Planning Amidst Uncertainty, Federal Budget Updates & More

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.

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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.

Budgeting with CEWS

One thing that is top of mind for our customers during the pandemic is budgeting and cash flow. Considering that earned revenues have largely been reduced and the Canada Emergency Wage Subsidy (CEWS) has been a major stabilizing factor during unstable times, projecting CEWS has become a priority for many. 

However, due to the ever-changing nature of the subsidy, as well as the estimation involved in the calculation and forecasting process, attempting to project CEWS is a much more difficult task than most would assume.

Here is some further detail to help you understand how challenging it is to forecast CEWS, and what your alternatives are when trying to project budget and cash flow.

Estimating Future Revenues

There are 2 steps to calculating CEWS. The first is to compare the current period’s revenues to a previous period to measure the revenue drop. This is where the first element of uncertainty lies. It is very difficult to forecast revenues with confidence. We don’t know what public health challenges lie ahead, so many organizations are struggling around programming decisions, what to charge for vs. offer for free, and what fundraising avenues to pursue.

Nonetheless, your bookkeeper needs your revenue estimates by month before they can make any further calculations. 

If you are accustomed to budgeting annually, you will need to pivot to a monthly budgeting process in order to generate estimates for CEWS.

Your bookkeeper will have evaluated the benefits of using the cash or the accrual method of reporting. If your company is filing using the cash method, your bookkeeper may need an up to date monthly cash flow forecast.

The Sliding Scale Factor

The second step is to calculate the subsidy rate. This tip sheet contains details on the base and top-up rates for Periods 8 to 10. 

Since the base subsidy rate is calculated on a sliding scale, any errors from step 1 will be multiplied by a factor of 0.8 for Periods 8 to 10. 

Additionally, if you have a greater than 50% revenue drop, a faulty revenue forecast will result in an inaccurate top-up subsidy estimate.

Estimating Future Payroll Costs

The second step to calculating your CEWS subsidy is to apply the rates to your payroll cost. Your bookkeeper will need your staffing costs by employee, by month in order to make the calculations. Employee detail is required because there is a maximum per employee.

Remember to allow for any anticipated changes — and any contingencies that should be discussed. For example, if you are considering a layoff under certain circumstances, your payroll will be reduced and your CEWS forecast needs to be reduced accordingly.

Government Policy

The government reserves the right to amend CEWS. We have seen a number of important changes to the program since it was first announced. We have also seen the rules confirmed very close to the implementation date. For instance, CEWS Period 8 arrangements were confirmed a few weeks after the Period start date.

The government has announced that CEWS will continue until June of 2021, but at this point we know the terms and conditions only until Period 10, which ends on December 19.

Risks

As you can see, there is a significant risk of inaccuracy in forecasting CEWS. The numbers involved are large. For many organizations, payroll is the single largest expense — and de facto CEWS has become one of the largest revenue sources.

Understandably, managers want to build CEWS into their budgets. For many organizations, CEWS has proven to be the single most stabilizing factor during the pandemic.

But, as you can see, a budget forecast for CEWS involves estimates on top of estimates — plus the “unknown” of future public policy changes.

Possible Approaches

The more conservative your estimates, the less likelihood you will wind up in trouble.

One important challenge with budgeting — in any situation — is that once the plan is on paper, people tend to feel “authorized” to proceed. This can mean that staff members forge ahead with planned expenses (which are in your control) while revenues (which are generally not in your control) remain uncertain.

One idea is to omit CEWS altogether. Define what revenues you’re able to count on, and what expenses you expect before even taking CEWS into account. This will give you a better idea of the state of your organization and your internal cash flow. 

Or, omit the top-up subsidy and prepare your budget forecast only on the base rate. 

If you are dependent on CEWS and therefore need to see it in the budget, prepare the best possible documentation for your revenue forecasts. Keep good notes! Review often. As each month elapses, re-evaluate your estimates for upcoming months. 

