Collection Effectiveness Index (CEI): Formula, Example and Benchmarks

The collection effectiveness index (CEI) is the percentage of receivables that were available to collect in a period and were actually collected. The formula is CEI = (Beginning AR + Credit sales − Ending total AR) ÷ (Beginning AR + Credit sales − Ending current AR) × 100. The numerator is what you collected. The denominator is what you could have collected, which excludes invoices that are not yet due. A CEI of 100% means every collectible dollar came in; the gap below 100% is the share that slipped past due. You can run your own numbers in the Collection Effectiveness Index calculator.

AccountingTools gives the same construction and notes that a result near 100% indicates a very effective collection function. It also makes the distinction this post builds on: CEI emphasizes collection performance, while DSO emphasizes collection speed and timing.

The Formula, Line by Line

CEI = (Beginning AR + Credit sales − Ending total AR) ÷ (Beginning AR + Credit sales − Ending current AR) × 100

• Beginning AR is the total receivables balance at the start of the period.
• Credit sales are sales invoiced on terms during the period. Leave out cash sales; they were never receivables.
• Ending total AR is the full receivables balance at period end, current and past due.
• Ending current AR is the part of ending AR that is not yet due under the customer's terms.

Beginning AR plus credit sales is everything that passed through receivables in the period. Subtract what is still on the books at the end, and you have what was collected. Subtract only what is still current, and you have what was collectible, because an invoice that is not yet due could not fairly have been collected. The difference between the two denominators is the past-due balance at period end.

Two definitional points matter in practice. Credit memos, write-offs and other non-cash credits also reduce AR, so in a month with large credits the numerator overstates cash collected. Some teams subtract non-cash credits from the numerator to keep the measure honest. Second, "current" means current under each customer's actual terms. A net 60 invoice at day 45 is current, and a net 30 invoice at day 45 is not. If your aging report buckets everything from invoice date instead of due date, fix the report before you trust the index.

Worked Example (Illustrative)

The numbers below are illustrative assumptions for a mid-market distributor with mixed net 30 and net 45 terms. Month 1 is a normal month. In Month 2, sales jump because a large customer pulls orders forward.

Check Month 1: 9.0 + 6.0 − 9.0 = 6.0 collected. 9.0 + 6.0 − 7.9 = 7.1 collectible. 6.0 ÷ 7.1 = 84.5%.

Check Month 2: 9.0 + 7.5 − 9.6 = 6.9 collected. 9.0 + 7.5 − 7.6 = 8.9 collectible. 6.9 ÷ 8.9 = 77.5%.

Collections in dollars went up, from $6.0M to $6.9M. A cash report alone would call Month 2 a good month. CEI says the opposite: the team collected a smaller share of what was collectible, and past-due receivables nearly doubled, from $1.1M to $2.0M.

CEI vs DSO

DSO converts the receivables balance into days of sales. A simple monthly version is ending AR ÷ credit sales for the month × 30. On the same illustrative numbers:

DSO fell by more than six days because the denominator, sales, jumped. Nothing about collections improved. This is a common way DSO misleads: any month with a sales spike makes DSO look better, and any month with a sales dip makes it look worse, regardless of what the collections team did. CEI uses beginning and ending balances against the same period's activity, and it isolates past-due balances, so a sales spike does not flatter it.

Use both. DSO feeds the cash conversion cycle and the cash forecast, because it tells you how many days of sales sit in receivables. CEI tells you whether the people and process responsible for collecting are getting the job done. When they move in opposite directions, as in Month 2, trust CEI on collection quality and investigate.

Interpreting the Number

There is no regulatory or standards-body benchmark for CEI. The bands below are practitioner rules of thumb that are widely repeated in credit and collections material. Treat them as a starting point and calibrate to your own history and terms.

Keep a few cautions in mind when you read the number.

First, the trend matters more than the level. A company whose CEI runs at 82% every month is in a steadier position than one that swings between 95% and 72%. Chart the trailing twelve months.

Second, monthly CEI is noisy for companies with few, large invoices. One $1.5M customer paying three days late can move a month by ten points. For those businesses, a quarterly CEI or a customer-level view is more useful than the monthly figure.

Third, CEI depends on how the aging is built. If disputed invoices are parked as "current" or credits are applied to the wrong buckets, CEI will be overstated. The fix is upstream in the AR subledger.

How Lenders Read Receivables Quality

Lenders rarely ask for CEI by name. They ask for the aging report, and the aging report drives the same conclusions. In an asset-based facility, receivables are collateral, and their quality sets how much you can borrow.

The OCC's Comptroller's Handbook on Asset-Based Lending, the guidance national bank examiners use, describes what a lender looks at:

• Delinquency. An account 30 days or more past due beyond normal trade terms is considered delinquent. An account is normally treated as ineligible collateral when it is past due by three times the terms, for example 90 days for 30-day terms.
• Cross-aging. Most agreements make all of a customer's receivables ineligible when any portion, or a set percentage, of that customer's balance becomes ineligible.
• Concentration. A bank normally treats any single account at 10% or more of total receivables as a concentration, and should limit concentrated accounts to no more than 10% to 20% of the receivables borrowing base.
• Dilution. Returns, allowances, disputes and other credits reduce receivables. The handbook says dilution varies by industry but is usually expected to be 5% or less of receivables.
• Advance rates. Common advance rates run from 70% to 85% of eligible receivables, and some banks go up to 90% for business-to-business receivables.

Here is how a falling CEI turns into lost availability. The figures continue the illustrative Month 2 above.

Check: 9.6 − 0.9 − 0.3 − 0.4 = 8.0. 8.0 × 80% = 6.4.

Every dollar that ages past the ineligibility cutoff comes out of the borrowing base at the full advance rate. At 80%, $1.0M of receivables aging past the cutoff removes $0.8M of availability, and cross-aging can pull more of the same customer's balance with it. A CEI that drops from 85% to 77% is an early read on that outcome, typically a month or two before the invoices cross the cutoff. For a company that is already close to its availability limit, that lead time is the reason to track CEI at all.

Credit officers also read the aging for what it says about the business. Rising delinquencies can signal disputes over product quality, a customer in distress, or a billing process that is producing errors. The OCC handbook makes the same point about dilution: a rise can signal a decline in product or service quality. Expect questions about any customer whose balance moves into the 61-to-90-day bucket.

Improving CEI

Most CEI problems trace to a short list of causes, and the fixes are operational.

Invoice accurately and on time. Late or wrong invoices start the clock late and invite disputes. Invoice on shipment, and match invoice data to the customer's PO requirements.

Work the 1-to-30-day past-due bucket. That is where collection effort has the highest return. A call at day 5 past due is a reminder. A call at day 60 is a negotiation.

Resolve disputes on a deadline. Track disputed balances separately with an owner and a target date. Disputes left open age into ineligible collateral.

Review terms by customer. If a large customer pays consistently at 55 days on net 30 terms, either enforce the terms or change them and price for it. Pretending the terms are 30 days distorts both CEI and the cash forecast.

Report CEI alongside covenant metrics. Put CEI, DSO and the past-due balance on the same page as your borrowing base and covenant headroom. The lender will see the aging either way; it is better to arrive with the explanation already written.

To test the effect of a change before you make it, enter your beginning AR, credit sales and ending balances into the CEI calculator. It shows collected, collectible and past-due amounts alongside the index.

Want to track receivables quality alongside your covenants? Get our Covenant Compliance Tracker →