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Achieving ExcellenceThis blog is part of the High-Performing Company Series, on Accounts Receivable. To read Part I, click here.
Efficient accounts receivable (AR )management is a cornerstone of strong cash flow. By understanding and optimizing key financial ratios, small to medium-sized businesses can pinpoint in efficiencies, improve collections, and achieve higher performance.
In this two-part series, we explore the four essential AR ratios that drive collections success:
These ratios provide critical insights into your collection staff's effectiveness and your company’s ability to turn receivables into cash. When used together, they create a roadmap for improving efficiency, increasing liquidity, and boosting your bottom line.
Collection Effectiveness Index (CEI)The CEI measures your staff’s effectiveness in collecting outstanding receivables. It calculates the percentage of collections made against what was due, factoring in both current and historical performance. The CEI score ranges from 0% to 100%, with 85% to 100% considered high performance.
What percentage of cash that was available for collection during a particular past period, did you staff actually collect?
Knowing your CEI score provides a clear understanding of your collection team's performance and highlights opportunities for improvement. For example, if your staff has a CEI score of 68%, it indicates there is significant room to improve collections, which in turn increases cash inflow.
A company with a CEI score of 68% and $1.6 million in total receivables collected only $1.088 million. By improving their CEI score, they could capture more of the remaining $512,000, significantly boosting cashflow.
Our financial ratios help you:
The higher your CEI, the more effectively your staff collects receivables. Together with DSO (which measures time to collect), CEI gives a comprehensive view of your AR efficiency.
Accounts Receivable Turnover (ART)ART measures how many times your company collects its average accounts receivable balance within a specific period, such as a year or quarter. This ratio provides insight into how efficiently your business is turning receivables into cash.
How many times a year or quarter, does your company collect its entire average accounts receivable?
ART is a powerful indicator of your company's financial health and the effectiveness of your collections process. A high-performance ART ratio falls between 8 to 12 times per year, indicating your business is successfully and regularly converting receivables into cash.
If your company has an average receivable balance of$200,000, an ART ratio of 10 means you’re collecting this amount in full 10times a year, for a total of $2 million in collections.
Our financial ratios helps you:
A strong ART ratio ensures your company maintains a healthy cash flow, minimizes the risk of overdue accounts, and optimizes operational liquidity.
Why CEI and ART Work TogetherWhile CEI measures your staff's ability to collect receivables, ART reflects how quickly those receivables are turned into cash. Using these ratios together provides a holistic view of your AR performance, helping you identify inefficiencies and take actionable steps to improve collections.
Next StepsOptimizing your CEI and ART ratios is essential for becoming a high-performing company in accounts receivable management. Together, these ratios empower you to improve staff performance, streamline collections, and boost cash flow.
Be sure to revisit Part I of this series if you haven’t already, and check out our other High-Performing Company blogs to learn more about financial ratio analysis.
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