Financial Surplus

A lesson may emerge from the Covid-19 crisis. That lesson is the importance of generating a financial surplus. Doing so will enable two outcomes. The first being to enable ongoing investment in your artistic program. The second being to enable your organisation to continue during bad times.

While some nonprofit organisations have been allowed to continue to operate as essential services during the current crisis, the arts and sports sectors were forced to close. Unlike the sporting sector, the arts sector will reopen later and require greater resources to rebuild.

Arts organistions have no control over pandemics and only limited influence over Government policy. They do have control over how they generate revenue and spend money. They also have control over the amount of their financial surplus.

Let’s put to rest a persistent myth about the nonprofit sector. Nonprofit doesn’t mean you cannot make a profit. It means you cannot distribute those profits to individuals. There is nothing to prevent any nonprofit organisation from generating any level of financial surplus they desire. Just look at the religous sector, the AFL and many national charities.

One thing that must change following a return to work. Arts organisations across the country should examine their policies on revenue, cost control, financial surplus and investment. Those having the conversation will be most likely to survive the next downturn.

Arts organisations dependent upon Government funding it will have limited ability to generate a financial surplus. It can be done. Both strategic financial management and effective governance are important.

A percentage of Government funding can be allocated to administration costs. It is important the cost of administration is less than the percentage available. If the cost of administration rises then other forms of funding must be secured. This may be from commercial income, philanthropic funding or donor funds.

Government funding to arts organisations has been falling for the past decade. There is no indication this will change, regardless of which party controls Treasury. Many arts organisations are choosing to be reliant upon a diminishing source of revenue, while not generating any financial surplus.

Arts organisations should recognise they are a business. Any business that fails to generate sufficient revenue to cover costs and generate a financial surplus will eventually go out of business. Boards and Committees should make strategic business decisions and be active in overseeing financial risk. Management teams should have experience to manage something that is both a business and an arts organisation.

A business approach is not at the expense of the artistic program. They compliment each other. First and foremost, arts organisations must present an artistic program that is innovative, that people want to see. This is their product, this is what they sell. Any financial surplus can also be re-invested in the artistic program.

Those arts organisations with a social agenda, seeking to deliver social impact into the community, also need to generate a financial surplus. They must re-invest in their artistic program. Reliance upon a single source, or a dominant source of revenue is great during the good times. It can become poor strategy when times are bad.

The solution lies in how your organisation develops and nurtures its family of supporters. These are the funders, donors, volunteers, board members, customers and influencers who love your product – your artistic program – and take it upon themselves to talk about you, spend money on you and encourage others to spend money.

Think of this way. You invest in your family of supporters during the good times. They support you because they want to. When the bad times arrive – and they always do – the financial surplus you have squirralled away is used to keep artists and staff in their jobs. You congratulate your family of supporters for enabling this to happen. They feel good about their contribution to the social outcome. They will remain supportative of your organisation.

Start with financial management. Budget for a financial surplus. Do what needs to be done to achieve this. The Board should ask the question at every meeting.

Having set the goal of a financial surplus, put in place an artistic program to achieve this – along with any commercial income activities. Hold the CEO and Artistic Director responsible for implementing actions that will deliver the surplus.

Building a financial surplus to help carry your organisation through a rainy day doesn’t occur overnight. It’s an incremental process over many years. The best time to start is today.

John Coxon is founder of art4u.australia, a consulting agency working with arts organisations to help them become viable and sustainable. John has adopted The Cycle as the foundation business model to guide arts organisations. Reach out to John to discuss how he might help you.

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