Museum Finance Rules
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As museums adjust to ever-changing economic realities it is essential to have a few tricks up your sleeve in regard to understanding and analyzing budgets and finances. How can you recognize the warning signs that your organization may be headed for trouble? What do directors, development professionals, and managers need to know about finance in order to steer clear of danger and maintain a healthy operation? This interactive session addresses these questions with specific tools of the trade. Moderator: Marjorie Schwarzer, Administrative Director, Museum Studies, University of San Francisco Presenters: Dr. Robyn Raschke, Associate Professor of Accounting, University of Nevada, Las Vegas Deborah Frieden, Principal, Deborah Frieden & Associates, Oakland, California
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Museum Finance Rules
- 1. Playing by the Numbers: Learning New Rules of Museum Finance Deborah Frieden Deborah Frieden & Associates Robyn Raschke University of Nevada, Las Vegas Marjorie Schwarzer & Ryan Pinter University of San Francisco
- 2. Pew Trust Findings (2007) 77% of cultural nonprofits: Weak or very weak financial position. 73%: less than 3 months of cash. 81%: inadequate working capital to invest In new ideas and infrastructure. Chronic low cash = unhappy creditors and low flexibility. Goal: break even & avoid a deficit year.
- 3. alance Sheets Marjorie Schwarzer and Ryan Pinter alanced Scorecard Robyn Raschke udgeting for capital campaigns Deborah Frieden
- 4. Know how to read your balance sheet • Balance Sheet – What you have, what you owe, and what you’re worth. • Assets – What you have that has $ value & can be measured. Some are more liquid than others. Some are depreciated over time. • Liabilities – Debts incurred in the process of obtaining assets. • Net assets – What you are worth. Difference between what you have and what you owe. To invest in organization’s health.
- 5. • Recurrent cash crunch (which leads to excess borrowing) • Declining assets-to-liabilities ratio (dipping into reserves) • A major one-time contribution/influx of cash that extends services without guaranteeing long-term financial support or additional revenue. • Excess solvency: assets-to-liabilities ratio > 8.
- 6. Cash is King A healthy organization should have enough liquidity (cash) to cover 90 – 180 days of operating expenses. Divide an organization’s annual operating expenses by 365. Then compute: Cash + other short-term investments Daily cash required
- 7. MUSEUM A EXPENSES FY 2012 1.942 million 365 days FY 2013 1.935 million 365 days
- 8. MUSEUM A EXPENSES FY 2012 1.942 million 365 days = $5,321 per day FY 2013 1.935 million 365 days = $5,301 per day
- 9. Museum A Balance Sheet FY 2012 Cash 282,762 Savings 0 Prepaid Expenses 0 FY 2013 Cash 178,382 Savings 0 Prepaid Expenses 37,646
- 10. Museum A Balance Sheet FY 2012 Cash 282,762 Savings 0 Prepaid Expenses 0 TOTAL 282,762 FY 2013 Cash 178,382 Savings 0 Prepaid Expenses 37,646 TOTAL 182,148
- 11. Museum A Balance Sheet FY 2012 Cash 282,762 Savings 0 Prepaid Expenses 0 TOTAL 282,762 5,321 FY 2013 Cash 178,382 Savings 0 Prepaid Expenses 37,646 TOTAL 182,148 5,301
- 12. Museum A Balance Sheet FY 2012 Cash 282,762 Savings 0 Prepaid Expenses 0 TOTAL 282,762 5,321 = 53 days cash on hand FY 2013 Cash 178,382 Savings 0 Prepaid Expenses 37,646 TOTAL 182,148 5,301 = 34 days cash on hand
- 13. Grow Working Capital Ratio analysis is a quick rule of thumb to help you assess your capital position. A healthy organization will have at least $2 in current (liquid) assets for every $1 owed, but no more than $9: $1. • Current Ratio: Current Assets Current Liabilities
- 14. Museum A Balance Sheet FY 2012 Cash 282,762 Savings 0 Accts. Receivable 76,000 Inventory 30,237 Prepaid Expenses 0 FY 2013 Cash 178,382 Savings 0 Accounts Receivable 304,336 Inventory 23,199 Prepaid Expenses 37,646
- 15. Museum A Balance Sheet FY 2012 Current Assets 389,099 FY 2013 Current Assets 543,563
- 16. Museum A Balance Sheet FY 2012 Current Assets 389,099 Current Liabilities 118,679 FY 2013 Current Assets 543,563 Current Liabilities 95,425
- 17. Museum A Balance Sheet FY 2012 Current Assets 389,099 Current Liabilities 118,679 = 3.27 FY 2013 Current Assets 543,563 Current Liabilities 95,425 = 5.69
- 18. Thank you.
