Dare to Run A Surplus

Last week I had the privilege to speak about our National Capitalization Project at two very vibrant, national conferences. I was fortunate to present with GIA members Janet Sarbaugh, the Heinz Endowments at Chorus America in San Francisco and Ben Cameron, Doris Duke Charitable Foundation, at TCG in Los Angeles. It is always thrilling for me to be in a room of arts practitioners whose passion is palpable.

The positive response by grantees to our common set of principles re-enforces that this work is relevant and timely. Most questions revolved around surpluses (cash or operating reserves) and candid discussions with funders about the real costs of operations. Our principles include the encouragement of cash reserves that allow organizations the flexibility to cover losses and to take risks.

Traditionally, institutional funders have expected income to equal expenses in project and operating budgets without provision for surplus. Even in instances where funders don’t require this, grantees have come to operate within those unwritten restrictions. Over the years, this has created an expectation that no one really wants to see a profit in a grant request or on a balance sheet. Budgeting for profit (or surplus) gives the illusion that an organization doesn’t need this grant, right? This has encouraged a nonprofit arts sector that spends as much as it makes (or more) with little or no reserves to fend off losses or allow for innovation or risk.

Unfortunately, there are stories from grantees that have been discouraged from growing reserves by funders who believe a reserve means they don’t need the money or that another organization needs it more. There are also stories of funders supporting cash reserves and were later burned by poor management of those reserves. Grantees need to make their argument for surpluses by thoughtfully calculating the need for reserves and giving those funds a defendable purpose. “We have xxxx in reserve in order to allow us to (fill in the blank.)  This gets us away from the 12-month cycle of life or death faced by many arts groups and puts analysis into a longer view of financial health as indicated by the organization’s balance sheet.

One presenter at a session I was in commented, “ I don’t know why you’re talking about surpluses, there won’t be any surpluses.” I disagree with that. If we have realistic budgeting, not taking risks unless we can afford to or without specific funding to do so, every organization can grow a surplus slowly but surely. As funders and grantees, the nonprofit arts sector may need to break its tradition with past operating practices. This might mean “right-sizing” or changing when and how we sell our product or raise our unearned income. It’s a time for innovation and adaptability. Those organizations that have access to liquid assets will have leg up.