Collections Effectiveness Index(CEI) is a popular metric across industries that gives the Order to Cash leaders a better understanding of how their A/R teams perform. Collection Effectiveness Index can be simply defined as “The percentage of account receivables that are collected in a given period of time.”
The CEI provides a clear understanding of the performance of the Credit and Collections teams. A higher CEI indicates that the organization incorporates a strong credit policy and effective collections process.
Day Sales Outstanding(DSO) and Collection Effectiveness Index(CEI) both are critical metrics that are monitored by the credit and the collections teams. Let us understand how these metrics are different from each other.
Collection Effectiveness Index is calculated by dividing beginning AR balance + monthly credit sales – ending AR balance by the sum of beginning AR balance + monthly credit sales – (ending AR balance x payment term/30).
First, let’s define some terms we will use to explain the formula.
Let’s further simplify the calculation of collections effectiveness index with an example :
Collection Effectiveness Index Calculation sample data :
Calculating Collection Effectiveness Index :
Therefore, the CEI for three months would be 64%.
During the period, your company collected 0.00% of your available invoices on time.
Want to improve your Collection Effectiveness Index?
Check out the tried and tested tips to improve the collections effectiveness index.
1. Clarity on Your Payment Collection Practices
Collections effectiveness index is the KPI that quantifies the robustness of your payment collection system. With a low CEI, the upper management ends up comprehending that the Credit and Collections teams need to perform a lot of course corrections in their day-to-day operations. It helps to understand the importance of collection efficiency.
2. Timely Assessment of Your Collection Policies
The Collection Effectiveness Index is a tangible key performance index if you want to understand the effectiveness of your collection efforts. You can use the CEI formula to examine the quality of your collection efforts on a monthly basis, but you can also use it to assess the quality of your collection efforts over longer periods of time.
CEI is an indicator of your collectors’ performance, but are you interpreting it correctly? What if your collector’s efforts are not translating into a good CEI? Let’s look at a few parameters that might be responsible for the exception:
Would a customer pay if the invoice was not received on time or if the invoice data were incorrect? They might not. It is preferable to track and double-check invoice information before contacting the customer.
Flexible credit practices and lenient payment terms could result in a low CEI. Customer payment behaviour should be used to create various customer segmentation buckets. Every customer segment would have its specific credit and collection policies.
Customers might have diverse payment preferences. Are you able to address their unique payment preferences? The absence of flexibility in payment options might impact cash collection schedules.
How much time do your Credit and Collections analysts spend per day figuring out which calls they need to make? Most of the collectors are victims of a lack of customer prioritization, and most of the time, they end up calling the wrong customer, which delays the payment.
Most Credit & Collections analysts call up the customers or send payment reminders when the invoices are overdue. Ideally, they should send proactive reminders as the due date approaches and not wait for the payment delay.
Understanding collections effectiveness index and computing it consistently will let you know what you might need to modify in your collections practices. Based on the patterns of how CEI is changing across months or quarters, you would be able to come up with a strategy on how to improve your collections strategies.
With the right tool, you can optimize the credit and collections process, thereby improving the Collection Effectiveness Index.
A good collection effectiveness index (CEI) is an indicator that an organization is effectively managing its accounts receivable (AR) and collecting payments in a timely and efficient manner. A generally accepted benchmark for a good CEI is 85% or higher.
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HighRadius Collections Software automates and optimizes the credit & collections management process to improve collector efficiency, minimize bad debt write-offs, improve customer relationships, and reduce DSO. It provides a complete set of tools to optimize and automate the credit collections management process and enable the better prioritization of credit collections activities All the information you need (invoices, dispute information, POD, claims, tracking info, etc.) on each case is automatically presented in a collections work-space and is ready for use. Apart from the wide variety of benefits that it has, it also comes with some amazing features like CADE (Collection Agency Data Exchange), collector’s dashboard which has prioritized collections worklist, automated dunning & correspondence, dispute management, centralized tracking of notes, call logs & payment commitments along with cash forecasting functionalities. The result is a more efficient collections team that contributes to enhanced cash flow and reduced DSO.