The Financial Perspective (Part 3)

Kushner and Pollack (2004) identified four key operating measures in their study of performing arts presenters that impact the financial perspective. The four measures are development efficiency, marketing efficiency, program margin, and capacity utilization. Development efficiency is the number of dollars contributed per dollar expended for fundraising and development activities. According the authors, the ratio for all presenters in the study average $7.93 in FY2001/02. Another study by Hager et al (2004) of Federal 990 forms submitted by not-for-profit arts, culture, and humanities organizations indicated a development ratio of $5.55 for FY 2001 returns.

Marketing efficiency is the number of dollars generated per dollar of marketing expenditure. Kushner and Pollack (2004) study of performing arts organizations found that on average, each dollar of marketing expense generated $3.19 in revenues.

Program margin is the ratio of box office income to the sum of artistic and production expense. Kushner and Pollack (2004) found that on average, box office revenues covered only 73.3% of production expenses; production expenses did not include marketing or overhead costs. In the study by Hager et al (2004), program margin for arts, culture and humanities not-for-profit organization was 72% in FY2001.

The final operating ratio indicated by Kushner and Pollack (2004) was venue capacity utilization. Revenues in the presenting context are directly proportional to the price and number of seats that can be sold. The number of seats available is the result of the venue capacity and the number performances available. Their study of finance and operations indicate non-for-profit presenter’s averaged 81% capacity in 2001/2002.

The website Charity Navigator (2005) provides a useful methodology for evaluating not-for-profit organizations which includes many arts presenters. In addition to working capital, fundraising and program efficiency ratios, the site also uses an evaluation of administrative expenses, revenue and expense growth rates to understand the performance of an organization. Administrative expenses are measured as a percentage of all expenditures. The median for all not-for profits according to the site was 10.3 %. Kushner and Pollack (2004) report administrative expenses represented 11% of all expenditure for not-for-profit performing arts presenters in their study of FY 2001/2002 Form 990 returns.

Charity Navigator (2005) views consistent revenue growth over of an extended period of time (currently 36 to 48 months) as an indicator of program sustainability. Revenue growth must outpace inflation as well as the growth of expenses. The Theatre Communications Group (2003) study of 214 theaters indicated that the 4 year compounded growth rate of revenues (adjusted for inflation) was 11%, while expenses grew by a rate of 18% in FY2003. The Theatre Communications Group data mirrors the Census Bureau data presented earlier (Table 3) that indicated average annual sector growth of 9.75% for not-for profits from 1997 – 2002. Expense growth was not available from the census data. Salamon and Sullvan’s (2004) survey of not-for profit organizations indicate that liability coverage and benefits were most cited as reasons for increased operating expense. The Theatre Communication Group (2003), Kushner and Pollack (2004) both indicate increases in private contributions, significant decreases in government funding and investment income. Box office income has remained relatively flat in recent years.