Quick quiz: Over the last 3-5 years, has your annual operating budget:
· Stood still?
And, if it’s grown, has it exceeded the standard inflation rate of 3%, or merely kept pace?
Executive directors likely know the answer.
Finance directors always know the answer.
And departmental leaders almost never know the answer.
Yet, the growth (or lack thereof) of your organization’s annual budget is everybody’s business and is a clear signal not only of how healthy your organization has been, but how innovative you can afford to be in the near future.
In our work with clients to bolster the loyalty of their patrons, we here at TRG are becoming obsessed with the answer to this question. Why? It’s a simple number, yet the meaning is not communicated consistently or broadly. Many organizations completely overlook it.
Recently one of our theatre clients told me about investments the company was making in its artistic product, and some big, very cool education initiatives they were undertaking. I said, “Fantastic! Is a funder behind all of this?” This very polite client replied, “Um, no, silly, our focus on patrons is paying off. We’ve grown our annual operating budget 32% over the last five years. We can afford to be cool!”
Wow. Here was the moment we had been working towards! This team’s relentless focus on patron-generated revenue had created luxuries; finally, they had reserves to deal with the rainy days. At last, that pot at the end of the rainbow was here, as evidenced by the growth in the overall annual operating budget.
And, what was truly inspiring is that an angel donor had not created it. The institution had done it—together, focused on optimizing patron revenue.
“Together” is the key word, as the more we integrate our work around patrons, the more profitable (yes, profitable) our organization is. As patrons become more engaged and loyal, their ROI increases and our costs go down. That’s not to say that we shouldn’t also invest in patrons with lower ROI. But, if we’re looking to serve our community and fulfill our mission, growth capital is required.
Consider the analogy: We make room for “cool” in our personal lives: I can’t afford a new backyard deck until I save. I skimp in areas, and perhaps find ways to generate a little extra cash to make the deck a reality. The principal is the same for arts organizations who want to see their cool ideas come to fruition.
Yet, our default is to find a donor, tap our board, or convince a corporation. We look for episodic help when in fact, reliable resources are right in front of us.
What if we had the funds to be cool…every year…without fail? What if we could count on working capital – say 5% or even 7% - annually to invest in ground-breaking new work and progressive initiatives? Wouldn’t THAT be cool? After all, innovation and creativity is what keeps the arts alive and our patrons engaged with us. It’s what the arts are known for.
So, evaluate your ability to innovate:
- What growth or decline have you achieved in your annual budget over the last several years? If there’s growth, how are you pacing against inflation?
- What surplus (or deficit) have you recognized at the end of each fiscal year? What was the cause of that? Really; it’s imperative to understand this, especially if it’s a deficit. We find so many times the answer is that a donor left, the board chair resigned, the corporation went out of business, or something similar. The revenue wasn’t diverse enough to sustain the exit of one large giver.
- With any surplus, what has your organization done? What did that capital enable, notably with the posting of a surplus over two or more years?
- Do you regularly budget for and plan for a surplus? We see organizations who operate consistently with a surplus have fewer emergencies (including those funder situations I described above) and take on more new initiatives. They can do so with trust that tomorrow, the bottom won’t fall out. The full portfolio of patrons, and our organization’s focus on them, are our insurance policy.
- Do you regularly communicate what that surplus will fund and enable? And, do you incentivize your staff to secure that surplus via their patron-focused efforts? If not, you should.
Developing a business model that first recognizes the true impact of patron-generated revenue and then assembles staff, strategy and operations around this fact is no longer just an interesting idea. It’s imperative for our field. In order to create reliable income, we must focus on patrons and through them, grow our annual budget. Honed here, we will better serve our mission sustainably, and create a future that contains many cool things.