At a time when financial health has become so precarious for too many arts organizations, it is a cause of concern that a great many arts organizations do not take one important precaution: they do not forecast year end results periodically throughout the fiscal year.
Most organizations do year-to-date results monthly, but too few extrapolate to create a projection for fiscal year-end results.
This is dangerous.
Year-to-date results do not always present an accurate picture of financial performance. They can be grossly affected by the timing of large income or expense items. If a big grant comes in early, the year-to-date results can look far better than budgeted. If an invoice is paid early year-to-date results get skewed and can give a false picture of overspending. Only those with a very detailed knowledge of income and expenses can derive a true picture of financial performance from year-to-date results.
In my first year running the Alvin Ailey organization, for example, we received a good number of gala ticket checks very early. This led many board and staff members to believe that we were doing far better than we truly were; we believed we had turned a financial corner when we really were still very far behind our true turnaround plan.
What is needed -- at least quarterly, though I prefer monthly -- is to project what the remainder of the year is likely to look like. This erases the timing problem and gives a picture of the complete fiscal year.
All staff should be asked to provide detailed expectations of income and expenses for the remainder of the year. These can be aggregated with year-to-date figures to provide a projection of what the entire fiscal year will produce. As the year progresses, this forecast should become more and more accurate.
We are now early in the new season. Most arts organizations are just completing the first quarter of the new fiscal year. This is a perfect time to review all projected income and expenses and to develop a view of the entire year.
If you are not happy with what you see, you still have many months to affect income and expenses; you can make selective budget cuts and implement aggressive and short-term fundraising campaigns. Do you need to push your annual gala especially hard this year? Can one use a projected gap to motivate board members to help with fundraising? Are there some expenses one can delay to a future year? These actions give the organization a far better chance of ending the year in the black.
The full year projection also provides a far more solid basis for developing next year's budget. It is dangerous to base next year's budget on this year's budget. One must base future projections on a solid analysis of what this year is actually going to look like when it is completed not a plan for this year.
So do not rely solely on year-to-date statements; they can lead to over-optimism or panic. Neither is healthy.