Collector Efficiency

“Collector efficiency” refers to the success rate of collecting debts owed. For a business, the efficiency of its collections team can make or break the organization, especially if customers tend to owe significant sums of money. As a business owner, you might be tempted to view efficiency purely from a mathematical standpoint, but it’s important to remember collector performance is also a people-management issue.

What Is the Collection Efficiency Ratio Formula?

Business owners and accountants can use several metrics to determine how quickly customers are paying their bills. These include the days sales outstanding and aging balance. However, these metrics don’t actually determine how effectively the collections team is doing its job. The collection efficiency calculation takes two main elements into consideration:

  1. Total collectible amount for month X – This includes the invoices overdue at the start of the month as well as all invoices the business accrues throughout the remainder of the month.
  2. Remaining recovery amount for month X on day X – This is the amount remaining on a specific day that the team failed to collect.

Formula:

(Total Collectible Amount – Remaining Recovery Amount)
/ Total Collectible Amount

The closer the ratio is to 1 or the closer the percentage is to 100%, the better the collection efficiency ratio.

What Is an Example Illustrating the Collection Efficiency KPI?

Victor owns a snowboard manufacturing business in Colorado and supplies stores across the country. In December, he had record sales totalling $500,000. By January 1, his suppliers only paid $300,000 of the invoice. During the month of January, he made another $400,000 in sales and received $200,000. His clients also paid an additional $100,000 for the sales made in December.

Total Collectible Amount for January – $500,000 + $400,000 = $900,000

Remaining Recovery Amount – $900,000 – ($300,000 + $200,000 + $100,000)
$900,000 – $600,000
$300,000

Efficiency: ($900,000 – $300,00) / $900,000
$600,000 / $900,000
0.67 or 67%

What Can You Do if the Efficiency Is Lower Than Desired?

Every business owner wants a 100% efficiency percentage. Whether this is a reasonable expectation will depend on your business model, the customers you work with, your location, the industry average and the economy.

Use those factors to set a realistic goal, then try:

  1. Setting a quota: You know your realistic efficiency rate. Share it with the team, even if the number is not 100%. This will give the team something to aim for. It’s a good idea to increase the quota toward a specific goal and set milestones.
  2. Training the team: Collections require strong organizational and communication skills. Invest in proper training so your accounts receivable team learns an established process that has a high success rate.
  3. Automating the process: Did you know you can automate several aspects of the accounting and collections process? This reduces the likelihood of human error and makes the work easier for your accounts receivable team.

Gaviti provides a simple and efficient tool for you to automate your collections process and improve efficiency. Are you ready to boost collector efficiency and cash flow for your business?

Schedule your free demo today.

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