Second year insights from the Arts Impact Fund: financial resilience
Over the last two years, the Arts Impact Fund portfolio has grown to 16 organisations, which will use investment from us to achieve a wide range of social outcomes – from helping young people to develop creative writing skills to reducing falls amongst the over 65s. However, the Arts Impact Fund also has a mandate to improve the financial resilience of the arts and culture sector in England – in addition to raising the profile of the impact created. In this issue of our new insights series, I’d like to draw to your attention how an organisation can become more financially resilient using social investment.
Firstly, what do I mean by financial resilience? There was an excellent piece written recently by Moira Sinclair, CEO of the Paul Hamlyn Foundation, about resilience in the wider sense, but here, I’m talking about the ability to weather challenging financial circumstances such as funding cuts or delays to receiving income, unexpected increases in costs, or unforeseen events that call upon the use of accumulated profits (reserves). This kind of resilience is important because it means that socially valuable organisations are less vulnerable to the vagaries of an increasingly fast-paced, economically volatile world.
In very broad terms, an organisation can become more financially resilient by:
- diversifying its sources of income;
- increasing its surpluses (through growing income in absolute terms, increasing prices or reducing costs); or
- expanding its balance sheet.
Having sound financial governance and management, as well a degree of entrepreneurialism, is obviously important too, but here I’m thinking about that in terms of developing the skills base of the organisation. Why these three factors?
An organisation with a diversified set of income streams is resilient because it doesn’t put all of its eggs in one basket. If one income stream underperforms, or doesn’t come through, there are others to fall back on.
Increasing surpluses could mean either growing an organisation’s profitability by growing the margin on products and services (the difference between price and cost) or increasing revenues in absolute terms whilst keeping profitability constant. Either way, there is more cash available in challenging circumstances, and more that can be spent on achieving the social mission.
Expanding the balance sheet means growing and diversifying the value of assets that appear on a company’s balance sheet. There are many types of asset, but the most obvious from a financial resilience perspective are:
fixed assets such as buildings, which are usually high in value, are typically associated with some kind of income generation (through service delivery or rental) and can be sold to realise cash;
unrestricted cash reserves that can be drawn on when required.
These financial resilience objectives can be achieved in many ways: from refurbishing a theatre to make it more attractive to patrons, to creating a trading subsidiary earning income through digital content licensing. You can read about more examples on our case studies page; but in each case, social investment has played a key role.
In fact, as the chart below demonstrates, in nearly 90 per cent of cases, an Arts Impact Fund loan has been used to improve revenues – either through income diversification or profitability – and in 50 per cent of cases, it has been used to expand the balance sheet. In the table below, the orange bars encompass financial resilience objectives, while the purple bars denote broad uses of finance.
Overall, six out of our 16 investees have used the loan for both revenue improvement and balance sheet expansion. These objectives are being achieved through setting up new ventures (e.g. Soho Theatre Company), acquiring new property (e.g. Studio Wayne McGregor) or by refurbishing existing property (e.g. Titchfield Festival Theatre). In three cases, investment into property (through refurbishment or acquisition) has gone hand in hand with setting up a new venture, intended to improve revenues (Live Theatre, Southbank Mosaics, Fuse Arts Space).
The lesson from this is that financial resilience can take many forms and can be cultivated in many ways. It’s helpful to work backwards from that end goal and break down what it can mean in theory and what it could mean in practice: how can existing assets – human capital, networks and physical things - be repositioned to diversify or grow sources of income, or strengthen balance sheets? For an arts organisation, this is the art of the possible.
Image: Blank Canvas bringing together classical, electronic and experimental music at Village Underground. © Village Underground