Watching Over Pledges Receivable During Periods of Change and Uncertainty
Pledges receivable are a vital asset on a nonprofit organization’s balance sheet. However, this asset is highly sensitive to changing economic conditions and donor sentiment. Understanding how past management actions have impacted pledges receivable, and learning to adopt new management tactics, is vital to protecting current pledges receivable and attracting new pledges.
We have all gotten better at responding to changing economic conditions and donor sentiment. However, we often tend to rush our response to these changing conditions without considering possible related collateral damage and the long-term impact of our actions. The impact on pledges receivable is a key case in point, surprising many nonprofits and forcing them to reconsider and reposition management practices and actions because of unexpected consequences.
Looking Back – Observations and Analysis
Many nonprofits have experienced a noticeable change in how existing pledges are being fulfilled (in other words, how payments are received on outstanding pledges). Donors may have slowed their current pledge fulfillment payments or even requested temporary suspensions to agreed-upon pledge fulfillment schedules. This not only applies additional stress to cash flow but also causes potential devaluation of pledges receivable.
This devaluation happens mainly through two often-required residual adjustments to the balance sheet: increased “time value of money” discounting (i.e., decreasing the value of pledges receivable that are expected to be collected further out into the future than originally expected) and increased allowance for doubtful pledge collections (i.e., decreasing the value of pledges receivable based on the probability that pledges become more exposed to the risk of not being collected as the fulfillment period is extended).
Consequently, nonprofits need to perform additional analysis of their pledges receivable and make necessary adjustments related to:
Changes in collection timing patterns for existing pledges that were previously booked;
Discounting certain pledges for possible longer fulfillment periods; and
Resetting the pledges receivable risk assessment allowance for doubtful pledges.
In order to effectively and efficiently react to changing conditions, plan on updating this pledges receivable analysis every six months to better react to changing historical collection patterns. Make sure to consider adjustments for time value of money discounting due to longer than expected fulfillment periods, and also take into account the potential negative impact on cash flow from slower pledge fulfillment collections.
It is important to be proactive and not wait for your auditor to make comments related to pledges receivable as part of the annual financial statement audit process. You could end up with a management letter that includes a significant deficiency or material weakness finding with a potential corresponding audit adjusting journal entry.
Looking Ahead – Tactics and Planning for the Future
Take the initiative and plan to move quickly to mitigate any historical downside trends recently experienced with pledges receivable. Look closely at how your organization has responded to past changing conditions and acknowledge what tactics worked and did not work. My top three tactics and planning strategies to maintain active communication with donors and bolster pledges receivable include:
Actively working with your development staff to assess donor sentiment;
Considering adjustments to the timing and tone of future pledge drives and appeals; and
Exploring new ways and new methods of communicating with donors about the organization’s programs and plans for the future.
Staff (especially development department staff) will have the best read on donor sentiment. The development department should brief the entire staff on their observations about donors. Target donor outreach and communications to build confidence during changing times and excitement for future growth and new opportunities.
Next, realign the timing of pledge drives and appeals to match changing economic conditions and donor sentiment. Be flexible and open-minded. Donors expect to receive traditional year-end or seasonal pledge drive requests, but this traditional timing might not always be optimal.
Consider new ways and opportunities to connect with donors. Add more frequent “thank you” communications, with expressions of gratitude for past donor support as well as updates on the organization’s accomplishments and plans for the future.
Also, where appropriate, express empathy for changing donor circumstances by acknowledging that donors might be in a difficult situation. Donors often appreciate receiving a note of thanks and concern instead of another poorly timed request for more contributions.
Finally, sometimes the key to attracting new pledges is as simple as finding new ways to communicate with donors (more often and with more passion) to keep donor interest high, maintain positive donor sentiment, and remind them that their gifts are having real impact. Explore how highlighting new programs and events, discussing plans for growth, or simply sharing exciting news about the organization’s existing programs, could spark the interest of your current donor pool and catch the attention of new prospective donors.
Planning Tip – Reach out to your independent auditors before year-end and ask for their observations and comments related to the potential impact of changing economic conditions and donor sentiment on recording pledges receivable. They will provide valuable guidance on how they are testing pledges receivable and what weaknesses they will be assessing. Ask if temporary slowdowns in payments warrant adjusting pledge receivable valuations and what testing considerations the auditor uses in evaluating pledges receivable.
Actively observing and assessing pledges receivable will be extremely valuable in mitigating potential downside trends and valuation risks while also better positioning your organization to solicit future new pledges.
