Collection Efficiency

What is collection efficiency?

Collection efficiency measures how effectively a business converts invoiced amounts into cash. High collection efficiency means most billed amounts are collected on time with minimal write-offs or discounts. Low efficiency indicates slow payment, disputes, or bad debt problems. Track collection efficiency alongside days sales outstanding to understand both speed and completeness of collections.

Calculating collection efficiency

Divide cash collected by total billings for a period. If you billed $500,000 and collected $475,000, collection efficiency is 95%. The missing 5% represents write-offs, outstanding receivables, and adjustments. Track monthly to identify trends. Compare against industry benchmarks. Professional service firms typically target 95% or higher collection efficiency over rolling 12-month periods.

Improving collection efficiency

Invoice promptly with clear payment terms. Follow up before due dates on large invoices. Escalate collection calls on aging balances. Address disputes quickly to remove payment obstacles. Review credit policies for problem clients. Consider requiring retainers or deposits from clients with poor payment history. Small process improvements compound into significant efficiency gains.