Q&A: How can the arts and cultural sector address financial pressures?
Tuesday February 28, 2023
Womble Bond Dickinson Restructuring Partner Samuel Dixon joins our Restructuring Advisory Partner Phil Reynolds to discuss potential resilience strategies
After facing down the challenges of COVID, the arts and cultural sector is facing a new suite of financial pressures.
Against this backdrop, we speak to Phil Reynolds, Partner in our Restructuring Advisory team, and Samuel Dixon, Restructuring Partner at law firm Womble Bond Dickinson, about how management teams, boards and trustees can build organisations’ resilience and address cracks in their operations.
Q: What’s the state of play for the sector?
Samuel: Like many other parts of the economy, the arts and cultural sector had a difficult time during the pandemic.
Lockdowns naturally reduced footfall, and in many cases, this still hasn’t recovered to pre-COVID levels.
But now visitor volumes are also being affected by the rising cost of living.
Household finances are being squeezed, which often means less money for recreational activities. People are making fewer visits to art galleries or museums – and when they do visit, they’re spending less than they might have before.
Phil: On top of this, organisations are facing higher operating costs with a restricted ability to pass the costs on
The Government has made energy support available to help with what have been soaring energy prices, but that’s set to reduce from the end of March.
At the same time, employers are needing to meet rising costs in areas like wage bills – one of the biggest input cost pressures they face.
Pressure here might only intensify. This time of year is often when salaries are reviewed and renegotiated, and many members of staff will be seeking pay rises to help meet the cost of living, which will increase the salary burden.
Very few organisations will be able to deliver a pay rise that fully meets or exceeds inflation. Long-term, this means they could lose valuable staff as they seek higher-paid roles elsewhere – in turn reducing their ability to deliver the shows and exhibitions that keep visitors coming through the door.
Samuel: And then, there’s the funding landscape.
Constraints on public funding are making grant funding increasingly difficult to obtain.
The recent round of National Portfolio Organisation funding has been challenging with some organisations seeing significant reductions in this line of funding. And private donors – like visitors – may be feeling the pinch, reining in their funding.
On top of lower visitor revenue and higher operating costs, this is leaving organisations in a difficult position . Many in the sector operate at a loss and then rely on funding and charitable donations to top-up income to deliver their programmes.
Taken together with declining visitor revenue, the maths might simply no longer add up. More organisations are therefore having to think carefully about their next steps.
Q: What should organisations be doing now to navigate a way forward?
Samuel: One of the key roles of any organisation’s board is to ‘horizon scan’ to ensure that they have appropriate contingency plans in place to deal with a number of different scenarios. Having this contingency plan – and ensuring it’s up to date – is a critical first step.
Alongside this, regular, granular forecasting is a must for any organisation – even if they’re currently well-funded.
It’s all very well having commercial and financial expertise within the organisation – whether that’s in the management team, or the trustees. But without data-backed insight into how the organisation could perform, it will be really hard to make informed decisions, and take corrective action if things look difficult.
If organisations don’t have cashflow forecasts, they need one now. If they do, it’s essential that it’s up-to-date, and regularly refreshed.
Phil: We also always stress the importance of having appropriate cash reserves
It’s often easier said than done, but it’s important not only for maintaining day-to-day operations, but also for ensuring that an organisation has the runway to effectively wind-up operations if the need ever arises.
All too often we find that organisations don’t have this headroom, and as a result are forced to make decisions on a scale, or a timeline, that they’d otherwise preferred to avoid.
There’s also a ‘softer’ point to keep in mind about organisational mindset.
Across the sector, organisations are often focussed on their ‘mission’ – their important cultural value – over ‘business’ factors.
In difficult economic conditions like this, and especially when organisations start to show signs of distress, the importance of having that ‘commercial’ mindset cannot be overstated.
Arts and cultural organisations fundamentally need to make [or raise sufficient] money[ to fund their activities], and be an attractive funding option.
The strength of an organisation’s trustees is critical to successfully achieving this outlook – especially where they have finance or commercial expertise.
But it’s important that they can apply this knowledge when it comes down to it. In our experience, there can be a quite stark division between organisation’s day-to-day operation and trustees’ involvement. Closing this gap means skills and insight can be more readily shared, and that neither the ‘commercial’ heads, nor the ‘mission-driven’ teams operate in isolation.
Q: If an organisation finds itself in distress, what are the first steps it should take?
Phil: We cannot overemphasise the importance of early action. The sooner support is sought, the more options will be available and the greater the chance of eventual recovery.
When an organisation is in financial distress, the first thing to look at are its ‘criticals’. What are its core priorities, and what do they need to do to successfully deliver against those core priorities?
It’s then important to assess how big of a gap there is between the current financial position, and what it needs to deliver those criticals. From there, we can look at how organisations can drive cost reductions in their programmes, generate value from assets or fundraise as best as possible to narrow the loss to the extent where it either disappears, or where it can secure additional funding to meet the difference.
At the end of this process, it may be that organisations are best served taking other steps to protect their long-term interests – for example, potentially merging with another organisation in the sector. The ‘right’ way forward will be bespoke to every organisation’s specific circumstances.
Samuel: This process of assessment can involve some tough decisions. In the arts and cultural sector, organisations may be spending on things that directly contribute to others’ wellbeing, education and enrichment – for example school outreach initiatives, or academic research.
The thought of cutting back on these may be unpalatable, but it might be necessary to ensure the organisation can survive to run them again in the future.
Throughout all of these discussions, it’s critical that trustees and management teams remain mindful of their legal duties.
These will shape what they can, and must do, when it comes to next steps – and will include both an organisation’s responsibilities as a company (where applicable), and as a charity, which may be slightly different, but demand equal care and attention.
In these challenging conditions, Phil and Samuel are pleased to offer a free, confidential 60-minute meeting for arts and cultural sector organisations to discuss:
- The key risk areas to monitor and manage.
- Sources of support.
- Potential restructuring options.
To book your session, please email: email@example.com
In difficult economic conditions like this, and especially when organisations start to show signs of distress, the importance of having that ‘commercial’ mindset cannot be overstated.Phil Reynolds Restructuring Advisory