The Three Ways to Evaluate the Financial Bottom Line

1. Unrestricted Surplus (before depreciation)

The average organization saw an unrestricted surplus equal to 6.9% of expenses in 2019 (a $195,073 surplus on a $2.81 million average budget). The positive figure means that average total unrestricted revenue exceeded average total expenses (before depreciation).

2. Operating Surplus (before depreciation)

Bottom line can also be calculated by only taking operating revenue into account. In 2019, the average organization had an operating deficit before depreciation equal to -0.2% of total expenses – virtually break-even (a $5,904 deficit on a $2.81 million average budget).

3. Operating Surplus (after depreciation)

A third view of an organization’s bottom line includes depreciation, a non-cash expense that reflects the annual loss in value of fixed assets. Including depreciation, the average organization had an operating deficit equal to 5.2% of expenses (a deficit of $148,861 on a $2.88 million average budget).  Depreciation is a non-cash expense, so it doesn't affect cash flow. The negative figure means that the average organization is not currently bringing in surplus funds that can be set aside for replacement of fixed assets as they wear out.

Theatre and Community Organizations Averaged a Positive Bottom Line in 2019

2019 Key Findings, by Sector

• Community and Theater organizations operate on surpluses when analyzed along with all three measurements, with the Community sector coming out on top after accounting for depreciation. Performing Arts Centers (PACs) had the highest unrestricted surplus, and Other Museums had the highest operating surplus before depreciation.

• The Community and Theater sectors averaged a positive bottom line in 2019, regardless of the measurement used.

• The Symphony Orchestra sector ended 2019 with a negative bottom line by all three measurements. These organizations experienced the lowest average bottom line when measured as unrestricted surplus. This, combined with lower working capital than the overall average (1.5 months), points to the idea that these organizations need to tighten spending in order to avoid future deficits that negatively impact their bottom line.

• Art Museums – the biggest budget sector – had the most severe operating deficits. However, when paired with the fact that these organizations operated on nearly 11 months of working capital in 2019, the deficits will likely smooth out over time based how much cash is available for borrowing.

• Art Museums also averaged the highest depreciation expense relative to budget, followed by PACs. These sectors tend to have high fixed assets, such as buildings. PACs ended the year with a surplus when depreciation is left out of the calculations. By contrast, the Music sector had the lowest average depreciation expense relative to budget. It also has the lowest average budget size.

The Larger the Organization, the More Likely to End the Year with an Operating Deficit

2019 Key Findings, by Size

• The larger the organization, the more likely it was to end the year with an operating deficit.

• Smaller organizations demonstrate the highest bottom line by any measurement. They also have the smallest difference between operating surplus before and after depreciation, and the lowest gap between unrestricted and operating surplus before depreciation. This simply means that small organizations tend to have fewer fixed assets and less unrestricted revenue not related to delivery of regular activities and programs.

• Medium and Large organizations have larger gaps between unrestricted surplus and operating surplus before depreciation, indicating that they bring in proportionally more revenue unrelated to operations than small organizations.

• All three sizes display the expected pattern of unrestricted surplus being the most favorable measurement, followed by operating surplus before depreciation, and finally operating surplus taking depreciation into account.

By Geography

• Large and Very Small markets recorded the highest bottom lines among all nine clusters before depreciation was taken into account. Very Small markets had expenses that were about 30% lower than expenses in Small markets. By market size, only large and very small markets reported a net surplus across all bottom line measures.

• The Washington D.C. and Los Angeles markets saw the greatest unrestricted surplus out of all of the independent clusters; they also reported a net surplus across all three bottom line measures.

• New York organizations averaged the lowest unrestricted surplus, both in absolute dollars and as a percentage relative to expenses.

• Organizations based in San Francisco averaged the lowest operating bottom lines, regardless of whether deprecation is included or not. They demonstrated the greatest percentage discrepancy between unrestricted surplus and operating surplus (both before depreciation), indicating that organizations in this market tended to bring in more non-operating revenue than those in other markets.