Collections Effectiveness Index (CEI) versus Days Sales Outstanding (DSO)

Collections Effectiveness Index (CEI) measures the quality of your collection efforts by means of a calculation of the percentage of receivables collected within a given time frame. Days Sales Outstanding (DSO) measures the time it takes to collect payments.

CEI gives an understanding of the effectiveness and quality of your internal collection processes and team, with a clear focus on collection percentages, whereas DSO indicates how quickly receivables are converted into cash.

With CEI, the desirable outcome is a higher percentage and with DSO you are looking for a lower numbers of days.

CEI and DSO are complementary metrics and should be utilized together for a more comprehensive overview of the accounts receivable performance. A high DSO alone, may suggest a slower cash cycle or inefficient collection process, however, when reviewed in conjunction with the CEI, more detail may be revealed. For instance, a high CEI to go along with the high DSO, leads to the suggestion that extended payment terms are in place, and the collection process may actually be solid.

Potential insights into a combined DSO and CEI:

• High DSO with Low CEI: Payments are slow and the collection process appears to be ineffective. Potential systematic issues across the order-to-cash process cycle.
• High DSO with High CEI: This suggests that extended payment terms in place, with an effective collection process. Early payment settlement discounts may help to lower DSO and optimize the cash flow cycle.
• Low DSO with Low CEI: This suggests that newer billings are being collected fairly quickly, however, there is room for improvements within the collection process. Review for disputes and write offs.
• Low DSO with High CEI: This suggests that the order-to-cash processes are performing extremely well. This is generally the ideal scenario for a high performing company.

More articles on the Collections Effectiveness Index (CEI) and Days Sales Outstanding (DSO)