“We have pledges receivable, but they are not on our books. Shouldn’t they be in our books?”

Such began our consulting engagement with a local nonprofit organization, Spring Center (not the real name).

Pledges Receivable and Accounts Receivable

Our Chart of Accounts Grand Tour continues with the next type of account commonly found on the balance sheet – receivables. Nonprofits typically have three main types of receivables:

1. Accounts receivables – also called trade receivables, this is money owed by customers of the organization who received services
2. Pledges receivable – future promises to give made by donors
3. Grants receivable — future gift commitments in the form of grants from private foundations, governments and other grantors

In reality, pledges receivable and grants receivable can overlap. Both pledges and grants are gifts to the organization.

Spring Center is a case in point for the importance of receivables.

Introducing Spring Center

Spring Center provides childcare services to low-income families. The nonprofit was blessed to have a newly invigorated board of directors comprised of community leaders who were doing an excellent job of bringing in donors. The only problem was that the organization’s accounting system, especially with respect to receivables, had not kept up with the needs of management. The board wanted to better understand the results of their operations and be able to “peer into the future” to better plan cash flows.

Spring Center had both pledges receivable and accounts receivable. They charged a sliding scale fee to families for the services they provided, which resulted in accounts receivable. And thanks to their board of directors, numerous donors had made future gift commitments to the organization, resulting in pledges receivable. How could they keep track of it all?

Spring Center had always recorded income as cash was received. They used a separate industry-specific software, ProCare, to manage the details of customer accounts. Therefore they could run reports from ProCare to see who owed money for childcare services (accounts receivable) and who was behind on paying. However they did not have a system for keeping track of pledges receivable other than an Excel spreadsheet.

Problems with Not Recording Receivables

Not recording receivables in their accounting system was creating problems in:

1. Projecting future cash flows.
2. Determining true income or loss in a given month
3. Understanding the total owed to the organization from both customers and donor commitments.
4. Producing financial statements for their audit and 990

Reporting income when cash is received and expense when cash is paid is called cash basis accounting. Cash basis accounting can easily be distorted or even manipulated. For example sometimes Spring Center held onto vendor checks then sent them all at once when cash was available. Other times they got behind on invoicing customers and collecting payment for services provided. Occasionally a client paid ahead. The cash flows in any given month could be erratic and not necessarily indicative of revenues earned or expenses incurred during that month.

On the other hand, accrual basis accounting records income when it is earned and when pledges have been made, not just when they are paid. Expenses are recorded when incurred or as assets are used up. Accrual basis accounting gives a truer picture of the results of business operations.

The Solution: A New Accounting System That Includes Receivables

Due to numerous problems in the organization’s books, we set up a new accounting system using QuickBooks Online. We set up all the open (unpaid) receivables as of Dec. 31, the last day of Spring Center’s year for accounting purposes. We recorded accounts receivable at the total amount per their ProCare customer management software. We set up pledges and grants receivable by individual donor, which totaled about $48,000.

Altogether, Spring Center had over $50,000 of receivables. Of those receivables, approximately $18,000 was expected to be received in the current year. Isn’t that good information to know if you have a tight budget and you need to plan ahead?

To manage going forward, we created a summary sales receipt form in QuickBooks so Spring Center can record new customer accounts receivables as a lump sum each month. They will also make lump sum entries for payments received on invoices during the month. That way they do not need to duplicate all the activity in ProCare for their childcare customers by making separate entries in QuickBooks.

Spring Center will also enter new pledges by each donor name as future gift commitments are made. Recording pledges receivable will also record contribution income in their books. They will record payments against the pledges as donors make payments in fulfillment of their pledge agreements. For now, Spring Center is using QuickBooks as their donor management software. We are encouraging them to consider using a separate donor management software as their needs continue to grow.

By recording increases to accounts receivable (new invoices and pledges) and decreases to accounts receivable (payments on invoices and pledges), they will be able to “look into the future” to see how much money they can expect in the current and future years. They will also be able to see how much income they are making based on cash or accrual basis. All they need to do is click the radio button on the profit and loss or balance sheet report in QuickBooks to indicate using the Cash or Accrual basis of accounting.

Love an Accounting System?

To say the director is over the moon with happiness over her new found financial reports would be an understatement. We have rarely seen anyone get so excited about accounting! With accounts and pledges receivable reporting under control, she can peer into the future with more confidence.

Just goes to show you anything is possible. Even loving your accounting system!

If you are interested in starting over using our QuickBooks Online company file template which comes with detailed bookkeeping “how to” instructions (packaged together as QuickBooks® To Go!), please contact us. QuickBooks® To Go! Enables you or your volunteer or staff accountant to create a beautiful accounting system. If you need services in addition to QuickBooks® To Go!, we would  be happy to talk with you to see what will work best to get you on the right accounting path!