The money dance of source and use

A thriving arts enterprise gives every dollar a job. But not all dollars arrive to work at the same time.

I can’t see the future
I can’t read your mind
Life just moves like clockwork
And I note the time
James G. Morales, Matt Morales, and Sophia James, from “Clockwork”

The personal money management app, You Need a Budget, suggests four rules for a healthy financial life that also happen to be useful for small and mid-sized arts organizations:

• Give every dollar a job – as soon as you have or expect a dollar, don’t let it wander around – assign it a specific task that advances your purpose.

• Embrace your true expenses - in addition to covering daily expenses, remember and include the large, less-frequent payments that constitute the true cost of your work.

• Roll with the punches - no plan survives first contact with reality, so don’t feel guilt or shame when things go sideways, rather regroup, adapt, adjust, and keep moving.

• Age your money - spending today’s dollar on today’s expense leaves you open to stress and vulnerable to surprise, so use the first three rules to build a reserve of “older” dollars to cover current bills.

Weaving throughout all four rules is the challenge not only of money in and money out, but also the timing of money in and money out (aka, “cash flow”). A beautifully balanced annual budget will show revenues that match or exceed expense by the end of the year. But it won’t reveal or resolve the roller coaster of available cash along the way.

This isn’t just a challenge in the nonprofit arts. It’s a central concern in any venture. About 82 percent of small businesses fail because they don’t have cash when they need it. And while a credit-worthy business can kick the can down the road with loans and lines of credit, that’s often just delaying the inevitable while also increasing its cost.

So, financial resilience is not only about giving every dollar a job. It’s about matching particular dollars to particular jobs. Some dollars come in steady, predictable flows. Some come in expected or unexpected bursts. Some are fickle and suggest they’re coming but never actually arrive.

The trick is to learn the rhythm of various kinds of income, and match them to expenses that move in a similar dance – matching the qualities of the source with the nature of the use.

As an example, if you own or rent a building, you have steady and recurring occupancy expenses – mortgage, lease, baseline operating costs. You’ll want to cover those costs with income that is similarly predictable and recurring (endowment income, retail rentals, and the like). If you have seasonal expenses that rise and fall alongside your projects – a production, exhibit, event – you want to match them with income that arrives in similar ways (season subscriptions, pre-sales, project-specific fundraising).

This matching of source and use doesn’t resolve all of your problems. And, as rule three states, you’ll often be wrong about the timing of both income and expense. But the discipline is one of the many ways to manage a complex creative enterprise without running out of cash.

Andrew

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From the ArtsManaged Field Guide

Function of the Week: Accounting
Accounting involves recording, summarizing, analyzing, and reporting financial states and actions.

Framework of the Week: Statement of Financial Position (Balance Sheet)
The Statement of Financial Position, aka the Balance Sheet, reports a company’s assets, liabilities, and net assets at a specific point in time. It offers a “snapshot” of what a company owns, what it owes, and the positive (or negative) difference between the two.