Credit Research Foundation’s Collection Productivity Analysis

Over the years CRF has developed and standardized numerous measures dealing with the quality of a businesses accounts receivable. However, collection productivity is the first measure to gauge how productive the effort is given the wherewithal available to perform the collection function. We have defined collection productivity as the measure of the efficiency with which a company’s sales are collected, given the resources, human and technological, to perform the task. 

Growth in accounts receivable collection productivity is a source of value that the credit and collection people provide to their company as increased productivity translates into more available income at less cost. As an example, if a company’s sales from one year to the next were flat, but the ending accounts receivable decreased while the number of people collecting the money stayed the same, it would equate to a growth in collection productivity. Understandably technology could be deployed to influence the reduction in ending A/R, however, a technology cost is accounted for in the formula for calculating the productivity.

There are essentially three ways to promote a growth in output:

• Bring additional inputs (sales dollars) into production (A/R dollars);
• Use technology or somehow become more efficient and reduce A/R over the prior period; or,
• Decrease the number of employees collecting the receivables.

CRF’s index of collection productivity shows changes in the ratio of output (ending A/R dollars) to employees and sales (input).  In our formula, a straightforward and easily understood measurement of productivity for the collection of accounts receivable function, we start by determining the sales to employee relationship and the A/R to employee relationship. To establish productivity growth or decline, we simply determine the difference between the percent of change in sales per employee to the cost of capital investment in technology, times the percent change in A/R per employee.  The result is the expression of growth or decline in productivity of the collection activity.

How Collection Productivity is calculated?

Using a simple spreadsheet we calculate the rate of change in collection productivity as the: (% Change in sales per employee from year one to year two minus the Average capital investment in technology as a % of labor) times the % change in A/R per employee from year one to year two.

Examining the factors of the formula in a table, more clearly demonstrates how to the calculation works. Illustration 1 represents the tabled calculations that you can apply to develop your own collection productivity worksheet. Simply adjusting years and changing the data in cells B2, B3, B4, D2, D3 & D4 will produce your results.

Illustration 1:

In this example, we have expressed an illustration of productivity growth comparing the change in collection productivity for 2002 from 2001 of 9.86%. The increase is due to two of the three input and output factors changing favorably: an increase in sales and a decrease in the number of people collecting the sales. Although the ending A/R increased, its influence was not enough to produce a decline (negative result) in the growth of collection productivity.    

If, however, the number of collectors would have remained the same in year two,   (5 collectors) and everything else remained constant, this example would have produced a negative result or a decline in productivity for 2002 of   -7.11%.

Illustration 2:

In our survey calculation, we assumed an average capital investment in technology as a percent of labor to be 25%. This was derived from the information in our CRF benchmarking of credit and A/R database. For your own calculation, if you know that figure you will get a more accurate growth or decline in your company’s collection productivity by using the actual percent.

Why another measure?

CEI, DSO, BPDSO, ADD, % Current, % over 91 days past due, why Collection Productivity?  Each meaningful measure fills the need and meets a specific objective. If a measure does not accomplish a purpose, don’t use it. Growth in Collection Productivity as calculated here indicates that an organization has found a way to accomplish better collection results from the previous year while utilizing less resources. A decline in Collection Productivity would indicate a change in factors that needs to be examined to create an efficient collection process.

Thanks to all of you who contribute your data to this annual survey. As we grow the survey from year to year, we hope that Collection Productivity will become a new standard to help you in your quest for proficient process control.