Guest article by Barry Hessenius, cross-posted on Barry's Blog, a service of the Western States Arts Federation (WESTAF)

Earlier this month, the National Center for Arts Research at SMU released a report on Working Capital, which found, not to anyone's real surprise, that a majority of arts organizations have relatively small levels of reserve capital to handle current and unexpected expenses.  Not surprising was the finding that museums had larger working capital reserves than did performing arts organizations.  What was somewhat surprising was the finding that smaller budgeted organizations had larger relative cash reserves than did larger budgeted organizations, due in part to their smaller fixed expenses allowing them to be more nimble.

While the study found an average of five months working capital across the sector, it noted that the majority of organizations had considerably less reserves as the results were skewed by the fact that working capital was concentrated in larger organizations and especially art museums.  Moreover, and perhaps most troubling is that there has been a decline in available working capital for most organizations.  Fifty-five percent of organizations had less working capital relative to expenses in 2016 than in 2013.

"...we found that some museums exerted a particularly dominating influence on working capital. To better reflect the overall museum experience, we looked at the median (i.e., midpoint in the range) level of working capital. Here, a more sobering figure emerged: the median art museum’s 2016 working capital was only 1.5 months, compared to 13.4 months for art museums on average.

Performing arts sectors broadly exhibited a more precarious liquidity position: they held from 2 weeks to 4 months of working capital and collectively averaged just 1.7 months’ worth.  Operas, theatres, and orchestras averaged one month of liquidity or less."

This, despite ongoing efforts across the sector to emphasize the importance of adequate capitalization, including GIA's multi-year effort in the area.  The reasons vary within sub-sectors in the field, and for individual organizations, but cuts to public and private funding, competition for scarce donor dollars, economic uncertainty, and poor planning and management by individual organizations are largely the cause.  Much of this is unavoidable and out of our hands.  But not all of it.

"Overall, NCAR’s research showed that the majority of arts and culture organizations are cash-strapped. Average working capital for performing arts organizations, as well as for half of the museums, is equivalent to fewer than two months of total expenses."

So what?  Living hand to mouth for many arts organizations is the norm, and has been for some time. And many do not see what they can do to fundamentally change that reality.  The expenses won't go away, and if they are to pursue the organization's vision, those expenses are necessary.

But the White Paper accompanying the study suggests some practical and real things arts organizations can actually do to mitigate the downside of inadequate working capital.  Among those suggestions:

1. Face the Challenge. Organizations can't make the situation go away by ignoring it.  It is essential to figure out how much reserve capital you need for times of limited cash flow and for opportunities that arise that require extra cash.  A long term plan is necessary, and then the hard part:  you have to budget to the plan and make reserves the priority, even if that means you need to cut back somewhere else.

"Organizations primarily build working capital through the generation and set aside of surpluses. When arts leaders budget to the zero mark – often because they are encouraged to do so by board members or some funders – they unintentionally perpetuate a starvation cycle. They spend every last dollar of revenue raised or earned, making it impossible to create short- or long-term savings."

2. Fundraising needs to go beyond the traditional budget cycle and include fundraising specifically for cash reserves.

3. The Board must set specific policies governing the use and replenishment of savings, and insist on sticking to those policies.

4. Unrestricted liquidity as a financial planning goal has to always come first.

Funding for the arts will likely continue to demand ever increasing time and human resources to simply stay the course.  Public and private funding for the arts will continue to be challenged by other competing causes, by economic uncertainty and downturns, and by shifting public policy priorities; all of which will be complicated by the arts ability to generate earned income tempered by the public's changing preferences for the way it accesses art and other forms of leisure activity and entertainment.  That reality is all the more reason organization survival will depend on smart money management and self-discipline which includes hard decisions, and continuous effort to generate and manage cash reserves.

Have a good week.

Don't Quit
Barry