What do you think of using the Credit Effectiveness Index as the key measure of credit performance?

Answer: Our concerns about the 'CEI' include the following:

1. Total AR [in the numerator] is impacted by the company's terms of sale, by its bad debt write off policies, by management overrides, by risk tolerance in the creditor company...to name only a few factors.

2. Current receivables [in the denominator] can be problematic if your system ages invoices [as many systems do] using the invoice date rather than the due date. The software used to gather the information needed to calculate the CEI must be 'smart' enough to hold the balance due as current until it becomes delinquent --- whether the terms are net 30, net 45, net 60, net 90 etc.

3. Still another area of concern about the CEI is the value of 'N'...the time period under review. It doesn't take a math whiz to figure out that if the CEI is not as high as you want it to be, by changing 'N' [the period under review] the CEI must change. A 'clever' individual would choose the time period that gives the most favorable [the highest] CEI.

4. The CEI is a snapshot. It is typically calculated once a month, like DSO and many other measurements. As such, it is accurate for that day - but may or may not be an accurate reflection of the department's performance throughout the month.