January 13, 2011 | Read Time: 3 minutes
As a teenager, I was a paperboy, delivering copies of the Daily Homes News in my neighborhood.
It was well known in my small town that paperboys were flush with cash every Thursday, since Thursday was the day that we collected subscription dues on our routes. And, like clockwork, my friend Tommy would approach me every Thursday to borrow “some change” to purchase pastries from the corner store.
When Tommy’s tab hit a certain level, I would approach him to try to collect his debt. And whenever I approached him, his response was, “as long as I owe you, you’ll never go broke.”
I share this story because many of our nonprofits are operating with the notion that if their balance sheets contain some level of accounts receivable, they cannot go broke.
After all, those receivables will eventually become cash—someday.
But this is a dangerous mind-set. In actuality, a nonprofit with an aging list of accounts receivable runs the risk of overstating its net worth and facing a cash crisis. It also runs a serious risk of insolvency.
What’s more, nonprofits with aging accounts receivable may find themselves tapping into restricted funds, slashing staff salaries, and cutting jobs; or delaying making their own debt payments to get by.
Nonprofits that rely on government money are among those most at risk of facing these challenges. I’ve heard a number of nonprofit leaders say, “Government funders may pay slowly, but the money is guaranteed to come.” Well, this isn’t exactly true all of the time. We know of organizations that have gone out of business because municipal and state governments have been slow to pay.
Human-service groups are particularly vulnerable to slow-paying government contracts. In many cases, these groups are not prepared to withstand late payments, as they tend to operate on narrow margins and lack adequate cash reserves.
Nonprofits that are considering working with government or that are looking at other new sources of support should be prepared to handle the problem of late payments. The following is a partial list of what they should consider when setting up new financial arrangements:
• Evaluate the terms of payment.
• Reach out to other nonprofits that have experience with the government agency or grant-making organization that is offering support to get the scoop on how timely it is in making payments.
• Assess your organization’s balance sheet to determine your ability to withstand late payments with available cash.
• Evaluate your group’s access to working capital: Does your organization have a line of credit to meet current and projected needs or will it qualify for a line of credit if it needs one?
• Project cash flow regularly, and establish contingency plans if payments do not occur as planned.
Summoning the courage to just say no to a grant or contract may be the best thing an organization can do to ensure its financial viability—especially if the group is not flush with cash. Preemptively making these kinds of tough financial and organizational decisions may prevent an organization from going broke so it can remain in the business of serving the public good.
