What is Collection Effectiveness Index (CEI) in Debt Collection?
How Does CEI Differ From DSO?
Though CEI and Days Sales Outstanding (DSO) are often confused, they measure different aspects. CEI assesses the effectiveness of collection methods, while DSO measures the time it takes to collect outstanding debts. CEI provides insights into how well the debt collection management software is functioning, whereas DSO tells how quickly a business converts credit sales into cash flow.
Collection Effectiveness Index | Days Sales Outstanding |
Measures collection process effectiveness | Measures the time taken to collect receivables |
Shows the strength of collection efforts | Indicates the speed of debt recovery |
Higher CEI shows efficient, timely payments | Lower DSO means faster debt recovery |
Combining CEI with DSO provides a comprehensive view of your debt collection efforts, cash flow health, and the performance of your debt collection software or agency.
How to Calculate the Collection Effectiveness Index (CEI)?
The formula to calculate CEI is:
(Beginning AR + Credit Sales/N) - Ending Total AR ÷ (Beginning AR + Credit Sales/N) - Ending Current AR
Where:
- Beginning AR: The accounts receivable collected at the beginning of the period.
- Credit Sales/N: Credit sales during a period (N = number of days).
- Ending Total AR: The total amount of open receivables (including overdue).
- Ending Current AR: Total collections received for credit sales in the same period.
By automating this process using automated debt collection software, businesses can streamline these calculations and make real-time adjustments to their strategies.
Why is CEI Important?
CEI provides a clear picture of how well a company’s debt collection software solution is performing, helping businesses understand whether their collection efforts are turning unpaid invoices into cash flow. For businesses, maintaining a strong CEI ensures:
- Improved cash flow.
- Fewer overdue invoices.
- Efficient collection teams.
It's a great metric to evaluate the performance of your debt collection software for small businesses, as it helps in tracking and improving collection strategies.
How to Maintain a Good Collection Effectiveness Index (CEI)?
Maintaining a high CEI (90-100%) indicates timely debt collections and efficient teams using best debt collection software. Here are some ways to achieve a near 100% CEI:
- Timely Invoicing: Sending accurate invoices using automated debt collection software ensures that payments are requested promptly.
- Multiple Payment Methods: Offering various payment options through your debt collection software makes the process easier for clients.
- Enhanced Communication: Regular follow-ups and reminders help ensure timely payments.
- Improving Credit Terms: Strengthening credit policies can reduce the risk of overdue payments, which can be tracked using debt collection agency software.
Conclusion
Utilizing a reliable debt collection software solution allows businesses to automate the process, track CEI, and improve their accounts receivable management. A strong CEI is crucial for financial health and sustained cash flow. Invest in tools that offer real-time tracking and automation, such as debt collection and recovery software, to help your business stay on top of outstanding payments.