Social Currency

Attendance at the TCG Fall Forum on Governance is comprised of primarily executive directors and board members, with a sprinkling of representation from artists and staff members from the nonprofit theater world.  So, after a day of terrific conversations, it was with great pleasure that I gathered a handful of them together for a panel discussion: “So You Have a Deficit, Now What?”  What followed was a refreshingly frank discussion punctuated with practical lessons applicable to the work of any nonprofit administrator: 

Preliminaries
We began with a few general concepts:

• Talk of deficits demands a consideration of assets, but some valuable assets don’t appear on a balance sheet.   Assets can also include intangibles such as:  audiences, knowledge, staff members, a board of directors, openness to change, technological tools and savvy, diversity of background and age among your staff, board and stakeholders, civic and business partners, your “brand”, organizational self awareness, and, critically, when seeking to overcome deficits, knowing your impact. 
• When considering “health” metrics at NFF, we think in terms of “months of cash” on an Unrestricted Liquid Net Assets (ULNA) basis.  If you strip away all of the buildings, property, equipment, temporarily restricted, and permanently restricted items from your Net Assets, how much cash is left for operations?  It can vary, but a rough starting point for an ideal is a 3 month cash/ULNA reserve.  
• Deficits can be “financed” through a variety of means including: accounts payable, mortgage debt, drawing on reserves, foregone wages, employee furloughs, and over-extended lines of credit.  It can be difficult to ascertain whether an organization is operating at a deficit, and structural operating deficits can be masked by a period of operating at sub-par capacity levels in order to keep expenses in-line. This will not be sustainable.

Managing Costs and Revenue

Tracy E. Long, General Manager of Adirondack Theatre Festival started off the panel by describing an initiative to overcome a $29,000 shortfall on a prior year’s performance, an 8% deficit on the annual budget.  While the scale may seem relatively small, the deficit posed a significant challenge to their cash flow and was an ongoing concern.  Long took on the deficit by addressing both revenue and costs: 

Revenue side

• Increase ticket revenue on the margin by raising ticket prices by $3 each.
• Develop theater projects with partners to share costs but generate new and increased revenue.
• Respond to board member interest in hosting a “Brewfest” with board member spouses and another nonprofit to generate fundraising revenue. 

Cost Side

• Decrease rehearsal periods for plays that could still be produced effectively with shorter advance time,.
• Change the design on printed materials to result in lower printing costs.
• Cut the full-time production manager and move to a “variable” staffing method – hiring as needed for theater tech and sharing the management tasks among the remaining staff.

Accumulated vs. Structural Deficits
Michael Gennaro, Executive Director, Trinity Repertory Company, began by making two important points:

• Even well managed companies are beginning to fail.
• Accumulated deficits and structural deficits are different and managing them requires different strategies. 

Michael drew from his experience with the Pennsylvania Ballet as his first example.  When he went there he found an accumulated deficit of $2 million on a $6 million operating budget.  In that instance Michael suggests the first step is to analyze what makes up the debt you are inheriting and evaluate any creative strategies you can employ to get rid of it.  At the Pennsylvania Ballet, the debt was almost completely financed through accounts payable, so Michael negotiated a “work-out” with the vendors to pay a percentage on the dollar of outstanding bills and thus retire the deficit.

In his current tenure as the Executive Director at Trinity Rep, he inherited a more challenging scenario:  Three separate lines of credit were maxed out or frozen, and the building required an expensive update to meet fire code standards.  Together, they amounted to more than $3 million dollars of accumulated deficit with the cost of deferred upgrades to the building generating a structural deficit.  In this instance he took the following steps: