The Collection Effectiveness Index

Home >> Credit & Collections Best Practices Summary

Collection Effectiveness Index

Most liquidity measurements for receivables, such as accounts receivable turnover, or the days of delinquent sales outstanding, are easily impacted by spikes or declines in sales, so they are not valid measures of collection performance. Instead, use the collection effectiveness index (CEI), which more precisely determines the effectiveness of the credit and collections staff. This measure compares what was collected in a given period to what was available to collect. A score close to 100% indicates a high degree of collection effectiveness.

To calculate the collection effectiveness index, add together the beginning receivables for the measurement period, plus credit sales during the period, and subtract ending total receivables. Then divide this number by the sum of beginning receivables and credit sales and subtract ending current receivables. Finally, multiply the result by 100 to obtain a percentage. The formula follows:

Beginning receivables + Monthly credit sales - Ending total receivables
------------------------------------------------------------------------------------- x 100
Beginning receivables + Monthly credit sales - Ending current receivables

The credit sales in this calculation are assumed to be generated over a one-month period. If the calculation were to cover a longer period, then divide the credit sales figure by the number of months being measured. For example, to measure the CEI for a quarter, divide the credit sales for the quarter by three before using it in the formula.

Podcast

A discussion of credit best practices is available on Episode 86 of the Accounting Best Practices podcast. Listen Now.