Lowball revenue forecasts, which will lowball the CEWS rate that you may claim. Highball expense forecasts, including salaries — but hold back as much as possible on actual spending.

How Young Associates can assist

A consultation with us may make all the difference to your comfort level and confidence that your accounting system is up to the challenge of the pandemic. 

We’d also be happy to give you a quote for full-service bookkeeping. 

We work on the basis of fixed price agreements, so you’ll know going in how much our work will cost — and we always offer a money-back guarantee: if you’re not completely delighted with our service, we will, at your option, either refund the price, or accept a portion of said price that reflects your level of satisfaction. 

Contact us: info@youngassociates.ca

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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.

Ten Tips for Reporting Financials to the Board

Ever had a moment of dread when preparing for a board meeting? Board meetings do not always have to be the event we wished we could skip. By establishing expectations for clear communication between board and staff and creating a common base of understanding of the company’s finances, your board of directors can become a foundational resource for your organization.

To uncover some of the best tips for financial reporting to your board, Young Associates interviewed senior managers and collated their views on handling financial reporting to the board of directors. We would like to thank Soundstreams Canada, Prologue to the Performing Arts, Toronto Dance Theatre, Crow’s Theatre, Playwrights Guild of Canada, and Dance Ontario for their support and assistance in creating these tips for financial reporting to boards of directors.

Now, for some tips on best practices:

