The greatest challenge facing arts organisation at present is how to remain viable.
Forced shutdown of businesses where people gather has been impacting upon arts organisations since early March. Exhibitions have been cancelled, shows closed, employees have had there hours reduced or been laid off. Even those few galleries that have chosen to remain open have seen the number of visitors dwindle as Governments have imposed isolation rules.
For those standalone arts organisations, that are not part of a local government body, there is one very important financial calculation to be made. That is the number of weeks or months they can survive without closing or going out of business.
This is the equation –
Cash Burn Rate = The shortfall or surplus of cash that you need to operate the business.
Understanding how long your cash will last provides you with a starting point to deploy financial and business strategies to either help improve your current position or to ensure they can survive an extended period of reduced sales/revenue.
Firstly, identify how much cash you have on hand. This is money in the bank rather than assets that need to be liquidated.
Secondly, identity your combined expenses. Average those expenses per month.
Thirdly, identify monthly cash sales. Average those per month.
Fourthly, deduct the monthly expenses from monthly cash revenue.
The resulting sum is the amount of ‘burn’. This is the amount you need to cover from your cash on hand.
Lastly, divide your cash on hand by the monthly ‘burn’ to identify how many months you can continue to function before you run out of cash on hand.
If your business sends out invoices, you cannot consider an invoice as cash in hand, until the invoice is paid and the money is in your bank.
Cash on hand = $100,000
Monthly cash sales average $20000
Monthly expenses average $30000
The difference between cash sales and expenses is $10000 average per month. Therefore divide cash on hand by the deficit.
$100000 / $10000 = 10 months survival
This means owners and boards have around 6-7 months to identify and implement strategies designed to (a) increase sales, (b) reduce costs, (c) introduce additional equity or (d) a combination of all three.
This information should be considered guidance only. Art4U can work with you and guide you through discussions with your accountant for specific financial advice. Contact John Coxon on email@example.com