Sunday, June 3, 2012

Sloppy Budgets and Unrealistic Expectations

Good morning.
"And the beat goes on..................."

The Arts Organization Budget Process:
Last week, Diane Ragsdale posted a blog on Feasibility Studies in connection with  Capital Campaigns and questioned whether or not their fallibility constituted a "racket."  Her question - in her own words - was basically this:
"My hunch is that the large majority of feasibility studies conducted are irrationally exuberant and portray campaigns and the expansions that they support as being sustainable when, in fact, the large majority of them are not." 
I think the same observation can be made for a frightening number of arts organization's annual budgets.  I think far too many arts organizations take their previous year's budget, add in some additional expense items they would like to see (and which they doubtless fervently believe are absolutely essential for their continuing sustainability), and then basically project income that will balance the budget - whether or not there is any meaningful basis on which to base their income projections.

These organizations tend to overestimate their income from all sources.  They project additional grant revenue (public or private) that is highly problematic and which is, in many cases, pure speculative wishful thinking; they irrationally overestimate earned income (and for performing arts organizations -  given the past five years of data - such overly optimistic projections in terms of audience development reek of hubris gone wild); and they far too often have pie-in-the-sky projections as to the level of donor support they expect.

The process is often times (especially I would think in smaller and mid-sized organizations in which there is not some institutional review - department by department - that forces justification of both expense and income) very simplistic and even casual.  Much of the process is simply guesswork.  While some organizations are wisely conservative, too many others are sloppy in rushing to embrace what they want to happen as opposed to what is likely to happen.  And I would also guess that many Boards are not as involved as they ought to be in questioning the base assumptions on which such questionable budgets are based; they simply don't dig deep enough and rely too heavily on assurances from the senior leadership.  In times of economic prosperity this process, if not wise, may be passable.  But in current times, the results can be disastrous.

Not all, or even most, arts organizations are guilty of the charges I level herein.  But there are enough organizations that do engage in overly optimistic, and unjustifiable projections of income that I think there is a problem - and I think there is ample evidence over the past five years of organizations that have gotten into deep financial trouble because of the tendency to believe what they wanted to believe without any factual basis on which to base those beliefs.

There are two facets to this problem:  First, too many leaders have virtually no training or background in budget planning.  As a sector, we just 'assume' people know all the intricacies of the process; the steps involved, and the nuances in constructing viable budgets.  We offer little training in the process.  And second,  there are few checks on this lack of a systemic approach to the budgetary process.  Too often neither funders nor donors have any reliable ability to monitor the process and precious little insider awareness and data on which to question what is presented to them.  But to make cash awards and donations without this knowledge has the potential to compromise the intent of the giver.  To what extent do funders or donors vet the budgets of the organizations with which they are involved?  To what extent do they even have the tools to accurately make a determination as to a given organization's realistic appraisal of their financial situation?  Nonprofits do not have to respond in the same way as the private sector to market forces that look at, analyze and insist on some degree of accuracy in projecting income and expenses.  There are no independent financial analysts pouring over nonprofit books and numbers so as to advise clients whether or not to invest in companies; we have no mechanism to look over the shoulder of organizational finances.  And too often, (because of time and financial constraints) funders and donors accept what is presented to them without serious questioning as to the accuracy, reliability and realism of the numbers.

We need some standards and protocols for the whole budgetary process.  Some model that organizations can access and which will help to insure accuracy and accountability; a systemic process that has some degree of verifiable benchmarks that will provide reliability.

I liked Diane's suggestion of some kind of independent community assessment of feasibility studies (financed she suggests by local government) so as to provide a more accurate and realistic calculation of costs, future community support probability, and community impact.  I wonder if there might be a similar option designed to bring some scrutiny to the annual arts organization budget and whether or not such scrutiny might help to establish baseline standards in that budgetary process that would require reasonable justification of projected income.  That result would, I believe,  be good for both the organization and its funders.

Have a great week.

Don't Quit
Barry


2 comments:

  1. I'm sure Diane Ragsdale is correct in her assessment far more often than many of us want to acknowledge. However, to be fair to the arts groups, no funder (public or private) will consider a capital campaign without these feasibility studies. Nor without optimism would any of us stay in this business. Having said that, the "blue sky" budgets, whether capital or operating, are an issue we need to face. In NYC, we briefly had conversations about how to go about establishing our own "best practices" in several areas. Many of us do not feel the commercial standards are fully applicable,and are very uneasy with the "measure everything" approach more and more in evidence, but have not found a way to offer alternatives. And frankly, I don't think funders are likely to offer appropriate alternatives. Their responsibilities are legitimately different from ours as managers of non-profits. I would like to see the internal conversations about best practices continued. Where are our think tanks? (Affordable and local!)

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  2. As someone who daily "works the books" for a local non-profit I have found that both the passionate managers and the volunteer boards are woefully lacking in basic financial understanding. I also note that the profession that oversees public reporting is narrowly focused on rubric, regulation and form. Eyes glaze over during conversations about FASB and tax returns. Managers don't get paid (if at all) for "Gray-sky" budgets and don't have enough street-cred in finance to challenge boards. The reverse is true as well. I agree with Alice that we need best practices forums at local level where the boots are on the ground.

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