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Collection Effectiveness Index (CEI)
Many organizations use the Collection Effectiveness Index (CEI) to measure credit performance. Unlike DSO and other methods of measuring credit department performance, the CEI is considered by many people to better able to determine the effectiveness of the credit and collection team and its collection efforts over time.
The Collection Effectiveness Index is calculated by dividing the collections made during a certain period by the accounts payable outstanding at the beginning of that period. The CEI measures the effectiveness of collection efforts over a given time period by determining the percentage of the open receivables that a company is able to either collect or resolve within a given time period.
The collection effectiveness index formula is:
(Beginning Receivables + (Credit Sales / Number of days) - Ending Total Accounts Receivable) Divided by (Beginning Receivables + (Credit Sales / Number of days) - Ending Current Receivables)
x 100 = CIE
The closer the corresponding answer is to 100%, the better the collection performance is rated. In other words, a score close to 100% indicates a high degree of collection effectiveness.
- The CEI, like the DSO, is affected by changes in sales;
- CEI does not distinguish among different types of credit terms, so it can be used in such cases, keeping in mind the sales bias;
Edited by Michael C. Dennis and Michael Zininberg