Finance

Breaking Even But We’ll Be Broke If Something Breaks

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The National Center for Arts Research (NCAR) released the results of a study last week that, while not the most cheery news to release during the holiday season, is not terribly surprising.

Looking at the data of 4800 arts organizations, they found that it is becoming increasingly difficult for arts groups to meet expenses. They based these assertions on an evaluation of three data measures: unrestricted surplus before depreciation, operating surplus before depreciation and operating surplus after depreciation

Looking at unrestricted surplus (before depreciation), the average organization saw an unrestricted surplus of 2.1% of expenses in 2016. In the same year, overall operating bottom line (before depreciation) was 0.4% of expenses—virtually break-even. However, surpluses fell to a negative 4.2% when factoring in depreciation, meaning that the average organization is not reserving sufficient funds to repair and replace their fixed assets, which can lead to future challenges, particularly for organizations with high levels of fixed assets.

Somewhat surprising, smaller organization were doing better than larger ones when the three measures were applied.

  • Smaller-budget organizations, with lower fixed assets and less fixed costs, demonstrate the highest surpluses by all measures, continuing a four-year upward trend. Conversely, larger organizations tend to end the year with deficits, continuing a four-year negative trend.
  • Across all sectors, small organizations buck the overall sector trend—i.e. even in sectors where bottom lines trended downward, the smaller-budget organizations within the sector actually grew, sometimes by over 50%.

However, it should be noted that these three criteria aren’t necessarily the only ones that matter in organizational financial health. NCAR’s next step is to:

…take a look at working capital and access to available cash. It may turn out that organizations with high fixed costs and fixed assets also have sufficiently high levels of cash reserves to cover annual shortfalls and future asset repair and replacement. If not, organizations might consider how they can become more nimble if a break-even budget is a goal.

It is worth looking closely at the study data and methodology to get a better sense of what this all means.

For example, when deciding what budget size constituted a large, medium or small organization, they used different numbers for each artistic discipline. A $2 million budget makes a large theater or dance company, but a small art museum and a very medium sized opera or performing arts center.

Their notes on trends in the Opera sector say that one organization heavily skewed the results for the whole sector and that if left out, there would be a more positive trend. There are similar notes in other sections, especially breakdown by geography where nearly every metro region had an outlier skewing the data.

The other area of the report that was interesting was their Driving Forces section which left me asking “Why Is That…?”

Total Unrestricted Revenue Drivers

  • Having more arts education organizations, music organizations, and opera companies in a community tends to raise the unrestricted revenue tide for all organizations in these sectors in a market, while having more performing arts centers tends to lower the unrestricted revenue for all organizations in this sector.
  • As the level of individual philanthropy in the market increases, unrestricted revenue goes down.  The fact that there is more giving in a market does not necessarily mean that it is being directed to arts and cultural organizations.  Unrestricted revenue also tends to be lower in more densely populated communities and those where with proportionally more Asian Americans.

Operating Revenue Drivers

  • Operating revenue tends to be higher for organizations that target young adults or African Americans, and with higher levels of local and state funding.
  • More public broadcast activity in a market tends to drive down arts and cultural organizations’ operating revenue.

I am making a broad assumption that the observation about public broadcast activity is a result of competition for donated revenue. What I wondered was if there was a benefit to underwriting sponsorship on public broadcasting that helps offset that effect by providing additional earned revenue. Or is there no sense that one should support the activities of cultural organizations that support public broadcasting?

What I wondered about the observation regarding unrestricted revenue tending to be lower in densely populated areas was if this meant people in densely populated areas placed greater restrictions on the way funds were used or if they simply gave less. In the context of the sentence that precedes it, the answer would seem to be that people give less, but that doesn’t necessarily need to be the case.

It would be interesting to know if people in less densely populated areas placed fewer restrictions on their donations, perhaps implying a higher level of trust in the organization or a confidence in their ability to evaluate the effectiveness of the organization.

Scratching An Itch

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There is a story I first saw in Non-Profit Quarterly that has been bothering me for a couple weeks. San Diego based arts organization ARTS (A Reason To Survive) is apparently in danger of closing after it’s founder left and replacement subsequently quit after four months.

While this is unfortunate and regrettably not as uncommon a story as we would like, that isn’t what bothered me. What has been something of a low level irritation since I first read the article was a quote from the founder, Matt D’Arrigo, in the original article about the financial difficulties.

“It’s the classic tale of a founder transition,” said D’Arrigo, who’s back at ARTS as a part-time consultant until the nonprofit is on stabler ground.

While he would certainly be in a position to know best since he is there on the ground and there may be elements to the story that remain unreported, what made me think this wasn’t the real problem was something the woman who replaced him said.

