Nonprofits’ Cash On Hand Hit 10-Year Low In 2023: Report

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Dive Brief:

• U.S. nonprofit hospitals and health systems’ median days of cash on hand hit a 10-year low in 2023, falling below 200 days for the first time in a decade, according to a report from S&P Global Ratings.
• Cash flow did not meaningfully improve from 2022 to 2023, the report said. However, operating expenses grew only modestly at 5%, following a steep 17% growth rate in 2022.
• While the sector is making incremental progress toward financial recovery, performance metrics are still below providers’ financial targets. The authors also noted a growing gap between the sector’s top performers and weaker providers.

Dive Insight:

Nonprofit providers have reported heightened expenses since 2020, due in part to staffing shortages and inflationary pressures.

For the past several years, analysts have attempted to forecast if and when nonprofits’ operating margins would return to pre-pandemic levels.

Nonprofit hospitals’ cash on hand — the funds immediately available to finance daily operations — is one indicator of financial health. Low cash on hand can impact providers’ ability to pay vendors, be ready in case of emergencies or invest in new capital expenditures.

Nonprofits’ cash on hand declined in 2023 due to rising expenses and a limited strengthening of reserves, according to the report.

Median days of cash on hand varied widely across health systems, with a 160-day difference between the highest and lowest performing health systems. Low performing systems were most likely to report a decline in liquidity.

Despite pressure on liquidity, health systems increased their capital spending last year. Alongside that spending, many have taken on new debt, S&P reported.

The combination of new debt and diminished cash reserves could lead to some negative ratings adjustments in the back half of 2024 and beyond, the authors warned. 

Expense growth also eased in 2023, according to the report. However, recovery was bifurcated between the industry’s leading and lowest performers.

Top performers reported median operating margins of 2.5% while the lower half of performers reported median operating margins of -2.7%.

Still even the best performers faced difficulties. Almost no organizations reported cash flow at pre-pandemic levels.

“Although performance ratios didn’t weaken further from 2022, the lack of any meaningful improvement closer to historical levels highlights the ongoing sector challenges and underscores our view that improvement of those ratios will likely continue to take time and those performance ratios could remain lower for the next several years,” the report noted.

While organizations recover, the gap between the best performers and weakest performers is likely to be more pronounced, the report said. Organizations with more financial cushion, for example, may be better situated to make operational changes to improve cash flow or reinvest resources.