Two sand traps of the 'red ink' business
Creative and connected work can depend on what's in your wallet.
“As the golden rule of business says: don’t run out of money. Or else.”
—Jim Schleckser, Inc. (2017)
My consultant colleague Adrian Ellis often reminds his clients that nonprofit arts organizations are “red ink” businesses, “costing more to produce and present than can be earned through the sources of income most directly available to them” (Casas and Ellis 2024). That’s the reason to be a nonprofit – opening avenues to contributed revenue, capital, volunteer labor, and other subsidies that aren’t available to commercial firms.
But those avenues are scattered with sand traps that can slow your progress or sap your strength. Among the most pervasive are uneven cash flows and anemic balance sheets. An effective arts manager will be ready to navigate both.
Cash flow describes the movement of cash (or cash-equivalents) in and out of a company – not receivables or payables, but actual, spendable currency. It’s a challenge for any business to maintain cash-on-hand when revenue and expense aren’t perfectly synchronized (during periods of growth, as one example). But for nonprofits, cash flow can be an endlessly shifting enigma.
Money needs to be spent to build out an event or exhibit long before ticket or gate fees flow. Gifts and grants arrive in their own time, if at all. Buildings and equipment lock economic value into durable assets, which both eat cash and cannot be easily converted back to cash once committed.
Which all shapes a related but separate sand trap of a weakened and withering balance sheet – the inventory of economic value an organization owns and owes. Arts organizations can become “house poor” with durable assets but no cash to animate them. They can become risk averse without a reserve to soften surprising blows. They can appear to be solvent on an annual report, but miss payroll if the roller coaster is underground when payroll is due.
That’s why a thoughtful arts manager needs a full box of tools to anticipate, mediate, and mitigate negative cash and a weakening balance sheet. That tool box can include loans or lines of credit (which require special care for a red-ink business, see Propel Nonprofits for guidance). It can include dynamic and proactive attention to your business model. It can include a creative choreography of cash to ensure flows in and out are balanced. It can include rigorous and clear-eyed planning around growing programs or facilities.
Beyond the tools, the work demands craftspeople with capable hands and a keen eye for structure and flow. You’re running a red ink business. It’s essential that you mind the tides.
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: Core Mission Support
Core Mission Support redefines "overhead" expenses as essential for nonprofit success, highlighting that strong finance, HR, and governance are crucial for achieving mission goals. This view argues that overhead is not a distraction but a necessary foundation for impactful programs and services.
Photo by Giorgio Trovato on Unsplash
Sources
Casas, Catalina, and Adrian Ellis. 2024. “Financial Support in the U.S. vs the U.K.: Key Distinctions.” October.
Ellis, Adrian. 2016. “Expanded Horizons: Looking Beyond Building Projects.” The Art Newspaper, April.
Schleckser, Jim. 2017. “Why the Golden Rule of Business Is Don’t Run Out of Money.” Inc, March 29.