Understand Receivables: a NFP Board Member’s How-to Guide
This article is part of a four-part series that defines key terms and important information for a board member to know and understand. The other three articles discuss accounts payable/accrued liabilities, deferred revenue and contributions and the basics of financial statements.
It’s not a requirement for all board members to be accountants, but there are some accounting terms that all board members should understand. One such term is “receivables.” Very simply, a receivable is an amount owing to an organization.
Common forms of receivables
- Accounts receivables. Amounts owing for goods or services provided.
- Grant receivables. Amounts owing under an agreement to fund an organization over a specific period.
- Loans receivables. Advances for which there is a commitment for repayment.
- Sundry or other receivables. A catch-all term for items such as miscellaneous reimbursements, such Harmonized Sales Tax rebates, due from other organizations or persons.
Importance of understanding receivables
Directors or stewards, need to know what questions to ask when presented with an organization’s financial statement. The only way to do that effectively is to have a working knowledge of the term. Some questions the board may ask include:
- Are the receivables in the statements complete? If they are understated, it may mean that the organization has more revenues than are being reported.
- How long has the balance been outstanding and has it been subsequently collected? If it has been outstanding a long time and has not been collected at the time the statement is being reviewed, that may raise a concern that it may never be collected. The organization may have to write it off as an uncollectable amount.
- Who owes the money? Even if the debtor acknowledges that they owe money to the organization, if they have no ability to pay that may be problematic to the organization.
- If there is a risk that the amounts won’t be collectible, should an allowance be reflected, and what impact would that allowance have on the organizations overall results?
As stewards, board members are responsible for ensuring these questions are asked each month. A board cannot meaningfully review and make decisions with respect to finances if the internal financial statements have not accurately addressed the question of receivables.
A clearly defined action plan
Board directors need to ensure processes and procedures exist so that amounts owing to the organization are promptly collected. If there’s no protocols in place, the board would be advised to establish some.
Directors are not liable for the amounts receivable; however, many non-profit organizations do not maintain significant cash reserves and are dependent on consistent cash flows to meet obligations. A build-up of receivables can expose an organization to challenges in meeting its goals.
GGFL is well versed in the non-profit realm. We have a team dedicated to the sector and are happy to offer advice and guidance to board members and organizations. Visit ggfl.ca/non-profit-organization/ to learn more.