We hope most of you have been able to book vaccinations now that the booking system has opened up to all Ontarians over 18! These are exciting times, and we hope we will see things start to improve soon thanks to increased vaccinations.

Though exciting, there is also plenty of uncertainty around the future of the sector. We would like to offer a few thoughts about the issues you are facing.

We Have Your Back

We’ve been starting to receive calls from the CRA following up on CEWS and CERS claims, and have been providing documentation on clients’ behalf. We’re braced for audits, but we’re confident we’ve done our due diligence and will be ready to assist if CRA comes calling.

 We continue to stay alert to CEWS, CERS, and other subsidies. Please get in touch with your bookkeeper if you have any specific questions or concerns. 

 

Planning Amidst Uncertainty

Impacts are Uneven Across the Sector

Some organizations are seeing large surpluses — others, large deficits — others, lesser impacts from COVID. Our observation is that some common characteristics drive the financial outcomes organizations are likely to see.

The biggest arts organizations, who generate proportionally more earned revenue and who receive proportionately less government funding seem more likely to be hurting. These organizations are also more likely to own land and buildings, and to have significant fixed costs — and therefore less agility.

Mid sized and smaller organizations, whose earned revenues make up a smaller proportion of their operating budget appear to have seen different financial outcomes (so far!): the continuation of operating grants and the addition of emergency grants and subsidies have the potential to create substantial short-term operating surpluses even in the midst of the current emergency.

The smallest arts organizations may have been left out in the cold. With no payrolled employees they cannot receive CEWS; with no rented space they cannot receive CERS; these same features make them ineligible for CEBA; and they may not have qualified for Canada Council emergency funding.

These disparities raise interesting questions about what interventions may be needed to support recovery, and about what shape the arts community may take in the “new normal.”

 

Benchmarks & Expectations

It’s difficult at the moment to feel any sense of control over financial plans. Managers are unsure how to plan programs, board members are feeling anxious about upholding their fiduciary/financial responsibilities, and everyone is trying to meet funder and donor expectations — expectations which aren’t necessarily clear. 

Previously, an accepted sustainability benchmark was to hold unrestricted net assets equal to about 3 months of revenues. At 2020 and 2021 year-ends, some companies are seeing surpluses that have pushed their net assets above that 25% mark — and of course there is concern about possible reaction from funders and other supporters.

Considering the longer-term effects of the pandemic, we expect that this generally accepted 3 months of savings benchmark may change — or at least be relaxed while the world recovers from the crisis. We expect that over the next few years, nonprofits and charities will absolutely need any larger surpluses they may have accumulated to sustain themselves as the sector rebuilds. 

 

What Can You Do?

• Save your surplus: If you’re worried about what a major surplus will look like on your financial statements, explore options that don’t involve rushing to spend it. 

• Plan (and communicate) for the long haul: Given the present uncertainties, it seems reasonable to ask stakeholders to support you in crafting a measured response. As of this writing, it’s unclear how the latest Federal Budget measures will be implemented — let alone what subsidies might be available past 2021. It is wise to assume that any short-term plans should be contextualized within a multi-year game plan, and that your game plan needs to remain flexible.

• Consider creating an internally restricted fund: Your board of directors can move to segregate a portion of your net assets for a defined purpose. This might be as general as “operating reserve,” or more specific such as “new creation fund” or “scholarship fund.” The objective is to define an intention for your net assets. This conveys to the readers of your financial statements that you are thoughtfully considering your future options (not just hoarding cash).

• Consider incorporating a foundation: This would be a significantly more complex response, requiring careful thought and planning. Larger organizations, or those with proportionally larger net assets, may find it beneficial to create a separate foundation to support operations. This has the effect of investing the main portion of your resources in a separate — though related — organization. Your operating entity therefore reports smaller net assets. Of course, you now have a second corporation to manage — so the pluses and minuses need to be carefully evaluated.

• Consult with an expert: Before changing the structure of your net assets, discuss the matter with your board, your auditor and other financial and legal advisors.

 

Revenue Uncertainty

Planning for the future is difficult when so much is still up in the air: When will venues be allowed to reopen? How soon will audiences come back? How long will subsidy programs like CEWS be around? What are the details of the new recovery programs?

With so many unanswered questions (and many more), the most we can do for now is speculate, and speculation doesn’t make for useful budget scenarios! 

 

What Can You Do?

• Narrow down your options: Don’t spend time agonizing over hundreds of scenarios. To the extent that you can, try to identify “bookends”: the best and worst case scenarios will give you a better idea of your limits.

• Focus on what you can control, leave what you can't: Revenues are tough to predict; expenses are usually more within your control. 

• Read your balance sheet: This will allow you to track your cash, which will help with immediate cash flow estimates. You’ll also want to pay close attention to obligations against your cash. For example, you may have deferred revenue from various sources — which entails commitments to upcoming activities. Be sure you understand how much flexibility you actually do have. 

 

Conclusion

Although in the “before times” you might have been tempted to spend down a large surplus, we believe it is reasonable to assume we'll have some years of repercussions of the pandemic to contend with — and that you are likely to find a future, mission-driven, strategic use for those funds. The government cannot continue its current level of subsidy indefinitely; at some point they will need to replenish their reserves. 

It will also be a while before audiences come back the way they used to. Though the timelines are unclear, the common wisdom is that the arts sector will be among the last to rebound. 

Ultimately, we don't know what the effects will be in the long term, so it is best to hold onto cash reserves, structure them thoughtfully, and be conservative about spending.

Important Dates and News

• June 2: QuickBooks Connect Conference

  • The YA team will be attending to make sure we stay on top of product updates, and get the most out of the software to best serve your organizations

• The CEWS and CERS programs have officially been extended to September 25, with rates starting to decrease in July. Details have yet to be officially published. The federal budget also proposed a potential extension to Nov. 20, 2021, if required.

• Deadline schedules for CEWS and CERS below

  • Periods 1-8 of CEWS have closed, Period 9 to close on May 20. 

  • Period 1 of CERS has closed, Period 2 to close on May 20.

This tip sheet was created by the Young Associates team based on the best information available to us as of the date of posting.

Although every effort has been made to provide complete and accurate information, Young Associates makes no warranties, express or implied, or representations as to the accuracy of content in this tip sheet. Young Associates assumes no liability or responsibility for any error or omissions in the information contained in the tip sheet. 

Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, with a focus on arts and culture. Young Associates also provides consulting services in the areas of data management, business planning and strategic planning. Heather Young published Finance for the Arts in Canada (2005, 2020), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.