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Accounts Receivable Aging and Due Dates

Aging. Now there’s a topic we can all relate to!

But I’m not talking about the kind of aging you and I experience each day. I’m talking about accounts receivable aging. The biggest difference is that accounts receivable, unlike you and me, do not get better with age.

In our last post, Why Care About Accounts and Pledges Receivable?, we talked about the benefits of recording receivables, including receivables arising from program services provided to clients (trade receivables) and future gift commitments from donors and grantors (pledges and grants receivable). In today’s post we talk about the difference between…

GOOD:  Knowing much money you should expect in the future.

BETTER:  Knowing when you can reasonably expect to receive that money.

Use an Invoice in QuickBooks

When you set up receivables, whether for program service fees, pledges or grants receivable, use the invoice form in Quickbooks. An invoice normally affects two types of accounts in your books:

  1. An asset account to record the amount receivable in the future
  2. An income account to record the related contributions or earned income

Yes, we see that question on your face. You record income even though you have not received any cash. That’s because you’ve either earned the right to receive cash by providing services OR a donor has made a commitment to provide cash in the future.

Invoice Dates

Notice the invoice form in QuickBooks has fields for two different dates:

  1. The Invoice Date
  2. The Due Date

Invoice date

The invoice date depends on the underlying transaction. The invoice date can be:

  1. The date services were provided, thus it’s the date the income for those services was earned, or
  2. The date the pledge was made, which is usually the date the pledge agreement was signed, or
  3. The date the grant was awarded, which is usually the date on the grant award letter.

Due Date

The due date is when you expect the receive payment.

For trade receivables, the due date is based on your normal policy. Two examples:

  1. A daycare center invoices at the beginning of each month for that month’s services. Therefore the invoice date might be March 1 while the due date is March 10.
  2. A counseling service provides therapy to a client and subsequently invoices the client a fee for those services. The invoice date would be the date the services were provided. The due date may be 30 days from the service date.

For future gifts, the due date is based on when the cash is expected to be received. Two examples:

  1. A donor makes a pledge, promising in writing to make 12 monthly payments of $50 totaling $600. If you create an invoice for each pledge installment, the invoice date would be the date the pledge was signed while due date would be based on the dates the pledge payments are due.
  2. A foundation awards a grant to be paid in full right away. The award letter bears a date of March 30 and arrives in the mail on April 7. The grant check arrives on April 23. You would create an invoice with an invoice date of March 30, the date of the award letter, because that is the date the foundation made the gift commitment. You can estimate a due date of 30 days from the date of the invoice, April 30 in this example, because you expect the check to arrive shortly.

Separate Invoice for Each Payment

Setting up an invoice for each pledge payment could be a big job if you have, say, 60 monthly payments on a five-year pledge. Fortunately QuickBooks (Desktop and Online) lets you make a copy of a transaction, edit the information and save it as a new transaction. Copying and editing to create new transactions saves so much time!

You do not necessarily have to set up an invoice for each pledge payment or for multiple grant installments. You could set up one invoice for the entire gift amount and simply apply payments to the invoice as you receive the money. Or you could set up one invoice per year (eg, one invoice for each year of a five-year pledge commitment). QuickBooks will always reduce the receivable amount and record the cash received each time you enter a payment against an invoice.

A Useful Report: Accounts Receivable Aging

The beauty of setting up an invoice for each installment payment, though, is that you can specify the due date for each payment according to the agreed upon schedule. Then you can run an incredibly useful report called the Accounts Receivable Aging Summary. You can also send the invoice to your donor as a reminder to pay the pledge.

The Accounts Receivable Aging Summary will show you if any invoices are still open past their due date, and if so, how far they are past the due date. The report works in increments of 30 days. So an invoice still within the due date is shown as “Current.” Once an invoice gets to 31 days past the due date, it now goes into the >30 days past due column. If an invoice gets to >60 days past due, it is shown in the >60 days column. Invoices over 90 days past due are the oldest category. If you have invoices over 90 days past due, it points to likely problems collecting on those invoices.

What if you could easily determine which invoices for services and which pledge commitments were behind on payment? Then you could make follow up calls or send letters to your clients and donors to prompt them to pay. The older the receivables, the less likely you are to receive payment.

Report to Show When is Cash Due

Unfortunately the Accounts Receivable Aging Summary report will not show you when payments are due. You could have pledge payments due two years from now that will still show as “Current” because, in fact, they are not past due. “Current” invoices do not necessarily mean cash will be received soon.

To organize open receivables by due date, you need to create a custom report. Drill down on the Accounts Receivable account from the Balance Sheet report and do some modifications to filter for All Dates, Unpaid Invoices, add the Customer Name and Due Date fields, and remove unneeded fields. Then you can export this list to Excel and sort by due date. (Generally QuickBooks Desktop has more report customization options; with QuickBooks Online we were happy to get a usable data table that can be further organized in Excel.)

Manage Future Cash Receipts

By making use of invoices in QuickBooks and paying close attention to the invoice date and due date as you create each invoice, you can

  • Produce reports that comply with Generally Accepted Accounting Principles
  • Show income earned and gift commitments made during a given time period
  • Stay on top of managing client invoice payments, pledges, and future grant payments
  • Create useful reports to help you manage cash flow

Perhaps we can all agree — aging, when done right, is a beautiful thing!

 

 

 

 

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