- 19. Playing By The Numbers October 6, 2014 Planning A Capital Project © Deborah Frieden Deborah Frieden & Associates And Getting It Right From The Start deborah.frieden@gmail.com www.deborahfrieden.com
- 20. The Steps to A Successful Project Are: 1. Create Clear Goals & Objectives 2. Admit What You Don’t Know and Get Help As Early As Possible 3. Create Clear Decision-Making Process 4. Develop a Concept Budget As Early As Possible and Get Stakeholder Buy-In 5. Plan Resources To Address Both $S & People
- 21. Answering the 5 Big Questions Why? How? What? When? Who? $ $ $ $ $
- 22. Why? • Will the Project Further the Mission? • How Will We Better Serve Our Community? • What Are Our Key Goals & Objectives for the Future? Do We Have A Vision? • Can We Clearly Articulate Our Goals & Vision? • How Will A Capital Project Secure the Future of the Institution?
- 23. Bart’s Adventure – Education Program Space at Birmingham Museum of Art Capital Projects From Small to Large de Young Museum
- 24. How? • How Will We Define the Project? • How Will We Implement the Planning? • What Kinds of Expertise Will Be Required? • What Are The Resources We Can Bring? • How Will Funds Be Raised? Have We Got a Fundraising Plan?
- 25. It’s About the People and the Process Program Planning with Senior Staff Kathleen Bartels, Director of the Vancouver Art Gallery (pictured). Museum of Craft and Design Planning Session
- 26. What • Program Space Needs – Quantitative Functional Use Descriptions – Narrative & Qualitative Technical • Benchmarking – Context for Decisions
- 28. When • Establishing Overarching Time Based Needs Fundraising Institutional Direction & Vision Capacity of Institution & Resources Outside Controls or Influence • Building a Schedule From Milestones • Creating a Cash Flow Statement Linking Funding Sources to Outflows Pledge Timeline
- 29. Establish A Conceptual Budget As Early As Possible A Concept Budget Is Used for: • Establishing Fundraising Budget & Plan • Hiring Architect & Engineering Team - % of Hard Costs for Fees • Establishing a Design-To-Budget
- 30. Hard Costs = General Construction Costs Are Built on Program: Space, Use & Technical Needs Step 1 – Create a Conceptual Budget for Purposes of Initial Planning • Use Benchmarking to Understand the Range You’re In • Use Your Space Program as a Basis • Hire an Estimator • Use Benchmarking as Reality Check • Use the SNIFF Test
- 31. Benchmarking Size of Comparable Spaces Percent of Total Space to Specific Dedicated Spaces Project Costs With Escalations Cautions with Benchmarking Reporting Differences - No Apples to Apples! Dramatic Economic Changes Projects Scope Differences Sources of Data
- 32. $s per 2013 Today's Cost at Opening S.F. 2.7% per Yr. $s Museum 1 California Hard Costs $ 143,000,000 $ 488 $195,675,743 $668 Total costs $ 202,000,000 $ 689 $276,409,092 $943 Museum 2 Southeast Hard costs $ 80,600,000 $ 455 $108,660,063 $614 Total costs $ 124,000,000 $ 701 $159,901,792 $903 Museum 3 Midwest Hard costs $ 18,850,000 $ 661 $20,386,275 $715 Total Costs $ 29,000,000 $ 1,018 $30,450,000 $1,068 Museum 4 Southwest Hard costs $ 120,250,000 $ 668 $130,050,375 $723 Total Costs $ 185,000,000 $ 1,028 $200,077,500 $1,112 Museum 5 New York,N.Y. Hard costs $ 50,000,000 $ 852 $60,236,576 $949 Museum 6 Northeast Hard Costs $ 26,200,000 $ 762 $27,510,000 $800 Museum 7 Midwest Hard costs $ 27,200,000 $ 800 $28,560,000 $840 Museum 8 South Hard costs $ 19,500,000 $ 696 $25,145,846 $855
- 33. Education Program Space Benchmarking Education and Program Areas by Museum Gross Building Area Education & Programs % Programs to Total Museum 1 311,389 21,400 7% Museum 2 589,000 20,800 4% Museum 3 630,000 67,600 11% Museum 4 163,500 5,000 3% Museum 5 234,000 6,875 3% Museum 6 292,000 17,981 6%
- 34. Building a Budget Hard Costs = General Construction Soft Costs = • Fees – A&E, Specialty Consultants, Project Management, Legal, City Agencies, etc. • FF&E – Furniture, Fixtures & Equipment • Relocation Costs • Public Relations & Marketing • Operational Ramp Up • Operational Deficit Support • Financing • Fundraising • Events
- 35. Renovation of Existing Buildings Birmingham Museum of Art de Young Very Different Than Building New
- 36. Step 2 – Use the Conceptual Budget to Kick-Start Serious Planning – Move from Gross Estimates to More Specific Budgets • The “Who” Internal to Organization is Established • Address the “Who” External to Organization Hire Architect and Consultants Address P.R. & Marketing along with Fundraising • Continue Building Soft-Cost Budget • Use Benchmarking as Reality Check • Use the SNIFF Test
