What is CEI?
Collections Effectiveness Index(CEI) is a popular metric across industries which gives the Order to Cash leaders a better understanding of how their A/R teams are performing.
The CEI provides a clear understanding of the performance of the Credit and Collections teams. A higher CEI indicates that the organisation incorporates a strong credit policy and effective collections process. CEI is calculated with the help of the following formula which shows how much of the receivables were collected out of what was supposed to be collected.
|Month||Sales||A/R Balance||Current A/R||31-60||61-90||90+|
The beginning A/R of an organisation is€6000, and the credit sales are €12,390. The ending A/R be €6200, and the ending current A/R be €4000. Therefore, the CEI for three months would be 64%.
How CEI evaluates Credit & Collections teams
A higher CEI value is always desirable. The major difference of CEI and DSO is that CEI does not calculate the time to collect the receivables, rather it shows the efficiency of the Credit and Collections teams and the patterns which they are following to collect their receivables.
A low CEI makes the senior management understand that the Credit and Collections teams need to work on their credit policies, collections strategies, customer rapport. On the other hand, a high CEI shows that the efforts put by the Credit and Collections teams are falling in place.
However, the O2C experts might have experienced situations in which their Credit and Collections teams are working day and night, yet the CEI value is low. In such cases, it is important to figure out the leaks present in the A/R processes.
Are you acting upon CEI properly?
CEI is a clear indicator of collectors’ performance, but what if you are not able to match the numbers with the efforts made by your collection team? The following factors might be responsible for the exception:
Invoice Related Factors
Would a customer pay if they do not receive the invoice on time or if they receive the incorrect invoice details? Obviously, they would not. Apart from this, they would not respond actively on your calls. It is better to track and cross-check the invoice information before reaching out to the customer.
A low CEI might be the result of flexible credit policies and lenient payment terms. It is better to tailor the policies and payment terms based on customer behaviour. To enable this, customer risk category segmentation is necessary.
Lack of Flexible Payment Formats
How many times have your customers expressed their desire to pay via a different payment method? With the evolving technology, customer payment behaviours also change, and it is important for an organisation to support multiple payment options to get paid on time.
Lack of Prioritisation:
How much time do your Credit and Collections analysts spend per day figuring out which calls they need to make? Most of the Collectors are a victim of lack of prioritisation, and most of the times, they end up calling the wrong person which delays the payment.
Most of the Credit & Collections analysts call up the customers or send payment reminders when the invoices are overdue. Ideally, they should send proactive reminders as the due date approaches, and not wait for the payment delay.
Tips to Improve CEI:
As CEI is directly related to staffing and employee performance, it is important to identify the loopholes leading to a low CEI and modify them. Some measures to improve CEI are given as follows:
A tracker to ensure on-time delivery of invoices, as well as proof-reading of the invoices, is necessary to make sure that the customer does not get an excuse to delay their payment.
Strong Credit Policies
The credit policies should be designed keeping in mind the customer behaviour and customer payment patterns. For instance, credit hold could be executed if the high-risk customers delay the payment after multiple follow-ups.
Multiple Payment Formats
Customers often express their desire to pay with newer payment methods such as SWIFT, CHAPS, Faster Payments, Wire transfer. If your treasury team is not supporting multiple payment formats, it would be easier for the customers to make an excuse and delay the payment.
Electronic Workflows and Escalations
There should a structured workflow in case of outstanding invoices based on their ageing buckets, call summary, customer payment behaviour. If required, the delinquent accounts should be escalated to other departments such as Sales, customer support.
Historic Data of Delinquency
A database of delinquent customers would help the Credit and Collections analysts to have a closer look at all the critical accounts. It would be easier for them to prioritise, and figure out strategies on how to collect the outstanding amounts from the customers.
Customer satisfaction is one of the key factors to success in the Credit and Collections department. It is important to maintain a good rapport with the customers otherwise, they might back out and never do business with your organisation again. It is important to follow the following tips while preparing for a Collections call:
Recall the previous customer interactions
The Credit & Collections analysts should go through a consolidated customer call summary to avoid unnecessary follow-ups, escalations.
Reach out to the right person
If the analysts are not calling up the right person to get paid, the payments would be delayed unnecessarily. For instance, if you call up a receptionist asking for the payment, she might redirect you to the A/P team, and you might end up calling multiple people, wasting your time.
Research about customer background
It is better to get prepared with call scripts and customer background details before calling up a customer. Imagine asking payment from a customer who just went bankrupt! The success rate of a call highly depends on the efforts made by the Credit & Collections team.