DSO vs CEI – Which is correct? How should you measure your effectiveness?
When it’s all about the bottom line, it’s important to know which equation to use. The two most common Accounts Receivable Management methods are DSO and CEI. One will identify the amount of time your accounts are outstanding while the other will establish your effectiveness to collect those accounts over time.
Why DSO reporting (Days Sales Outstanding)?
It’s important to understand how long it takes your clients to pay you. Depending on the terms, a company should look to have a DSO of under 40 days. A DSO of over 45 would indicate that you are in need of some help to collect your receivables. Remember, you must pay for your supplies/inventory as well and you don’t want to have your cash tied up in your accounts receivables. The equation for DSO is:
DSO = (Ending Total Receivables * 365) / Annual Credit Sales
Why CEI reporting (Collection Effectiveness Index)?
Your CEI will tell you how effective your collection efforts are. If you are able to collect all money owed to you, you will have a CEI of 100%. A CEI lower than 75% will start to negatively affect your cash flow and operations. Because CEI can be calculated for any time period, it’s often more accurate than DSO. Being able to monitor your cash using CEI will help you to see patterns and make changes to how you address your accounts receivables. The equation for CEI is:
CEI = [(Beginning Receivables + Month’s Invoice Revenue – End Total Receivables) / (Beginning Receivables + Month’s Invoice Revenue – End Current Receivables)] * 100
So which to use? Well that depends on you. What are you more concerned with, how quickly you are getting paid or how effective you are at getting paid. Both equations can give you insight into how your company is performing and where you might be able to make some improvements. Use them both, why limit yourself to just one tool in your tool belt?
Not sure how to get started? We’re here to help. As Accounts Receivable Consultants – we can offer suggestions, processes and techniques to assist in getting more of your cash in your pocket. Contact us today to schedule your consultation. Contact Us Here – 844-882-9022