- 37. Who • Board Leadership Establishing Committees & Terms of Reference Fundraising and/or Capital Campaign • Staff Leadership PM Liaison with Whom? Decision Making Structure Resource Allocation • Selection and Contracting of Expertise Architects & Engineering Economic Advisors Legal Counsel Campaign & Political Consultants
- 38. People Going Through A Process with Shared Goals Full Cost Benefit Reduced Risk Investment Security Institutional Sustainability
- 39. A Balanced View to Strategic Performance Measurement Robyn L. Raschke, PhD., CPA Lee Business School-Accounting
- 40. Think about it… Would you be able to drive from home to work ONLY by using the rear view mirror? Source:http://www.qcidirect.com/rearview-mirror-extender.html
- 41. It’s not enough Although important, financial statements measure PAST performance. A Balanced Scorecard (BSC) is a management tool that considers financial and non-financial measures by linking strategy to measurable goals
- 42. It begins with your MISSION What is your organization’s vision of the future? Why does it exist? It should focus on the OUTCOMES the organization wishes to achieve (end) and not the programs (means)
- 43. 4 parts to the BSC The Mission Financial/Governance Perspective Internal Perspective Intellectual Perspective Customer/Public Perspective If we succeed, how will we look to our financial donors? How do we create value for our customers? Which processes How can we must we excel? learn and improve?
- 44. Financial/Governance Perspective Accountability between the museum and society Objectives & Measures include: Fundraising capability % increase Diversity of sources Fundraising efficiency (fundraising expenses divided by total contributions received) Increase in partnerships/sponsorships Help share cost of exhibits Increase in earned revenues (gift shops/events/café/etc)
- 45. Customer / Public Perspective How do we create value to our community and visitors? Objectives & Measures include: Public engagement Increase in first-time visitors Percent of returning visitors # of schoolchildren that visit Range and variety of programs Visitor satisfaction # of collaborative projects with other institutions
- 46. Internal Perspective Operational effectiveness & human resources Objectives & Measures include: Staff & Volunteer development Employee satisfaction % of budget dedicated to training & development # of curators Internal communications & Information processing
- 47. Intellectual Perspective Stewardship of collections and development of new knowledge Objectives & Measures include: Preserve collections Percent of work displayed Artwork purchased Artwork loaned to other museums Knowledge creation Publishing Research Grants Media coverage on exhibits
- 48. Example: Museum of the American Cocktail “the Museum of the American Cocktail seeks to advance the profession and increase consumer knowledge of mixology while stressing the importance of responsible drinking. MOTAC celebrates and preserves a rich aspect of American culture while providing educational resources for professionals and the public. We also aim to broaden career opportunities in the spirits industry and encourage more participation from women and members of under-represented groups in the field” Source: http://www.cocktailmuseum.org/about/
- 49. Example only (there is no “correct solution”) Perspective Key Goal Measure Financial/Governance sponsorship capability increase in # of sponsors, diversity of sponsorship Customer/Public engagement capability # of public events, # of events to the professional mixologist Internal staff & volunteer recruiting capability quality of staff, employee & volunteer satisfaction Intellectual knowledge creation capability # of publications, # of curated exhibits
- 50. Note: KPI’s are Key Performance Indicators Source: Boston Consulting Group (2011) & A. Zorloni (2012)
- 51. Thank you! Contact information: robyn.raschke@unlv.edu Resources used for this presentation: Kaplan, R.S. (2001). Strategic Performance Measurement and Management in Nonprofit Organizations. Nonprofit Management & Leadership (11:3), pp. 353-370. Zorloni, A. (2012). Designing a strategic framework to assess museum activities. International Journal of Arts Management (14:2), pp.31-47.
