrate the practical application of recovery curves.

Scenario: A financial institution manages a portfolio of consumer loans. The organisation constructs recovery curves based on historical data for different loan types. The curves show that recovery rates decline significantly after 90 days of delinquency.

Action: Armed with this insight, the institution revises its collection strategy. It introduces more proactive communication with borrowers within the first 30 days of delinquency to address issues early. Additionally, it reallocates collection resources to prioritise accounts between 30 and 90 days delinquent.

Outcome: Over the next several quarters, the institution observes an improvement in recovery rates within the critical 30 to 90-day delinquency period. The recovery curves for these loans begin to align more closely with the expected recovery rates. As a result, the institution reduces write-offs and improves its overall collection performance.


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