In an ideal world it would be desirable for artistic risk not to be compromised by financial risk, say Rick Bond and Stephen Aldridge.
Many arts organisations aspire to generate a reputation for artistic vibrancy, adventure and exploration and funding frequently encourages such an approach. As many good programmers will have intoned ?It is too risky to play safe.? But adventurous artistic policies, especially those invoked in order to secure funding, can be dangerous if they ignore an organisation?s existing financial and statistical trends.
Sustaining such strategies therefore depends upon more than fertile minds, but upon the existence of effective management systems, of which accurate financial forecasting is a key element. Financial management should not be viewed as a system that fetters creative intent, resulting in the limiting of its role to necessary book-keeping and accountability procedures. Instead, it should be perceived as a tool to aid accurate planning.
How many valid cultural initiatives have been undermined by ?over optimism?? In many cases the evidence for income or expenditure already exist within the organisation?s financial history. Knowing how to identify and interpret this evidence can therefore pay huge dividends. Plans can be prepared that are supported by existing trends, or on variations based on feasible explanations.
The ?science? of measuring financial trends is nothing new. In the corporate world there are long and well-established measuring tools which have been used to evaluate the financial health and future prospects of an organisation. These tools were designed to serve organisations whose principal aims are profitability and who provide opportunities for investors. The underlying principles of financial measurement still hold true for the arts, but many need to be adapted to encompass key and specialist features:
? Levels of grants and contributions
? Event programme analysis
? Event and trading income relationships (the spend-per-head)
? The administrative burden
? Restricted and non-restricted funds
? Endowments and donations
? Trustee/board participation
? Risk to tax-free status
Taking these into account, it is possible to create a model that can be used to evaluate the health of an arts organisation and by examining trends, to highlight the extent to which its health is improving or degenerating. For example, expressing the level of reliance upon contributed income compared to ticket sales as a ratio can indicate whether future ticket sales assumptions are sustainable or optimistic, if the trends over a three to five year period are identified.
To be effective, an organisation?s evaluation process should build the picture, analyse the findings, prioritise the findings, devise recommendations and provide an action plan. The system for keeping financial records currently being used by an organisation does not have to be extensive or complex to create an evaluation model. Essentially though, the raw data for the evaluation is obtained from financial accounts and budget forecasts for the previous three to five years, historical statistical information and management information.
An analysis module consists of three components:
? Analytical ratios which measure revenues, expenditure and cash flow.
? An assessment of financial trends over recent history and a comparison against forecasted objectives.
? Measurement of management levels effecting financial stability, e.g. staff turnover, trustees/board involvement, level of internal controls.
One approach is to use 20 different analysis measurements, allocating a rating to the various key financial areas as well as to the organisation as a whole. The ratings can then be compared year on year both within the organisation and with other comparative organisations in the sector. A commentary accompanies each individual financial measurement which interprets the findings, enabling the organisation to formulate an action plan where necessary. At its simplest level it will assist the preparation of the annual budget, but it can also be used to assess the implications of major change, such as capital development or new artistic policies. The model can then be re-run in future years to measure the results of the organisation?s actions ? it is a perpetual management tool.
Rick Bond is Director of the Complete Works, a cultural consultancy and training agency. Stephen Aldridge of Acorn Financial Management is a Financial Associate. t: 01598 710698; e:comworks@dial.pipex.com