A financial strategy: don't run a business without one! (Part 1 of 3)

Jill Townsley, Till Rolls at Compulsive, Obsessive, Repetitive at Towner courtesy of the artist and Towner A financial strategy is not a list of income and expenditure which, when totalled, equals zero or a small positive number; nor is it the pious statements included in trustee reports about a reserves policy and the management of risk.  A financial strategy sets out how you will secure and spend the financial resources of your organisation in support of your core purpose and aims.  Designing such a strategy is as much an art as a science.  It is an exercise in which you mange the tensions between the urgent (the short term) and the important (the medium/longer term).  It is the place in which the hard choices get made.  It is always a work in progress.

I have set out below the likely components of a financial strategy for a visual arts organisation.  In addition to the brief comments offered, the links will take you to additional ideas, insights and resources.

Funding

Funding models within our sector are changing rapidly and they will continue to evolve both in response to macro economic realities and long-term structural changes in the economy and society – the good times are over!  Against a background of declining public funding, a sluggish economy, static if not falling real personal incomes for many and increasing funder demands for a more diversified income base, organisations need to understand both their existing funding model and the one they want to move to.

What is your current funding model?

  • Where does your income come from?
  • What is the balance between unrestricted and restricted income?
  • What level of risk is associated with each source?
  • Are you overly reliant on one source?
  • Is your funding model well aligned with your core purpose or are those ‘shoddy compromises’ getting too uncomfortable?

What should your future funding model look like?

  • What sources will reduce or disappear?
  • What new opportunities can you identify?  What would you need to do to develop these sources?  How long would it take for these new initiatives to pay off?
  • What contingencies will you need to make against uncertain income sources?
  • Can you reduce your dependence on one or two sources?

Delivery or cost model

Understanding the cost side of the equation is all about where the money goes. If you are going to make the money you have go further (and the alternative is, at best, a smaller programme) it is vital to understand how the resources you are buying deliver the work you do.

  • How does your current cost base break down between fixed (i.e. costs you cannot change in the short term without incurring a liability such as salary costs) and variable/direct costs which vary with the level of activity
  • What is the balance between staff and other costs?
  • Which activities need investment, which activities contribute to overheads and which ones really make profits you can invest in your core activity?  (Will anyone whose café or shop really generates a profit after a full allocation of overheads tell everyone else how they do it?)

How do you want your model to change?

  • In general terms the more uncertain your income base, the more flexibility you should aim for in your cost base so you can shrink and grow the organisation as funding waxes and wanes.
  • How can you raise productivity within your staff team?  Examples could include: training, better use of technology to reduce costs, redesigning job roles and processes and changing opening hours.
  • Could you outsource some functions or share them with other organisations?
  • What changes do you need to make if your organisation wants to increase its earned income? Do you need to employ different people or re-skill the ones you have?  Do you need to implement new systems to manage your new business?  Do you need to create new budget lines for investment in new products, start up costs and sales?

This concludes part one of this three part post: next I will take a look at assets and reserves.

Thank you to Matthew Rowe, Jill Townsley and the team at Towner for providing me with the perfect picture for this post: a beautiful and bewitching new work made from till rolls and, as ever, thanks for reading

 Susan