Overcoming Arts Groups’ Working Capital Shortages

Connexeo - 06/04/2018

The average community performing arts organization in the United States has less than two months of working capital in its coffers, according to the National Center for Arts Research (NCAR) at Southern Methodist University in Dallas. Challenging scenarios, as these groups have just enough money to get them through their next show.  Maybe.

A sustainable cultural organization has the financial resources to support its mission over the long term,” a just-released paper from the NCAR reports. “It raises and earns enough revenue to cover its full costs each year, and it has adequate flexible cash (or other short-term assets) on hand or readily available.”

Among cultural arts entities, performing arts groups have much less working capital than museums, the NCAR study found. Art museums, for example, averaged 13.4 months of working capital – though that figure is somewhat skewed, since the median level is just 1.5 months; meaning half the museums have less than that amount in working capital.

Performing arts organizations, however, average 1.7 months of liquidity, holding a range of two weeks to four months of capital. Operas, theaters and orchestras averaged less than one month. And the amount of capital has been in decline. Some 55% of cultural organizations had a lower percentage of liquidity relative to expenses in 2016 than they did in 2013.

“We are at a time when the financial health of our arts and culture organizations is at a critical level. While few arts leaders wake up with excitement over working capital management, many lose sleep over it,” said Zannie Voss, director of NCAR. “Healthy working capital gives arts leaders breathing room.”

All is not bleak! Both the NCAR study and a survey of non-profit arts organizations in Massachusetts found that smaller, more community-based arts groups had more working capital on hand than larger organizations. For example, the Massachusetts survey found that large entities had less than three months of cash available in 2014 – the last year of the study – compared to the overall average of 5.8 months. The NCAR study, including all museums in addition to performing arts groups, found small organizations beating large ones, 7.6 months to 4.5.

The reason: Smaller, community-based groups tend to have lower fixed costs and did not use surpluses to expand facilities or make major equipment purchases. The NCAR project found, in fact, that 4% of smaller groups saw fixed assets rise, 44% declines and 52% remained the same. In other words, they conserved cash.

The Massachusetts Cultural Council, which conducted the study in that state, recommended a multi-pronged approach to help correct the liquidity issue, including a needs-assessment program, a grant program and an online clearinghouse for funding opportunities. The latter two have been implemented. Additionally, the council has successfully lobbied the state legislature to add arts funding for the next fiscal year, though the House and Senate must still reconcile a $2 million difference in their figures.

Meanwhile, the NCAR offers several tips to arts organizations that want to improve liquidity:

  • Set savings goals. Money needs to be set aside to ensure timely payment of bills during slow revenue months, meet “rainy-day fund” objectives” and prepare for that once-in-a-lifetime production opportunity that will require a quick infusion of cash.
  • Manage surpluses. Do not be tempted by that large number at the bottom of the balance sheet. Resist the urge to buy that fancy new sound board. You want to set a goal for how much working capital, in months, you want to have after a set period of time, and what that amount will be. Make sure you save enough money to make that goal.
  • Fund-raise for reserves. Check out our previous blog on fund-raising ideas.
  • Make hard and fast rules regarding use of savings, and communicate them so people don’t think the board is hoarding the cash.
  • Spend the right way at the right time. Only you know what that is, but make a plan, and stick to it.

A critical component to smart planning, is establishing accounting, reconciliation, ticketing and registration software solutions.  Organizations will save money and time by improving workflows and automating receivables, payables, ticketing purchases and reconciliation.  Connexeo’s software and payment systems have a complete solution, that allows customized selections to best fit the needs of their clients.

With wise planning, community arts groups can increase the amount of working capital they have and ensure a successful future. 

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