The collection effectiveness index (CEI) is a measure of the ability of the collections staff to collect funds from customers. It operates at a somewhat higher level of precision than the days sales outstanding measurement, and so is finding increasing popularity among collection managers.
The collection effectiveness index compares the amount that was collected in a given time period to the amount of receivables that were available for collection in that time period. A result near 100% indicates that a collection department has been very effective in collecting from customers.
The formula for the CEI is to combine the beginning receivables for the measurement period with the credit sales for that period, less the amount of ending receivables, and then divide this number by the sum of the beginning receivables for the measurement period and the credit sales for that period, less the amount of ending current receivables. Then, multiply the result by 100 to arrive at a CEI percentage. Thus, the formula is stated as:
((Beginning receivables + Monthly credit sales - Ending total receivables) ÷ (Beginning receivables + Monthly credit sales - Ending current receivables)) x 100
A collections manager can drive a high CEI number by focusing on the collection of the largest receivables. This means that a favorable CEI can be generated, even if there are a number of smaller receivables that are very overdue.
The CEI figure can be calculated for a period of any duration, such as a single month. Conversely, the DSO calculation tends to be less accurate for very short periods of time, since it includes receivables from prior periods that do not directly relate the credit sales figure in that calculation.