Are Nonprofit Deficits the New Normal?

A report entitled, The 2016 National Arts Index, An Annual Measure of the Vitality of Arts and Culture in the United States: 2002-2013, was recently released by Americans for the Arts. As I read the report I was not surprised but I was disheartened by the financial challenges faced by this sector, especially after reading another earlier report (Oliver Wyman and SeaChange Capital Partners) about the entire nonprofit sector’s need to improve financial risk management procedures and policies.

As I read in the Americans for the Arts study that as of 2013, 42 percent of nonprofit arts organizations (nationally) were running a deficit, I wondered if executives and trustees are accepting this as the norm, working on improving their deficits or have wishful thinking that long running deficits won’t eventually cause failure.

For the arts organization that is simply in the dark about how to manage a deficit, I offer the following: Executives and board members must provide adequate financial and strategic oversight by being good detectives. What questions are appropriate to ask?

1) What caused the deficit? (I. e., overzealous funding expectations, programs continually draining the organization’s cash?)

2) Is the deficit a trend over a few years or an anomaly?

3) Is the deficit due to a timing issue, i.e., delayed reimbursement from contracts or a drop in true revenue/funding?

4) Is your finance group producing transparent, accurate and timely financial reports that can be explained in plain English so that board members can pick up potential signs of instability?

5) Is your auditor reputable and do you have appropriate “checks and balances” in place regarding disbursement and collection of funds?

6) Are you discussing strategic financial issues at board meetings like whether you should be collaborating with partners, improving financial controls or policies, establishing reserves or benchmarking against your peers?

7) Are board members trained in understanding, assessing and managing financial risks?

The fact that many nonprofits face similar challenges in staying afloat by virtue of “cost minus funding” (not getting full reimbursement for costs), makes it even more essential for executives and trustees to be forward thinking in planning their organization’s future.  Taking the necessary steps to assess and manage financial risk can be overwhelming however over time, can secure a viable future.