The Collection Effectiveness Index (CEI) is a metric used by organizations to evaluate the effectiveness of their receivable collection process. It was originally developed by Dr. Venkat Srinivasan to determine the percentage of open receivables an organization is able to recover or resolve over a 1 year period.

The original formula:

First Collection Effectiveness Index formula

This original formula, however, was not appropriate for users who wanted to measure performance for periods shorter than one year. The Credit Research Foundation (CRF) suggested the following modification to the formula, introducing the value “N” into the calculation. “N” represents the number of months or days in the period being assessed.

Revised formula:

Collection Effectiveness Index CEI formula 2 (periods less than 1 year)

Multiplying by 100, of course, converts the result of the division into a percentage.

CEI vs. DSO

Both the Collection Effectiveness Index and Days Sales Outstanding (DSO) metrics provide valuable insights into the results of your collection efforts. The CEI, however, is considered a better indicator of effectiveness because it measures performance over time, versus DSO, which measures an Average Collection Period (in days) at a single point in time.

Value of the CEI Metric

Essentially, the CEI compares what was actually collected during a given time period to what was available to be collected – thus providing a percentage indication of the effectiveness of collection efforts during that period.

The CEI provides insight into the strength of the organization’s credit policy and collection process. The closer the CEI is to 100%, the greater the likelihood that the organization is making sound decisions based on well-constructed credit guidelines and collection procedures.

If your CEI is low or has been dropping from period to period, it’s time to re-examine your credit policy. You may be extending credit to companies that are not creditworthy, or your collection process may need improvement.

Sample CEI Calculation

To break down the math for you, here’s an example of how to calculate the CEI for a 3 month collection period based on the sample data given.

Sample Data:

	Credit Sales	A/R Balance	Current	31-60	61-90	90+	Totals
Jan	3,400	6,210	3,350	1,800	995	65
Feb	3,600	6,015	3,555	1,600	800	60
Mar	3,900	6,325	3,650	1,750	855	70	6,325
Totals	10,900

Beginning Receivables = 6,210
Credit Sales = 10,900
Ending Total Receivables = 6,325
Ending Current Receivables = 3,650
Period = 3 months

Collection Effectiveness Index - Formula 3 months

CEI Example Part 1

CEI Example - Part 2

CEI Example - Part 3

Conclusion

The Collection Effectiveness Index can be a valuable tool to help you analyze your recovery efforts. A quick, simple calculation, it gives you a measurable indication of the direction your process is headed and can alert you when adjustments need to be made.

*****

Subscribe to the Credit-to-Cash Advisor
Monthly e-Newsletter -- It's Free

This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.