To keep your business running you need to receive timely payment for your products and services. But how can you tell if your collections processes are up to par?
By tracking key performance indicators (KPIs), you can gain insight into how well your accounts receivable (A/R) practice is operating and where you may have room for improvement. The Collections Effectiveness Index, or CEI, is a vital measure of your organization’s collections efficiency.
What Is CEI?
A formula used to gauge a company’s proficiency in gathering payment from customers, CEI compares the amount an organization collects within a given timeframe against the total amount available for collection within that period.
Generally speaking, a CEI of 80 or above indicates an effective collections process; a CEI of 50 or below suggests that a company’s collections operations require evaluation.
The CEI Formula
To calculate CEI, businesses use the following formula:
Beginning A/R + Credit Sales – Ending Total A/R
Beginning A/R + Credit Sales – Ending Current A/R x 100
- Beginning A/R = A/R balance at the beginning of the given time period
- Credit sales = the amount of sales made on credit during the timeframe (the amount of new A/R added)
- Ending Total A/R = the A/R balance at the end of the time period
- Ending current A/R = total of payments received for credit sales made during the period
For example, let’s say that a business wants to calculate CEI for August. The company has a beginning A/R for the month of $100,000, $25,000 in credit sales, an ending total of $55,000, and a current ending A/R of $5,000. The business plugs these values into the formula to calculate a CEI of just over 58 percent for August:
$100,000 + $25,000 – $55,000
$100,000+ $25,000 – $5,000 x 100 = 58.33
DSO vs. CEI
While CEI can be considered a measurement of collections efficiency and quality, days sales outstanding (DSO) is a measurement of time—namely, the average number of days it
takes for a company to collect payment on invoices. A DSO of 45 days or fewer indicates that a business is receiving payment relatively quickly.
To calculate DSO, companies divide A/R over a given time period by the total value of credit sales during the same timeframe and multiply the quotient by the number of days in the period being measured:
Current A/R balance
Credit sales revenue x number of days in a given time period
The Importance of CEI for Your Business
Why does CEI matter? Tracking the index will allow your business to:
- Gain actionable insight. By calculating CEI, you find out how well your collections team is performing. A low CEI indicates that your company’s available cash flow isn’t what it could be with a more effective collections operation; a higher CEI means you have efficient processes in place.
- Gauge quality over time. Your business can apply the CEI formula monthly, quarterly, or for a full year to determine whether your collections are consistently on track over a longer time period.
- Mitigate potential issues. Using CEI as a KPI will enable your company to proactively address bottlenecks and other potential concerns in your collections and invoice management processes.
If you plug your organization’s data into the CEI formula and you aren’t happy with the results, you can employ several tactics to improve the effectiveness of your collections process:
- Automate invoicing. If you’re still performing your invoicing processes manually, you’re spending valuable time on an activity that can easily be streamlined and accelerated. With the right A/R platform, you can free up internal resources, automate invoice creation, and bill your customers more quickly to boost your CEI.
- Tighten up your payment policies. Consider shortening your payment terms—lowering a 45-day payment deadline to a 30-day deadline, for example—to improve your CEI.
- Offer a range of payment options. Make sure you’re accepting the most convenient payment forms for your customers. When you offer various options—ACH, credit or debit card, virtual card, and check—you improve your chances of receiving payments quickly and offer a better service experience.
- Follow up on delinquent accounts effectively. One of the main contributors to a low CEI? Past-due invoices. Make sure that you’re immediately identifying delinquent accounts and taking appropriate measures to follow up, which includes communicating effectively with your customers.
Start Boosting Your Collections KPIs with Invoiced
If you need to boost your CEI, start by putting your collections on autopilot. Invoiced offers a powerful cloud-based A/R solution with a Smart Chasing Engine designed to lighten the load for your collections team and allow them to focus on more strategic projects.
Learn more about the Invoiced platform’s capabilities for automated collections, integrated task management, and multichannel communications: https://www.invoiced.com/accounts-receivable/automation