Blog #5: How budgets work – Part 1: Revenue

Little Brown Notebook Blog Post #5: “How budgets work: revenue”

part of a series on “The Impact of the Coronavirus on the Arts”

Before delving further into the impact, I thought I’d share a few posts about the financial side of running an arts organization that produces and presents shows. For the purposes of these posts, we’ll talk about the typical performing arts season which has productions, concerts, and events from September through May.

REVENUE

Revenue is just fancy word for income or resources coming in to the organization.  When laying out a budget we break these revenue streams into a few major categories:  Earned Income, Contributed Income, and In Kind.  …and, of course, there are several subcategories within each of those.  If we were to make a pie chart of the typical “revenue mix” for a nonprofit arts organization in the United States it would break down to roughly 60% earned income, 20% grants, and 20% donations.  [Graphic from a 2017 study by American for the Arts]

pie_chart revenue

EARNED INCOME

In performing arts, the largest percentage of earned income comes from ticket revenue from subscriptions and single ticket sales.  A key aspect of this revenue is that it is unrestricted – once the show is over you can spend it wherever you need it to sustain the organization.

Subscriptions are a key part of keeping many organizations afloat as they’re built trust and loyalty. Organizations offer ticket packages at a discounted rate in the spring and patrons buy them in April/May for shows they won’t be able to see until the next season, which is often months away. The much-needed infusion of cash from subscriptions helps the arts organization sustain itself during the summer months when there are no productions (so no single ticket sales) and donations may be down.  It also provides capital needed to cover the upfront expenses that need to be paid during the months leading up to a production.  More on that in our next blog post about expenses.

Single ticket sales are a huge stressor as a producer as they tend to be last-minute, the week of the show.  You watch the daily ticket reports looking for a bump. Did the article in The Isthmus inspire anyone to purchase?  Is there an uptick after a social media campaign or your latest newsletter. Every morning is a check against the money that has already been invested in the show vs the earned income from ticket sales.  Why is this such a big deal?  Go back to the imaginary pie chart with 60% of the revenue needed coming directly from patrons via ticket purchases.

Beyond tickets, many performing arts organizations offer classes and outreach programs. The registration fees for classes work much like a subscription – You pay tuition up front, for the promise of the delivery of a specific number of lessons/classes.  For outreach programs, you’ve got a flat fee to bring a performance or workshop to a specific audience and are usually paid for that work after the event.

Other segments of earned income include concession sales (wine sippy cups!), merchandise, and

CONTRIBUTED INCOME

I’ll start this section by ranting a bit about the terminology “contributed” as it sounds like you didn’t have to EARN it.  Contributed is usually defined as “gift in support of mission.”  Anyone who has ever written a grant or spent hours building a donor campaign can attest to the fact that it is earned.  Rant over.

The main categories of contributed income are grants, sponsorships, and donations.

Grants from the government (like the Madison Arts Commission, Dane Arts, and Wisconsin Arts Board) and foundations (Madison Community Foundation, Peterson Family Foundation, etc) are usually awarded in support of a specific project – they’re funds that are restricted. When you write the grant application, you are making the case for support for a particular show or project and, if you are funded, the money must be spent on that show or project. Further complicating this process is the requirement by some granting agencies that no portion of the funds underwrite “administrative overhead” aka the daily operations of the arts business which will make the project possible (institutional marketing, company staff, fundraising expenses, etc).

Sponsorships are usually a promotional exchange.  A company pays cash or donates a substantial amount of goods or services in exchange for benefits like being named as the lead sponsor for a particular project, logo on website/poster/program, verbal recognition in a preshow announcement, and program ad space.  Some sponsorships also include a specific number of tickets to a performance and/or a corporate performance for the business and its employees and families.

Individual Donations are when someone gives you money to support the work you do as an organization or arts business.  The relationship building that inspires someone to send money, no strings attached, takes time and attention.  Think about the times you’ve donated – What moved you to send $$?  Were you thanked for your contribution?  Will you consider supporting the organization in the future? Why or Why not?

IN KIND GOODS & SERVICES

In Kind Good and Services is just business jargon way of talking about donated goods and services. When budgeting for a show, I usually lay out revenue, expenses, and in kind as three separate sections as in kind are both a revenue (donated) and an expenses (you have to account for what it would have cost so your budget balances out).

Examples include someone volunteering their professional services like an accountant giving you a discount on monthly bookkeeping, a church allowing you to rehearse in their space for no charge, and a printing company donating the printing of your programs. For In Kind gifts you ALWAYS track what has been donated and the cash value of that item as you need to know what it actually costs in case you need to pay for it for a future project or event.

Hopefully this whirlwind exploration of the revenue side of arts organizations has provided some insight into how companies work.   We’ll tackle expenses in the next blog post and then discuss how the coronavirus is disrupting the business model.

 

READING LIST

Americans for the Arts regularly conducts nationwide surveys of artists and arts organizations.  See “Source of Revenue for Nonprofit Arts Organizations” from 2017.

Grantmakers in the Arts Study Points to Positive and Negative Revenue Trends,” by Eileen Cuniffe for the Nonprofit Quarterly on February 26, 2018

“Arts Management: Uniting Arts and Audiences in the 21stCentury,” Ellen Rosewall, Oxford University Press, is the best arts management text available.  We use it as the foundational book for all the courses in the Arts Management program that I teach at University of Wisconsin-Whitewater. It should be required reading for all nonprofit staff members and nonprofit board members.

Beyond Sustainability: Identifying the Right Resource Mix for Growth,” by Woods Bowman for Nonprofit Quarterly for July 12, 2017