Are unpaid invoices and late payments causing you financial headaches? Are you ready to improve your collection efforts and achieve better financial stability? Good news—we have a solution!
In this blog, we will introduce you to the collection effectiveness index (CEI). This is a crucial account receivable KPI that measures your company's ability to collect its receivables. We will explain what CEI is and show you how to calculate and improve it. So get ready to take charge of your collection process and enjoy the peace of mind that comes with greater financial security.
What is CEI?
What does CEI stand for? In accounting, CEI stands for Collection Effectiveness Index. The collection effectiveness index is used to measure how well the company is doing with its AR collection efforts. The CEI is given in percentage form: A higher percentage means a better collection rate.
It takes into account the total amount of cash collected compared to the total amount of invoices during that same period. If the construction company is able to collect most of the payments during that time, they will have a high CEI. If the invoices go unpaid, they will have a low CEI.
Why Is CEI Important?
The CEI score shows how many of your invoices are collected on time and where you may be falling short. But why is CEI important? What makes it such a critical KPI to track for your business? Here are some of the key reasons:
1. Clarity on Collection Practices
CEI provides clarity on the effectiveness of your collection by quantifying the process. It is important to know how well your collection process is working and where it can be improved. By monitoring the CEI, you can clearly identify any inefficiencies and prioritize areas for improvement.
2. Regular Assessments
The CEI is a good way to measure how good your collection efforts are on a regular basis, usually once a month. This lets you make changes to your process so you can get the best results possible. For construction businesses, where cash flow is very important, regular assessments of CEI can help to ensure a steady stream of revenue.
3. Long-Term Assessments
CEI not only gives you regular assessments but also helps you check your collection efforts over long periods of time. By keeping track of your CEI over months or years, you can see if your collection process is getting better or not and make the changes you need. In the long run, this will assist your construction company's bottom line.
4. Identifying Issues
A low CEI score can mean that there are problems in your invoice-to-cash processes. The problems can be manual invoicing, a need for more flexible payment terms, or miscommunication with customers. These problems can make it take longer for you to get paid, which hurts your cash flow. Understanding your CEI helps you identify these challenges and change your collection approach to ensure financial stability.
How to Calculate Your CEI
Calculating CEI is simple and requires four numbers from a specific time:
1. Beginning AR Balance:
This is the amount of money owed to you by customers at the beginning of the time period.
2. Ending Total AR Balance:
This is the amount of money owed to you by customers at the end of the period.
3. Ending Current AR Balance:
This is the total of the payments you received for credit sales made during the period.
4. Credit Sales:
This is the number of sales made on credit during the period.
To calculate your CEI, you need to follow a simple formula:
(Beginning AR Balance + Credit Sales during Period – Ending Total AR Balance) divided by (Beginning AR Balance + Credit Sales during Period – Ending Current AR Balance) multiplied by 100)
The CEI Formula Explained
The formula calculates the percentage of outstanding invoices that were collected during a specific period of time. The higher the CEI, the more effective your collection efforts are.
A CEI of 100% means that you collected all of the outstanding invoices during that period, while a CEI of less than 100% indicates that there is room for improvement in your collection efforts.
Collection Effectiveness Index Example
Let's say that during the first quarter of the year, your construction business had the following:
1. Beginning AR Balance In January: $30,000
2. Ending Total AR Balance in April: $31,000
3. Ending Current AR Balance: $ 20,000
4. Credit Sales: $25,000
Using the CEI formula, your CEI would be calculated as follows:
This means that your collection efforts during that period were 68.75% effective. You still have room for improvement in your collection processes to reach the ideal CEI of 100%.
How to Improve Your CEI
Then everyone wants your CEI to be 100%, but in reality, it is not very common, especially in the construction industry. You can consider a CEI of 80% or higher as good.
Anyway, steps need to be taken to improve your CEI. This includes changes to how you collect invoices or improve communication with your customers. Whatever it may be, below are some tips to help you improve CEI.
1. Automate your invoicing processes:
Make sure your invoices are accurate and sent out on time to avoid late payments and disputes.
2. Implement a strong collection process:
Have a clear and consistent process for following up on outstanding invoices.
3. Monitor accounts receivable:
Keep track of outstanding invoices, payment histories, and payment trends to identify areas for improvement.
4. Communicate with customers:
Be proactive in communicating with customers about their outstanding invoices and payment expectations, and offer payment options to make it easier for them to pay.
In Conclusion,
Now you know the answer to the question: “What is CEI in accounting?”. The Collection Effectiveness Index (CEI) is a crucial KPI for measuring accounts receivable effectiveness and identifying areas for improvement. By using the CEI formula and implementing strategies to improve your collection processes, you can increase your CEI and achieve better financial stability.
Don't let managing your accounts receivable stress you out. Consider working with a bookkeeping service firm like CCA. They can take the burden off your shoulders and help you improve your CEI even further. Imagine streamlining your invoicing processes, monitoring accounts receivable, implementing an automated payment reminder, receiving regular reports, and improving communication with customers. That's the kind of support CCA can provide, leaving you free to focus on running your business and achieving greater financial success. >> Get a FREE Consultation
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