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Nov 23, 2011

Note to Governments: Step up and support nonprofit financial health

My November column for Business First has just been submitted, with a particularly local focus this time around. Ohio Association of Nonprofit Organizations (OANO) recently released the Ohio Nonprofit Sector Report, a compilation that profiles the economic impact of the nonprofit sector in the Ohio economy.

According to the report, by 2009 Ohio nonprofits had assets equating to $62.6 billion. In Franklin County alone over 1900 nonprofits had assets of $7.6 billion and put over $12.6 billion into the local economy through their expenditures. In the latest Johns Hopkins/OANO study, Ohio’s nonprofits employed 482,000, making them the fourth largest sector in Ohio. From an economic development perspective, this is sixteen times the employment provided by Ohio’s utilities, five times the employment of the information sector, and almost double the employment of the finance, insurance, and real estate sector.

Wages are another important measure of the impact of a sector on our economy. The Ohio nonprofit sector paid over $18 billion in wages in 2010, translating into $500 million of personal income tax revenue for Ohio state and local governments and $1.1 billion in Federal tax revenue. Only manufacturing and local government contributed more through payroll.

You would think that government and private sector economic development efforts would view fostering the expansion of nonprofits as economically beneficial as fostering expansion by for-profit companies. But nonprofits are usually neglected in the incentive programs, largely because tax incentives are of little benefit to nonprofits. Only the New Markets Tax Credit program by the Federal government figured out a way to make tax credits work to the benefit of nonprofits.

Yet the double standard that we often see in attitudes toward the nonprofit sector creep back in the business relationship between nonprofits and government. With all the effort of the right hand of government economic development efforts to benefit the economy through encouraging nonprofit growth, it is disappointing to see the left hand of business contracting compromising nonprofits’ ability to effect that growth.

Governments everywhere are eroding nonprofit financial health in ways that are often invisible to the general public. According to an Urban Institute survey, Three-fourths of nonprofits nationally reported payments over 30 days past due in contracts with all levels of government. The past due invoices averaged $100,000 per organization. The State of Illinois recently made headlines by accruing 166,000 unpaid bills worth $5 billion, making its payment record the worst of any state.

Ohioans should take little comfort. Ohio ranked 18th among the states with its 56 percent of nonprofits reporting late payments on their government contracts. The most common past due period was 60 days. If net 30 days were the most common contract term, this payment practice means that Ohio nonprofits must cover their expenses for one quarter of the year before they see any revenue. That is a huge cash flow drain which will compromise many nonprofits’ growth prospects.

As more money and effort is put into economic development efforts it is essential to be watchful for relatively unseen practices that can undermine the impact of these development efforts. Economic development programs are intended to bolster the health of business and leverage investment in job creation. Tax credits, grants, and loans are the most common tools used. The first two improve earnings and cash flow while the third provides leverage, often at concessionary terms. Two of the three benefit both for-profit and nonprofit organizations.

But deteriorating payment terms can offset these benefits. A better approach would be to include payment terms as a tool of economic development. Paying invoices on time rather than chronically past-due can be viewed as an economic development tool to increase the benefits of investment programs and overall to improve the business climate in Ohio. Businesses that have good cash flow are more prone to invest in expansion. And lenders are more prone to finance expansion by borrowers whose receivables are lower and cash higher.

Everyone likes leverage when it is beneficial. The most beneficial leverage is one that produces more social good for every dollar. The economic impact of the nonprofit sector in Ohio coupled with the social good they provide can give Ohio tremendous impact for every economic development dollar invested in the nonprofit sector. But our civic leaders and elected officials need to be reminded regularly that prompt payment terms on contracts and grants can affect this impact as much or more than a nonprofit’s own efficiency efforts.

Reluctance by elected officials and civic leaders to insist on marked improvement in payment terms to nonprofits and for-profits can undermine their positive efforts to foster economic development and job creation in Ohio. It is time to bring this back-office practice into open and routine discussion by our economic development leadership.

If your organization needs guidance in financial matters, consider hiring a consultant. They can give you the help you ensure your finances remain stable, even in this time of economic need. Linking Mission To Money offers many resources for organizations looking for consultation. Learn more here.