Guest post by Steven Lawrence, Independent Consultant and Senior Research Affiliate, TCC Group

At some point we have all lived paycheck-to-paycheck, scraping by until the next infusion of cash. It’s stressful, limiting, and often more expensive in the long run. We promise ourselves that next month we’re going to do things differently.

Sadly, many in the arts and cultural sector are running their organizations exactly that way. A few essential facts to consider from Five Steps to Healthier Working Capital, a new whitepaper from Southern Methodist University’s National Center for Arts Research, and the companion interactive resource, Months of Working Capital Index:

• The average arts and cultural organization had five months of “working capital,” meaning if no more money came in, your group could still pay its bills for nearly half a year. More working capital (or “liquidity”) is even better, but that’s not an unreasonable amount.
• However, this reasonable average reflects very high liquidity among a very small number of arts and cultural organizations.
• The reality looks more like operas and orchestras, which average two-to-three weeks of liquidity—the equivalent of having a couple dollars and change in your bank account at any time other than payday.
• And over half of arts and cultural organizations had less working capital in 2016 relative to their expenses than in 2013, despite the continued strengthening of the economy.

Why are so many arts and cultural organizations so illiquid or, more colloquially, lacking “rainy day” funds? According to this research, one major factor is your stage of development: “When organizations grow, often by adding new permanent costs and infrastructure, their financial health frequently suffers.” Organizations with lower overhead and more stable costs are able to take advantage of surpluses to have a healthy amount of working capital on hand.

What does it take to get your organization’s liquidity to a place where you’re not worried about how you’ll pay next month’s bills and can face an unanticipated cost or seize an unexpected opportunity? The National Center for Arts Research has detailed five common sense steps to get your organization the liquidity it needs to have, from setting savings goals as part of long-term planning to building unrestricted liquidity first.

What may be the most invaluable step on their list is to “Plan for—and manage—surpluses.” Rather than save that birthday cash from the folks, we immediately go out for drinks and dinner with friends. In the case of arts and cultural organizations, it may be some not-quite-essential “need” that absorbs the surplus. 

Alternatively, it could be the board or donors who encourage arts leaders to “budget to the zero mark,” so the organization doesn’t appear too flush, thereby “unintentionally [perpetuating] a starvation cycle.” Boards and donors need to be educated that a certain amount of savings ensure the good health of both individuals and organizations.

Developing and honoring a formal plan to save for the unexpected may not be as exciting as staging a new performance or exhibition. But that liquidity will ensure that you can continue to stage those performances and exhibitions next month, next year, and well into the future. 

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Steven Lawrence partners with funders and nonprofits to develop the knowledge they need to strengthen the field and make well-informed decisions. Among his recent clients are Ariadne: European Funders for Social Change and Human Rights, Global Greengrants Fund, Grantmakers in the Arts, Prospera: International Network of Women’s Funds, and United Philanthropy Forum. Previously, Steven served as Director of Research for Foundation Center, which represents the leading source of information about philanthropy worldwide. In his more than 20 years at the Center, Steven led ground-breaking research on philanthropic support for priorities such as human rights, social justice, health policy, education reform, peace and security, and mission investing.