Notes de l'éditeur
- There are many ways to look at an organization’s financial situation in order to help with decision-making and clearly, as Dr. Raschke pointed out, Boards need to understand that the financials are only one part of the overall organizational health. This morning, we are going to emphasize two essentials: looking at the balance sheet & minding the cash. Reading the balance sheet (which is also called a Statement of Financial Position) provided by your auditor and reported on your 990 helps you assess trends and take your organization’s temperature. Let me review these concepts which I know most of you are familiar with already. A Balance Sheet essentially captures your assets, liabilities and net assets. Take a look at your handout which is an actual Statement of Financial Position from the 990 of a museum that will go unnamed. Your assets (figures 1 – 16) are what you have that has financial value. Your liabilities (figures 17 – 26) are your debts, what you owe. And your net assets (27 – 33) are what you are worth after the liabilities have been subtracted from the assets. Building your net assets is key to developing your ability to invest in future mission-related growth. Now this list can get very confusing as you drill down into the details. For example: Some assets with value are restricted and cannot be converted into cash. For example, line #14 (intangible assets) is the collection. Line #10 is land, buildings and equipment which is depreciated. Likewise some net assets (#28 and 29) are permanently or temporarily restricted as in an endowment fund. And items like accounts receivable are recorded as a net, factoring in, a net amount of what a company expects to ultimately collect, because some customers are likely not to pay. Knowing what to look for can help you identify some common red flags that your organization’s finances are heading in the wrong direction. ----- Meeting Notes (10/6/14 10:31) ----- A blance sheet, also known as a Statement of
- There are many more red flags that these four, but here are four that we want to emphasize today. 1. Watch for a recurrent cash crunch which means you are borrowing on a line of credit in order to pay your most pressing bills (like payroll). 2. Assess whether your assets are keeping pace with your liabilities so that you are growing as an organization and not dipping into reserves to fund operations; 3. A one-time large infusion of cash for operations is a great thing, but also a red flag if the organization uses it to plug a hole or start a program that it can’t sustain. And finally, in the case of nonprofits, too much money is not a good thing. Watch out for excess solvency, that is that your assets exceed your liabilities by too great a factor. That means that you are hoarding resources to the detriment of your mission. These are the kinds of trends that watchdog organizations like Charity Navigator look for as they rate nonprofits and their use of resources toward the greater good.
- NEXT SLIDE: The first is your cash position. A healthy organization should have enough liquidity (or access to cash) to cover 90 to 180 days of operating expenses, depending on how reliable and regular your cash receipts are. We know that museums’ cash flow is uneven: admissions vary according to the season; collecting on grants – especially government grants – is an uneven process. But here is a general rule of thumb that accounts use. Get out your calculators. Take the annual operating expenses (if you turn your sheet over for Museum A is was 1,942,300 in 2012 and 1,1935,000 in 2013. Divide that number by 365 days. So what was rough daily cash needed per day in 2012? $5321. What was it in 2013? 5301? So this implies that expenses per day went down slightly and if you look at the income, it went up from 2012 to 2013. So we should be okay, right? Well let’s look at the balance sheet to dig more deeply. Turn your sheet back over and look at line #1 (cash) and line #2 (savings) and line #9 (pre-paid expenses). Those are the only relevant assets if you want to see how much cash you have on hand to cover your costs, because the other assets are non-liquid. So for 2012 add: 282,762, zero (since all the funds here are in cash and not in an interest bearing account) and zero (since there are no prepaid expenses). Divide the sum (282,762) by the amount of cash needed per day which was 5321. Uh oh. How many days of cash did Museum A have on average in 2012? 53 days. That’s not good. Let’s see what happened in 2013. Add: 178, 382 + 0 + 37,646 (prepaid expenses): (182,148) and divide by 5301 and we get 34 days of cash. That’s bad. So even though Museum A made more revenue and shrank expenses from 2012 to 2013, their liquidity declined. We can see some clues as to why in the balance sheet, for example in line 4 we can see that their receivables climbed from 76,000 to 304,336. What this might tell us is that raising more money and spending less money is not a foolproof solution to fiscal health. They may also need to look at their internal processes for collecting money owed to them and managing their cash.
- Another quick indicator of that you are growing your working or operating capital so you can invest it into your mission is ratio analysis. A healthy organization should haveat the very least enough assets to cover your liabilities and a growing ratio to show that you are building capital that you can dip into in order to try out new ideas and maintain your facility, signs of a healthy organization. So to calculate this, go back to Museum A’s Balance Sheet. Look at its total assets (line 16) and it seems very healthy. But if we subtract lines 10b, 11, and 15 since those are nonliquid resources like collections, land, stock etc. We really have about 389099 to play with. Now divide the liabilities (line 26) into these current assets. Our asset to liability ratio in 2012 was 3.27 which is fine. Now let’s look at 2013. Again, our current assets did go up, since we have that large accounts receivable line that we can count in. So our assets are 543,563. And our liabilities decreased to 95,425, So our ratio increased to 5.69, meaning that Museum A is growing although its cash position is weak. There are many many more ratios that you can work with and they need to be looked at in conjunction with other factors, but we wanted to give you can idea of how to play around with the numbers. We’ve also given you sheets for a Museum B, which is not in as satisfactory a position as Museum A so you can see another example and play with it yourself. We’ll hang out after this session to help you crunch and analyse the numbers but for now we’ll look at what you can do once you have begun to stabilize your organization so that you grow not only working capital but long term capilal.