Are Capital Reserves Amassed During the Pandemic Beginning to Erode?
4-minute read
May 2, 2024; updated July 25, 2024
Working capital is a measure of an organization’s liquidity, and represents the ability to weather uncertainty, unexpected losses, and adapt to changing circumstances. A primary way to grow working capital is through consistent operating surpluses.
To explore how organizations’ bottom line and working capital have fared over the last few years, we analyzed data from FY 2019 to 2023 collected from 734 organizations through the Cultural Data Profile.
Key Findings
- Organizations did a remarkable job operating within their means during the crisis.
- Operating surpluses were positive for 2021 and 2022, but this trend has reversed in 2023.
- Most organizations had less than 6 months of working capital going into the pandemic.
- Working capital rose during the pandemic due to relief funding and reduced expenses due to shutdowns.
Organizations were Adept at Managing Expenses During Pandemic Closures
While revenue fell during pandemic closures, organizations were able to manage finances by drastically cutting expenses while doors were closed then slowly reintroducing expenses during reopening. This led to the average organization experiencing operating surpluses in FY 2021 and 2022.
Operating Revenue, Expenses and Surplus, 2019-2023
This trend began to reverse in 2023. As earned revenue made a slower than expected recovery, and relief funding diminished, expenses began to outpace revenue as re-opening continued. Overall, revenue was 16% and expenses 14% higher in 2023 than in 2019 in nominal dollars. The rise in both fell short of inflation.
Inflation and Slow Earned Revenue Recovery
The effects of inflation are an important part of the picture. During periods of high inflation – like the last few years – each dollar in an organization’s budget has significantly less buying power than it did the year before. As organizations began to resume programming after pandemic shutdowns, they likely found that their previous expenditures were not sufficient to produce the same programs they had before the pandemic, leading to a growth in expenses in 2023 (as shown in the graph above). The graph below depicts the same figures but adjusted for inflation – providing a better direct comparison to pre-pandemic spending levels. Adjusting for inflation, operating revenue was 3% lower over time while expenses were 4% below their 2019 level.
Inflation-Adjusted Operating Revenue, Expenses and Surplus, 2019-2023
In our previous analysis on revenue sources, we found that most revenue sources did not keep up with inflation, aside from the notable exceptions of government revenue and foundation contributions. For many organizations re-opening and the resumption of programming expenditures was complicated by these trends: arts leaders were realizing that audiences weren’t coming back at the same levels while rising costs made it difficult to do more with less to protect the bottom line.
Organizations Running Deficits Before the Pandemic Lost Ground
While the trends above describe the average organization’s experience, a closer look reveals stark differences across organizations based on their position going into the pandemic. In the following analysis the 734 organizations in the cohort are subdivided into percentiles based on their operating surplus in 2019. This effectively gives us a glimpse into how the pandemic affected organizations who were doing well, versus those who were already running deficits before the pandemic. We contrast this to their operating position in 2023.
Change in Operating Surplus/Deficit for Small Organizations, 2019-2023
Subdivided by Percentile Based on 2019 Surplus
Change in Operating Surplus/Deficit for Medium Organizations, 2019-2023
Subdivided by Percentile Based on 2019 Surplus
Change in Operating Surplus/Deficit for Large Organizations, 2019-2023
Subdivided by Percentile Based on 2019 Surplus
We can see that organizations who were in the bottom percentile going into the pandemic slipped into deeper deficits, while the top percentile tended to improve their already rosy financial outlook. This growing gap between profitable and unprofitable organizations is
visible across every budget size.
If we look at BIPOC organizations, there were even larger gains among the top percentile of organizations, whose operating position improved by 36.6 %. In contrast, non-BIPOC organizations lost ground across the board, with the largest loss among the bottom quarter.
Change in Operating Surplus/Deficit for BIPOC Organizations, 2019-2023
Subdivided by Percentile Based on 2019 Surplus
Change in Operating Surplus/Deficit for Non-BIPOC Organizations, 2019-2023
Subdivided by Percentile Based on 2019 Surplus
Working Capital Rose During Pandemic Years
The operating surpluses experienced by the average organization during pandemic closures lead to increases in working capital over the pandemic years.
Median Months of Working Capital, 2019-2023
During 2019, organizations tended to end their fiscal years near the break-even point, as we saw earlier, so they had little to squirrel away. The median working capital in 2019 for organizations in this analysis was 3.9 months.
In 2020, as doors closed and expenses decreased, relief funding was allocated, significantly increasing working capital. However, as expenses rebounded in 2022 and outpaced revenue in 2023, the average organization experienced a slight deficit. This trend is reflected in the declining months of available working capital for the median organization starting in 2022.
We use median values for working capital instead of averages because the latter can be misleading due to a few large institutions skewing the data. For instance, in 2019, these institutions had an average working capital equivalent to 6 months' worth of total expenses, compared to the overall average of 3.9 months. Median figures, representing the midpoint of organizations in the sample, provide a clearer picture of the majority of organizations' experiences.
Looking to the Future
Robust working capital is vital for a thriving arts and cultural sector, providing leaders with flexibility and security. Having sufficient savings allows organizations to navigate uncertainties or potential losses without risking closure. With access to cash, they can ensure smooth operations and manage temporary or unpredictable revenue shortfalls effectively. This financial resilience enables them to adapt to evolving community needs and maintain relevance over time.
While the high levels of working capital seen throughout the pandemic years are encouraging, there are signs that this new level of liquidity may not be sustainable. As we saw in previous analysis, earned revenue is recovering slowly, most sources of private giving have not kept up with inflation, and pandemic relief funding has – for the most part – wound down. We can start to see the working capital amassed during the pandemic eroding in FY 2023, with a potential for further erosion in future years. Organizations may start to return to the cash strapped position they were in pre-pandemic, further heightening uncertainty about limitations on earned revenue and the absence of a sustainable revenue engine. It’s also worth noting that these figures represent the median experience – many organizational are already short on cash as they navigate these shifts in revenue.
Only time will tell how will organizational leaders and those who support them will respond to these changing conditions and steer towards a sustainable future for the sector.