All revenue comes at a cost

Cost of Revenue

SOURCE: Flickr user photosteve101

It is a natural state of being in a nonprofit arts organization to be searching for more and different sources of revenue. Nonprofits are nonprofits, after all, because they produce or present or preserve work that costs more than it can generate in direct revenue. So there’s always a gap between direct revenue and expenses. And that gap yawps constantly, like a hungry pup. Yawp.

But so often when I hear arts groups (boards, staff, artists, whatever) talk about potential revenue sources, they skip a rather essential truth: all revenue comes at a cost. Whether it’s earned or contributed, through direct activity or side venture, as a gift or a grant or a subsidy, every nickel of revenue costs you something to discover and receive. Those costs can come in many forms:

  • Time and attention: While you’re chasing revenue, you could have been chasing something else. Sometimes that ‘something else’ is the mission and purposes of your organization.
  • Overhead and infrastructure: Every action requires an actor, and over time the search for revenue can change the balance of an organization from artistic to administrative actors. This isn’t necessarily a bad change, just one that alters the cost and shape of doing business.
  • Nature of relationships: Financial exchange often defines and refines the relationship between individuals — sometimes harmlessly and in complete alignment with existing relationships, sometimes not. It’s essential to understand how new streams of revenue will alter existing relationships required for healthy operations.
  • Promises and purposes: Sometimes new revenue comes with strings attached — with contractual requirements on how, when, and where you can spend it. If those requirements align with your work, your timeline, and your cash flow, hurray for you! If not, you’ve added cost and complexity to your life.
  • Actual cost: New streams of revenue generally require new processes, policies, systems, and people, all of which can add financial cost — both fixed and variable.

The key, of course, is finding and developing revenue streams that exceed their total cost. And because you’re in a nonprofit, such streams are necessarily difficult to find. As a first step, it helps to be constantly alert to the obvious and hidden costs of any action, and to bring that awareness into your conversations with artists, staff, board, and constituents. Does that new dollar cost you more than a dollar to receive? And if so, does it at least move you forward on your mission, rather than sending you sideways?

 

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Comments

  1. says

    In classical music, the problem, of course, is that it began as court activity paid for by the aristocracy. Musicians were part of the household help. That’s why, to this day, they still wear tails. It was and still is the uniform of butlers and other types of servants. Musicians were essentially serfs and paid very little.

    In the 19th century concert halls were built as a form of for-profit activity. The concepts of labor were still similar to serfdom so overheads were small and allowed for profit.

    By the 20th century classical music (and most forms of dance and spoken theater) were no longer able to pay for themsevles. Musicians began to demand middle class salaries, and technology brought much more efficient and engaging forms of entertainment (even if superficial.)

    In America, orchestras and opera houses try to make up for this, in part, with various schemes like bars, restaurants, special privileges, T-shirts or whatever they can merchandize. These endeavors usually don’t work well, which is one of several reasons why bankruptcy is a common part of our cultural lives.

    In Europe, most orchestras and opera companies are owned and operated by the state – something that places these activities back toward their original function as part of court (i.e. government) activity. Concerns about “revenue streams” and paying the organizations’ business oriented CEOs salaries in the million dollar range are unnecessary.

    • says

      Great synopsis of orchestra funding models. Thanks William. Although even government, public, or aristocratic patron money comes at a cost. And, like any other system that has a single dominant funding source, can be erratic over time based on the whims of the funder.

      • says

        Arts administration is interesting because it is a relatively new academic discipline. As a result, it does not have a substantial literature of research like some other forms of business and administrative science. So when people compare the consistency of public, private, and hybrid systems of arts funding, they have difficulty substantiating their arguments.

        Some aspects of such a study would not be too difficult, since many European countries keep good records of their spending. The Council of Europe has also done some useful studies. It is more difficult to get an overview of funding in the States because our funding is less systematic. The Commonwealth countries would also be a bit more difficult because they use genuinely hybrid systems – though they lean toward Europe’s public model.

        So we don’t really know if hybrid systems of funding are more consistent. Most indications show that funding is less generous in the Commonwealth than in Europe, but better than in the USA.

        We also don’t have data to show that exclusively private or public systems are less consistent than hybrid systems. General observation suggests that Europe’s public system is far more stable than the private systems in the USA. No orchestras with the stature of Philadelphia have declared bankruptcy. No houses like the NYCO have collapsed. And evidence shows a higher ratio of substantial cultural institutions per capita in Europe with long-term stability.

        Ideologues in the USA often grasp at funding problems in European countries and portray them as norms when they are not. The problems in Greece and Spain, for example, are not normative for the 30 or so countries of Europe and their cultural institutions. Nevertheless, some point to those problems as generalized weaknesses in public. It will probably be a while before arts administration will be given to the same sort of scientific discussion that might typify more established forms of public or business administration. Until then, we should remember that many presumed statements of fact might be ideological or based on culturally conditioned assumptions that might not be true.

        • says

          We might also look at examples where public or private funding stepped in to compensate for the loss of one or the other. We might find that in reality they are linked and most often move in tandem. This *seems* to be a pattern in the Commonwealth countries, but at this point, I don’t think we can really draw overall patterns with any certainty.

  2. says

    I disagree that “Arts administration …does not have a substantial literature of research like some other forms of business and administrative science. So when people compare the consistency of public, private, and hybrid systems of arts funding, they have difficulty substantiating their arguments,” as stated above. In the United States, non profit administration graduate programs and research centers, arts administration graduate programs and research centers, non-profit research firms, (Wallace Foundation, Americans for the Arts, Dana Foundation, CompassPoint, etc.) are many others have generated a wealth of current, sophisticated research that speaks to funding and other related topics. Let’s not further marginalize non-profit arts administration even more by claiming it lacks the rigor and documentation that other fields have that many individuals and organizations have worked so hard to provide.

    • says

      To make the claim a literature exists similar to other areas of business administration, we would need to see some examples of bibliographies. And *more specifically*, articles that compare America’s private funding systems to Europe’s public funding models (and also to the hybrid systems used in the commonwealth countries.) Can you document your claim by listing list some significant studies in that area? I would like to read them. Let’s not further marginalize arts administration by accepting its lack of international comparisons of funding systems. This could lead to parochial, ethnocentric views that blinker our thought.

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