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.