When faced with uncertainty or the prospect of loss, organizations with adequate savings can plan the best path forward, knowing that a deficit won’t put them out of business.
Photo courtesy of Alonzo King LINES Ballet, San Francisco, CA. Photo by RJ Muna. Photo courtesy of Alonzo King LINES Ballet, San Francisco, CA. Photo by RJ Muna.
By Rebecca Thomas of Rebecca Thomas & Associates and Dr. Zannie Voss of SMU DataArts
At the end of 2019, the majority of cultural organizations hovered at precariously low levels of working capital with only about one and a half months of ready access to flexible cash. Faced with what we now know to be a year plus of uncertainty, the adequacy of working capital became critical to survival.
This report offers insight into the financial health of nonprofit cultural organizations prior to the pandemic, with an emphasis on organizations that primarily serve BIPOC communities. We also share key recommendations for organizations and grantmakers to consider as we pave a path for stabilizing and restoring the sector post-pandemic.
Prior to the COVID-19 pandemic, the U.S. economy was in a record-long period of expansion, lasting from June 2009 to February 2020. Household incomes and real gross domestic product grew during a period of record-low interest rates and low unemployment. In the midst of this Goldilocks economy, we shared a sobering analysis of the financial health of the arts and culture sector. Our report, Five Steps to Healthier Working Capital, showed that in 2016, most organizations operated with minimal liquidity and were ill-prepared to manage risk, whether inside or outside their organizations.
Fast forward to the end of 2019, right before the onset of the COVID-19 pandemic. The adequacy of working capital became critical. With it, organizations could take steps to plan and reposition. Without it, organizations would be poorly prepared to weather unprecedented declines in audience and income.
In this context, SMU DataArts refreshed its analysis, which paved the way for us to focus on these questions:
SMU DataArts’ new research shows that working capital in 2019 hovered at precariously low levels for the majority of cultural organizations, just as it did in 2016. During this period, most organizations ended their fiscal years near the breakeven point and did not achieve surpluses. Their expense growth slightly outpaced their growth in operating revenue, so they had nothing to squirrel away. Moreover, while working capital did rise for some, 47% of organizations had fewer months of working capital in 2019 than they did in 2016, and for many others, working capital was relatively unchanged.
These findings are stark as we consider the forced closures and exceptional reductions in staff and artist employment that resulted from COVID-19-challenges that still persist as of the time of writing this report. While many grantmakers and donors rose to the call to provide relief funds to cultural organizations, their support can only be a temporary stopgap. Most arts groups will need more short-term liquidity and other flexible capital than they have now to survive, recover and rebuild.
In this paper, we share findings and observations about the working capital levels of arts and cultural organizations, with particular emphasis on BIPOC-serving organizations. We offer suggestions for grantmakers as they invest in the recovery and rebuilding efforts of their grantees. As cultural organizations adapt for an uncertain future, we recommend they undertake immediate planning to assess short-term liquidity needs and identify strategies for stabilizing and restoring healthier working capital post-pandemic.