Nobody reads the balance sheet. Boards read the budget. Funders read the narrative. Staff read the line they are responsible for. Everyone reads the bottom of the operating statement to see whether the year came out positive, and then the meeting moves on to the capital campaign. The balance sheet, if it appears in the board packet at all, sits near the back, doing the one thing none of those other documents can do: showing what ten years of decisions added up to.
A bad year shows up in the operating statement. Ten bad years show up on the balance sheet. You see it in the composition of net assets, in the line of credit that somehow gets a little larger every spring, and in the distance between what the endowment says it is worth and what the organization is actually allowed to spend from it.
I have spent more than twenty years in and around the finance offices of arts and cultural organizations, most recently as CFO of the Curtis Institute of Music. I now serve as a fractional and interim CFO to mission-driven organizations, sit on the boards of SMU DataArts and the National Opera Center, and read a great many financial statements. What strikes me every time is how much those statements say and how few people in the organization have really read them. Or maybe they have tried, but nobody ever took the time to explain how to read them.
The numbers I find most interesting are usually the ones we do not put in the annual report: days of cash on hand, the ratio of restricted to unrestricted net assets, net income versus net cash, board giving, deferred maintenance, depreciation, capex, endowment corpus erosion, covenants, debt service, aging receivables, aging payables. Those numbers tell us whether there is a path forward or whether we are in urgent need of a course correction.
The document everybody does argue about is the budget, so let me start there.
A Balanced Budget Can Be, and Often Is, a Lie
A major gift is not a business model. A sold-out run is not profitability. And a balanced budget achieved by freezing three positions, deferring the roof another year, and booking contributed revenue at a number the development director privately calls aspirational is not really balanced. Everyone in the room knows it, and we approve it anyway because the alternative is a conversation about scale that nobody wants to have.
I think the sector has gotten very good at producing balanced budgets and much less good at producing organizations that can absorb a bad year. The usual answer to the second problem is an endowment.
And yet…
Endowments Fail in Predictable Ways
A five percent draw on an endowment that has lost a third of its value is five percent of two-thirds of the money, and the budget built on last year’s draw still has to be funded from somewhere. That somewhere is almost always the annual fund, which is how a market event becomes a development problem and gets described in the board minutes as a “fundraising shortfall.”
The rest of it is just as predictable. Draws get set by what the budget needs rather than what the corpus can sustain. Restrictions accumulate over decades until the usable portion is a fraction of the headline number in the annual report. Boards designate funds in good years and undesignate them in bad ones, which is fine, but it should be minuted as what it is.
There are moments that call for drawing hard, and I have argued for those in the boardroom. What I want is the second half of the motion, the part that says what this decision costs the organization in 2035 and what we will stop doing now to make sure that problem in 2035 does not happen to us.
Where I Got It Wrong
I have signed off on budgets that balanced on paper. I have presented a contributed revenue number I was nervous about in a room where saying so would have derailed a plan a lot of people had worked hard on. I did that, at least in part, because I worried about my own job security. Now that I am independent, I have become unrestricted myself.
I have watched organizations defer decisions for a year because the year looked survivable, and I have been the person who told the board it looked survivable. In hindsight, some of those calls were fine. Some of them cost an institution two or three years it did not have.
I mention this because I do not think these failures come from bad people or finance offices full of fools. They come from good people working inside incentives that reward the appearance of stability, on a timeline where the person who names the number is often the person who has to own what happens next. I have decided not to be that person more than once.
What I Will Do Here
These stories almost always get told by a local reporter in the week after an organization closes, when the only remaining question is who to blame. By then, the useful part is over. The work worth doing happens three and five and eight years earlier, when the pattern is already visible in the numbers and still reversible, and when almost nobody is looking.
So I will read actual financial statements and say what I see in them. I will use public filings and name organizations when the record is public. I will keep client matters out of it entirely, which unfortunately means some of the most vivid examples I have are examples I cannot use. But I will anonymize them when the story is too good not to be told. I will also show the arithmetic that a CFO does rather than simply assert the conclusion, because worked examples are the only thing that has ever reliably changed my own mind.
When I do not know something, I will say so. When the research is thin, I will report what it failed to find along with what it found. And I will try to be useful to the people actually running these places, who are mostly doing something difficult and under-resourced and who do not need one more person on the sidelines explaining that the arts need a new business model.
Unrestricted is an accounting classification, and it is also the deal I am making with you about the writing. I have been the person in the room who got it wrong, which is most of what qualifies me to do this.