The Collections Effectiveness Index is measured as a percentage of accounts receivable collected within a given time period.
Similar to other measures of A/R success such as days sales outstanding and accounts receivable turnover ratio, the collections effectiveness index (CEI) offers insight into the success of your accounts receivable collections efforts. The difference is that instead of measuring time to collect, CEI measures the ability to turn invoices into cash.
Measuring the effectiveness of collections efforts entails comparing the amount collected within a given time period to the amount of receivables available for collection during that same time period. A collections effectiveness index close to 100% means that your collections efforts are very strong and successful.
Consider the following formula to determine CEI:
(Beginning receivables + Monthly credit sales - Ending total receivables) ÷ (Beginning receivables + Monthly credit sales - Ending current receivables). Then multiply the answer by 100 to get a percentage.
How to Improve CEI
Collections effectiveness can appear to be impressive when the collections manager focuses more on high value receivables, leaving smaller value A/R to go past due. (That's when accounts receivable clean up can help!) When measuring CEI regularly, a collections manager may begin to notice trends that can help improve cash flow over time. If CEI is decreasing, it's advisable to drill into the reasons why including:
- Invoices not being sent regularly
- Customer creditworthiness may be questionable
- Little to no follow-up on invoices
- Lax credit policy
- Missing payment terms or unclear payment options
- No procedures for escalating late payments, including using debt collection services
Again, any measurement and reporting can be useful if observed regularly. Tracking trends in these reports will help determine the overall effectiveness of A/R policies and procedures to keep cash flowing to your business.