Playing the Numbers: Learning the New Rules of Museum Finance

Editor's Notes

• #5: 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
• #6: 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.
• #7: 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.
• #14: 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.