The collection Effectiveness Index (CEI) refers to the key performance indicator used in accounting to measure the quality of the collection processes. This metric helps in determining how effectively the collection strategies are adopted to ensure timely payments and stable cash flow for the business.
Now you know what the collection effectiveness index is, let's discuss how to calculate it and why it is important in accounts receivable management.
What is the collection effectiveness index in accounts receivable?
What's the difference between the collection effectiveness index and DSO?
How to calculate the collection effectiveness index (CEI)?
Why is the collection effectiveness index (CEI) important?
How to maintain a good collection effectiveness index?
In accounts receivable, Collection Effectiveness Index (CEI) is an important metric that can help AR collections teams identify the efficacy of their collection methods. It helps the business understand the performance of the credit control and collection teams.
When it comes to accounts receivable management, it is crucial to understand how the collection strategies are working for the business, and whether invoices are paid on time without disrupting the business's revenue. Hence, the collection effectiveness index gives an idea of the same, and it is calculated with the accounts receivables collected over a specific period.
Most often, the collection effectiveness index is confused with Days Sales Outstanding (DSO), since both of them have almost similar interpretations. But they are different metrics to measure different values.
Let's have a look at the differences between CEI and DSO.
Collection Effectiveness Index
Days Sales Outstanding
Measures the quality of the collection processes.
Measures the time taken to collect the receivables.
Determines the effectiveness of the collection processes.
Determines the average number of days taken to collect receivables.
Higher CEI indicates regular timely payments and good-performing collections team.
Lower DSO indicates strong collection policies and faster cash flow.
The powerful combination of CEI and DSO provides valuable insights into your collection methods, the health of your cash flow as well as the performance of the collections team. It is an efficient tandem for any business to manage its accounts receivable while bringing in revenue.
Beginning AR: The Accounts Receivable amount collected at the beginning of the period.
Credit Sales/N: The number of credit sales made during a specific period, where N refers to the number of days.
Ending Total AR: The open receivables collected, current and overdue, at the end of the period.
Ending Current AR: The total collections received for credit sales made during the period.
The collection effectiveness index is a financial ratio that can provide insightful information on your credit control management. It helps you understand the efficiency and performance of the collections team in collecting the receivables timely.
The effectiveness of the collection team to turn unpaid invoices into cash flow is one of the strongest strengths of a business. Thus, the CEI shows the quality of the collection team's work, bringing cash flow to the business.
It also measures the rigidity of your collection practices, helping your business understand how the strategies are working for accounts receivable collection. It is important because it gives you increased visibility into your credit control policies, and helps identify how you can improve them to increase timely collections.
The CEI can be used to identify the effectiveness of the collection methods in a business over a particular period, like every month.
A good collection effectiveness index (CEI) that is near 90-100% indicates that maximum accounts receivable are collected on time, or that the collections team is efficient in collecting all the accounts receivable timely.
Send Accurate And Correct Invoicing On Time
Offer Different Payment Options For Seamless Transactions
Improve Your Credit Policies And Payment Terms, Especially With Delinquent Accounts
Improve Customer Communication For Positive Experience
Automate Reminders And Follow-up With Customers Regularly
If you haven't been able to monitor your accounts receivable lately and gather in-depth insights and KPIs, then you need to try automating your accounts receivable.
It'll save you a lot of time and resources while letting the accounts receivable automation software track and keep a record of all the useful insights such as the collection efficiency rate.
Stay tuned to our blog for more accounts receivable terminology, industry updates, and tips!