20 Grantmakers in the Arts Reader
do know the line is at least $25,000 as that was theamount outstanding at FYE ’09).Together, these items give us a good entry point. The rstinvolves durability, the second adaptability, while the thirdis linked to liquidity. It is possible to draw some conclusionsabout CHP rom these three data points, but I generallypreer to look deeper. Now take a look at your grantee’s bal-ance sheet. Jot down some initial observations or questions.Then put them aside. Ater you’ve worked through thebalance sheet with this article, go back and see i you havegreater insight into what you noted.Analysis o balance sheets can be aided by the use o someratios. There are limits to the useulness o ratios whenapplying sectorwide standards, which I mention at the endo this article. However, within an organization and lookingyear over year, ratios are meaningul. To gain perspective onthe signicance o the dollar amounts o the items on thebalance sheet, it is important to relate them to the state-ment o activities. At Nonprot Finance Fund (NFF), wedo so by creating ratios based on operating expenses.
Two such ratios that assess liquidity and, to an extent,adaptability are Months o Cash and Months o Liquid NetAssets. Each gives you a distinct window. In both cases, wewant to know how long an organization can operate withthe unds it has in hand. Let’s look at Months o Cash rst.
Months of Cash
= the number o months o ex-penses that can be covered with available cash.The ormula is airly straightorward: determinethe amount o one month’s expenses by dividingtotal expenses by 12; then, divide total cash byone month’s expenses.
CashAnnual Expenses / 12
On the sample balance sheet on page 21 we seethat at FYE ’08, CHP had nearly seven months ocash, while at FYE ’09, the amount dipped to aboutfve months. In general, NFF encourages organiza-tions to aim or a minimum o three months o cashat all times (note that this is a guideline rather thana frm standard). For those producing and present-ing riskier/less commercial are, we suggest aimingor at least six months. Ideally, or all organizationsat least three months would be set aside explicitlyin a risk reserve, to be replenished as soon ateruse as possible.As a nonproft’s cash can oten be restricted, wealso want to measure liquidity against that portiono the organization’s net asset base that should betruly available to cover operations. Such net assetsdo not include property and equipment (which can-not easily be converted into cash or operations).We call this portion o unrestricted net assets “Liq-uid Net Assets.”
Months of Liquid Net Assets
(LNA) = the numbero months o expenses that can be covered with theliquid portion o unrestricted net assets.The ormula is more complex: take the total amounto unrestricted net assets and subtract rom it prop-erty and equipment (PE, net o depreciation) minusacility-related debt. Divide the result by one month’sexpenses. (Note: generally, board-designated undswould be subtracted rom unrestricted net assets,too. CHP’s balance sheet ormat takes care o thator us.)
Unrestricted Net Assets - (PE Net - PE Debt)Annual Expenses / 12
Cider Hill Players has little property and equipmentand no acility-related debt, so the calculation isairly basic. In the callout box, we see that at FYE’08, CHP had nearly seven months o LNA, while atFYE ’09, the amount dipped to about six months.It is sae to say, then, that CHP has strong liquid-ity. When we add their $50,000 board-designatedreserve, we could make a case that they have areasonable amount o adaptability as well. Howdoes your grantee’s balance sheet are on the liquid-ity measures?
Adaptability and Durability
Beyond liquidity are longer-term risks that cultural organiza-tions are challenged to address. Examples include:
• buffering against unexpected challenges (e.g.,
• seeding support for pursuing new artistic opportunities• investing in organizational change that can lead to
improved net revenue
• funding new purchases, upgrades and replacements to
property and equipment
• providing long-term stability
As stated previously, organizations address these capitaliza-tion needs with inusions o capital rom strategic debt aswell as grants and contributions. An additional approachthat NFF urges organizations to take is establishing andbuilding reserves. Reserves help lower the risk o whetherunds will be available when they are needed. It is a veryrare organization that has sucient amounts set aside inreserves to meet all its uture needs. And we would notencourage organizations to move in that relatively impracti-cal direction. But, we have seen and do see the wisdom inputting a reasonable sum o unds into reserves that can bedrawn down and replenished as possible.
There is a range o reserves that can provide arts groupswith a frst line o deense or source o opportunity; a