More Money Blues

It may be hard to believe but getting too much money can sometimes destabilize a nonprofit organization.

In a previous article, one such scenario was outlined where a grant or contract lacks sufficient funds for infrastructure support. This may strain an organization’s capacity to support the additional programming paid for by the new funds.

Cost reimbursement contracts are another common challenge to a nonprofit. Many contracts require the organization to spend its funds, and then submit an invoice to be repaid. It is up to the organization to be able to fund the float between the time the funds are spent until the time it receives reimbursement.

The following example illustrates this problem. Assume your organization has a $1.2 million government contract to deliver certain program services. Assume the funds are spent evenly during the year resulting in a monthly run rate of $100k.

Further assume your organization invoices monthly. Your accounting department is able to generate invoices within two weeks after month-end. The government agency is typically able to reimburse you within eight weeks of receipt of your invoice. (Many city, state, and local agencies take longer.)

How long is your organization without the cash?

Assuming disbursements on average occur mid-month, it takes four weeks from date of disbursement to the date of sending the invoice. It then takes the government agency another eight weeks to pay. That is a total of 12 weeks, or approximately three months!

With a three-month turnaround, your organization is effectively forced to finance $300k at any one time (3 months @ $100k each).

Where will this money come from?

Many contracts provide for an advance that is intended to solve this problem. Hopefully, you have this type of contract. Other agencies allow a reimbursement to be requested online with funds wired almost immediately to your bank account.

If neither of these options is available, let’s hope your organization is fortunate enough to have sufficient working capital to cover this. If not, you will need to raise the funds from donors who do not mind having their money go toward general operating support.

A line of credit may also be needed. The downside is a $300k line of credit may cost your organization $15k per year in interest and fees depending on rates.

Further compounding the problem is that the government agencies themselves may experience their own cash-flow problems, thus causing them to delay their reimbursements to you. Many organizations, especially during the height of previous recessions, had to waste considerable time begging government agencies to pay their invoices.

Moral of the story: taking on too many cost-reimbursement contracts can stretch an organization’s ability to fund the float between the dates of disbursement and reimbursement. Before taking on contracts of this nature, perform a financial analysis to be sure your organization can sustain the additional funding.