Many arts and culture organisations operate with limited reserves and are reliant on fundraising income to support their charitable activities each year; however, the cost-of-living crisis is also creating increased uncertainty and competition for donations and grants. Sadly, there are already charities who have been forced to cease operating as a result of these challenges.
It is important to take action swiftly at the first signs of financial difficulties, and in this article I set out some of the key areas that trustees and management should consider on a regular basis.
Be alert for early warning signs
Some common early warning signs within the sector are: a loss of or reduction in funding from key funders, an upcoming retirement or change in key management (particularly the CEO, executive or artistic director), a declining pipeline for activity-related or fundraised income and unexpected venue repair and maintenance costs.
Cash flow forecasting
Regular cash flow forecasting is an essential part of your financial management toolkit. Some charities only prepare annual cash flow forecasts which look 12 months ahead to satisfy the requirement to assess the charity’s going concern status when approving the financial statements. It is much better practice to maintain rolling budgets and cash flow forecasts, ideally on a monthly basis, and to forecast further than the next 12 months. Charities who applied for the latest round of ACE funding will have already considered their planned activities and costs until 2026, and this information can be used to help prepare extended budgets and forecasts.
For venue-based charities, forecasting future repairs and maintenance costs and capital expenditure is vital. I recommend to my clients that they project these for at least a five-year period, particularly as these costs are often significant and unavoidable.
Restricted funding
I’ve seen a significant improvement in cash flow forecasting across the sector over the past few years – both as trustees and funders become more aware of their importance, and as financial planning tools become more common in accounting software. However, it remains an issue that many charities do not separately identify restricted funds within their forecasts. Restricted funds are monies that have been donated to the charity to be used for a specific purpose and should only be spent on those activities. Dipping into restricted funds to cover unrestricted activities, even if briefly, is risky and can sometimes go unnoticed if it occurs during the financial year and is resolved by the end of the reporting period.
Using restricted monies for general purposes or for other projects can lead to a breach of trust, so it is important that cash flow forecasts separately identify restricted cash, income and expenditure. Mitigating action can then be taken against any predicted use of restricted cash for unrestricted activities – for example, by organising extended credit terms with suppliers as a means of delaying unrestricted cash outflows.
If your cash flow projections show that you are at risk of not being able to meet your unrestricted liabilities as they fall due in the longer term, but you have available restricted funds, one thing to consider is to approach donors who have given restricted funding and ask whether some or all of the donation can be used towards general purposes.
Trading activities
Another area to critically review is your trading activities, to assess whether these are profitable. For many arts and cultural charities, trading activities (such as a shop or café, or refreshments at performances) are an expected part of your offering; however, it may be that by restructuring these activities you can improve the amount of funds that they contribute to the charity.
A collective responsibility
The ideas above are good practice to adopt even if your charity is not facing financial difficulties at present. Trustees should also always remember that they are jointly responsible for managing the charity, no matter what financial training they have. It is all too common in instances where financial difficulties arise that the board becomes overly reliant on one or two trustees to guide the process, which puts both the charity and the trustees at risk.
Jane Askew is a director and head of arts and culture at haysmacintyre
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