…Remmell said that even after she got a sizable grant to turn the organization around, she recommended the “indefinite suspension of all operations and an organized closure” because of a lack of immediate general operating funds. In an interview, she said that the grant and other money the organization had in the bank was earmarked for specific programs and infrastructure and couldn’t be used on other costs to keep ARTS going.

D’Arrigo acknowledged that Remmell walked into a difficult situation.

“We never had a huge financial cushion,” D’Arrigo said. “Part of my burnout was that I was constantly on a hamster wheel of raising money. My job was constantly keeping it together … that’s one of the reasons I left. And it wasn’t as strong as was needed in order to successfully do a founder transition.”

When I read that, I immediately thought that the real problem was that so much of their funding had restrictions associated with it and there wasn’t much flexibility to use the money for general operations. Despite all the success the organization had realized, including an Oscar winning documentary about one of the homeless teens they helped, they couldn’t find anyone willing to provide unrestricted funding.

Once my initial indignation about the non-profit funding environment passed, I recognized that the problem might also be rooted in a failure to diversify their funding sources. Looking at their most recent 990, their earned revenue was about 18% of their budget with the rest in grants and donations. If the founder was feeling burnt out by the constant need to fund raise, he may not have had the opportunity to identify sources that would provide unrestricted funding or develop programs that could generate additional earned revenue.

In any case, I don’t think this is a case of founder transition at all since it doesn’t appear any of the challenges facing the organization emerged after his departure. There are probably lessons in here about not letting your ambition outstrip your capacity to generate revenue.

The fact the organization wasn’t moderating their ambition might be cause to closely monitor how funds were being deployed. However, the idea that their funders and donors didn’t might not have trusted them enough, despite their successes to loosen restrictions on how money was used, sticks in my craw.

Increased Funding Options For Artists Nationwide Via Springboard For The Arts

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If you hadn’t seen the press release floating around social media, Springboard for the Arts announced that they partnered with the microlending platform Kiva to provide artists a loan of up to $25,000 for 36 months at 0% interest.

Springboard executive director Laura Zabel probably laid out the best rationale for pursuing a loan versus a grant:

“Grants are great, but when you apply for a grant or fellowship, you’re putting that timeline and power and agency in someone else’s hands, to decide if you get that money,” says Laura Zabel, Springboard’s executive director. “At Springboard, we like platforms or mechanisms that put the power back in the hands of the artist. It’s a much more active way that you can pursue building your business.”

Since many of you may know that many of Springboard’s activities are focused in Minnesota, I should emphasize that this program is available to any artist anywhere in the U.S.

It probably also should be noted that this is only one of a few microloan programs for artists and it appears to be the only one that isn’t limited by geography or discipline. If nothing else, Springboard is breaking new ground by offering alternative funding options to artists.

According to the FAQ about the program, as a Kiva Trustee, Springboard for the Arts endorsement means they can “provide matching funds to help artists reach their fundraising goals on Kiva’s platform and a wide network of business support to help artists build and expand their businesses.”

The way Kiva funding is generally set up, the artist needs to come up with 20% of the funding and the Kiva community covers the other 80%, thereby putting less of a burden on an artist’s family and friends. It appears that Springboard will match what an artist raises with a loan as well, providing access to a larger pool of money.

Springboard has a whole curriculum of business skills for artists, consultations and other resources to help support those looking to develop and execute a business plan, regardless of whether they are participating in the loan program.

Since you have to attach a business and a repayment plan to the Kiva loan application, those education and planning materials may be a good place to start for people.

If Your 990 Were Being Interviewed, What Would It Say?

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If you are gearing up for Giving Tuesday and getting all sorts of great promotional materials out in circulation, you may want to consider what potential donors might see when they start to investigate your organization to see if you are worthy.

I had a post that appeared on ArtsHacker today based on a helpful Non-Profit Quarterly article that charts out what sort of information is communicated in each section of your 990 filing.  Obviously, there is nothing you can do between now and Giving Tuesday to change the impression people infer from your 990 filing. Presumably your solicitation strategy extends beyond the next couple weeks meaning there is still an opportunity to affect the information people receive in the future.

The ArtsHacker post that appeared today also drew on some other pieces I wrote. One about the potential for lawsuits by beneficiaries, marginalized board members, donors who use the increasingly easy access to 990 filings as the basis for a claim.  Another dealt with the IRS’ increased scrutiny on good governance and whether an 990 indicated appropriate policies were in place.

As I also point out the 990 doesn’t need to be a major source of worry. The form provides a section for supplementary materials.

“… where you can attach additional information you think is pertinent. This may be a discussion of changes in operational and philosophical direction that resulted in an atypical shift in your finances. This is also an opportunity to mention any points of pride or information of interest to make a case for your worthiness to those who may be perusing your 990 filing to learn more about your organization.