An organization’s accounts receivable (AR) balance is made up of the money that is owed to the business but not yet paid. Nonprofit organizations generally accumulate accounts receivable balances from one or more of the following sources:
- Grants receivable – future gift commitments from governing agencies, private foundations, and other grant sources.
- Pledges receivable – donations promised but not yet delivered
- Accounts receivable – trade receivables, or money owed by customers of the organization for goods or services
- Dues receivable – Membership and association dues not yet collected
The total of an organization’s AR is considered one of the company’s assets and typically assumes the balances will be collected in the fiscal year that they were recorded. Unfortunately, collections do not always go as planned and nonprofits find their accounts receivables becoming unmanageable. Uncollected income can create the following issues for an organization:
- Cash flow concerns
- Unbalanced financial statements
- Unpredictable budgeting and cash forecasting
- Expensive audit or Form 990 preparations
Revising your organization’s AR policies and procedures is the best defense against unpaid invoices. Continue reading to learn more about the best practices for accounts receivable collections.
1. Create Processes
The first step in developing best practices for accounts receivable collections is to get organized. An organization can more effectively collect unpaid receivables if the correct processes and procedures are in place. Proactively instructing team members how they are expected to invoice, collect, and record accounts receivable balances will eliminate inconsistent and ineffective practices down the road.
2. Review Credit Policies
In the process of revising procedures on accounts receivables, be sure to review credit policies. There must be clear guidelines on the following aspects of collections.
Credit Application Process
Use a credit application to determine whether each customer, member, or donor can accumulate an AR balance at your organization. A credit application may include banking information, references, and a contract. This may not apply to grants and short-time commitments, like monthly dues, but is a great resource for new or one-time customers and contributors.
Credit limits can be set based on each client’s credit application or can be set as a general rule within the organization. For example, customer A may be approved through a credit application to receive up to $2,500 worth of meal services before service is interrupted by non-payment.
However, if your organization doesn’t extend set credit lines, it’s a good idea to have a standard maximum balance allowed, like “3 month’s dues, or “pledges of $10,000.” The exact amount will depend on the specifics of your nonprofit.
Set realistic, but aggressive, payment terms. Require that all goods and services be Net 30 or less. This gives the AR team time to correctly invoice, remind, and collect. Shortening the current payment terms you are offering is a great way to simplify the billing and collections processes.
3. Automate Billing And Payments
Automate the billing and payment processes to expedite collections. Most modern accounting software solutions, like Sage Intacct, can increase the organization’s overall efficiency by automating processes including:
- Invoice creation
- Email templates
- Recurring billing notices
- User-friendly reporting
Offering customers, donors, and members multiple payment options, including automatic monthly bank drafts, manual electronic payments, e-check processing, and more is a great way to automate the payment process. Most software, like Sage Intacct, has an optional module to accept manual and automatic payments.
4. Remind, Incentivize, And Penalize
Once a balance has been invoiced, set up predetermined timelines to remind, incentivize, and penalize.
Remind – Using automated billing or manual processes, frequently remind customers, members, and donors of their balance. It’s good practice to send a weekly reminder, via mail, email, or phone, once the due date has passed.
Incentivize – Offer incentives for customers that pay before the due date or members that prepay their dues. Incentives may be a discount on the next purchase or the current bill.
Penalize – Implement a fee schedule or penalties for unpaid invoices, like a 10% late fee or loss of access.
5. Weekly AR Reviews
Meet with the accounting, billing, or collections department frequently. Weekly AR reviews can give leaders an accurate picture of how the current accounts receivable balances may affect the organization’s financial health. It is also a good practice to loop marketing, sales, and customer service team members of past-due accounts since they often have the most exposure to the members, donors, and customers.
6. Get Help
To thoroughly review and revise the accounts receivable collections process at your organization, don’t wait too long to enlist outside help. There are collection agencies that offer services to help organizations recover past-due revenues. Some accounting systems even have a built-in collections module.
Reaching out to a professional accounting service is also recommended to maximize the efficiency of your AR procedures. An accounting service, like JFW Accounting Services, can work with your leaders, staff, and members to:
- Document effective billing and collections processes
- Evaluate the impact of accounts receivable on your organization’s bottom line
- Help your organization to utilize the best automated, customized software
- Efficiently apply payments record the financial transaction to the general ledger
Book your Client Assessment here.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.