1. Don’t give up; the right Treasurer is out there! Just like dating…you don’t always meet the right one for you first time out. Seek a Treasurer with a strong financial background who can help you prepare and present board reports, address the Annual General Meeting, and support the development of the annual operating budget. It’s often a balancing act between accounting training or business skill, and an understanding of the not for profit world. Having the right credentials is great, but may ultimately be less important than finding a compatible person. So, finding a CA or Bank Manager may not be essential. If you’ve found somebody who has great technical skills, but is new to the sector, it’s up to you to help them deliver their best by cultivating their engagement with your organization and the sector.
2. Gauge the financial comprehension level of your board. It’s not necessary for everyone on your board to be financially literate, but according to our interviewees, it’s extremely helpful to have multiple board members with at least a basic grasp of financial management. How much they understand the financial stuff will influence how often and how in depth financial reports are presented at each board meeting. With a board comprised solely of artists, you risk a lack of financial comprehension and understanding, making presenting financial data difficult, timely, and at times, ineffective. At the same time, if your board is comprised only of those with strong financial backgrounds but with little understanding of the organization’s mandate, then you risk focusing solely on financial matters and at the expense of other mission related topics that need to be addressed.
3. Sometimes the ideal is not the realistic. While it would be nice to have a healthy balance of individuals with practical financial management experience and arts people (or people from whichever sector your charity occupies) on a board, most of the time, this is not the case. Ideally, it would be great if all board members read reports prior to the meeting, and attended all the organization’s events accompanied by some of their friends and colleagues. The reality is that some board members will not do that on their own accord. Learning from our interviewees, the best approach is to promote the engagement of all members, creating policies for them that ensure that their participation on the board will benefit the organization and its bottom line. Examples include attending 75% of the performances in a fiscal year, contributing an annual donation to the organization, and recommending colleagues with sought-after attributes. Although you may not reach the ideal, you can still reach a realistic goal with your board that benefits the organization, and communicate how the actions of board members impact the financial reality of the organization.
4. People are always changing. Be prepared for that moment when your beloved Chair or Treasurer has reached their maximum time as a board member, and you have to go about finding a new one, (one you are worried will not be as compatible!) But that’s okay… and normal! Outlining the qualities and attributes that your previous member had, or ones that are missing from your current board will help narrow your focus in recruiting a new candidate. All of our interviewees have been in that position, and said they were open to recommendations and referrals from other board members, colleagues, and confidants. Remember, the point in the recruitment cycle when you need to pay attention is when the new VP is being sought. Start setting standards and building relationships then; thus, when they arrive as your new President, you have been grooming them for up to two years!
5. Send out materials ahead of time. Sending out materials (board report, balance sheet, income statement) to your board members prior to the meeting gives them time to prepare questions and concerns in advance. It can save you time at the board meeting because it is anticipated that everyone will have reviewed the material. A board with members who possess strong financial comprehension skills may not need to see copies of the reports prior to the meeting – unless there is a specific issue at hand that needs to be addressed. For most of our interviewees, sending out the material ahead of time allowed some of their directors time to process the information, and save valuable meeting time.
6. Not all board meetings need a balance sheet and income statement. If an organization has a Treasurer who possesses a background in chartered accounting, then that individual tends to keep such a close eye on the finances that regular viewing of the balance sheet and income statement would become redundant and unnecessary for both the Treasurer and the other members. This is not the case for most of our interviewees, who include a balance sheet and income statement in the board reports that are sent out at least a week in advance to the meeting, allowing them some time to review the month’s finances and keep up to date. Most of our interviewees use the balance sheet and income statement to continue engaging their board on financial matters, allowing for complete transparency of the numbers.
7. Consider if your board meetings need to include a standard financial agenda. A common principle for financial reporting to the board is to schedule financial reporting at every single board meeting. For our interviewees, this varies based on the level of financial comprehension of their treasurer and board. For organizations with a strong Treasurer, financial matters would only be discussed if absolutely necessary. For other organizations, it becomes necessary to include a financial agenda at every meeting in order for everyone to be on the same page. Creating a standard agenda focusing on addressing any issues with the financial data is one way to encourage board members with limited financial knowledge to ask questions and become more engaged with the financial operations of an organization.
8. Plan to connect with your treasurer before each board meeting. Most managers do not have a lot of time in a board meeting to talk at great lengths about the financial matters at hand; therefore, preparing beforehand with your treasurer can ensure that both of you are on the same page and more importantly, that they are able to understand your perspective on the finances. If your treasurer has a strong financial background, then he or she can help you determine the reality of your financial position, and work together to map out how to present the information effectively to the rest of the board.
9. Board meetings do not have to occur every month. While common principles call for board meetings to run every month, most of our interviewees push it to every 6-8 weeks. Timelines can be affected by physical distance between members, and scheduling. While it is good practice to plan out each meeting date at the AGM, in reality many organizations decide on the date at the prior meeting. The most important thing to take away is that board meetings should be consistent and require all members to be present and prepared.
10. Make sure your board is “on board”. Remember: your board members are the legal representatives of your organization. It is their responsibility to be committed to your organization by reading the board reports, engaging in the organization’s activities, and helping with fundraising initiatives. You shouldn’t have to parent your board members to make sure they do all their readings. Make it clear to the board what is expected of their position, and how beneficial their efforts are to the organization. It doesn’t matter if they come from a business, finance, or arts background: all of them are expected to be engaged with and updated on the events and happenings of the organization, as well as the financials. Make sure your board members are aware of their duties and do not get caught up in using their position as a resume booster, but rather they prioritize the mandate of the organization.

This tip sheet was created by Caroline Bendiner, Centennial College Intern from the Cultural Heritage & Site Management Program. Founded in 1993, Young Associates provides bookkeeping and financial management services in the charitable sector, focused 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), a textbook and self-study guide on accounting and financial management for not-for-profit arts organizations.

Disclaimer

If I have a surplus, why don’t I have any money?

It’s probably a timing issue.

You might be strapped for cash if you are paying off bills from past year losses. In the same way, if you’re doing some early spending on future projects, this year’s money might be flying out the door to get ready for next year.

You could also be tight if you haven’t collected all the money people owe you. For instance, maybe you’ve rented a lot of studio time or gathered a lot of event registrations. If those people have booked but not yet paid you could be in trouble. In the same way, you could have solid fundraising pledges, or a confirmed grant, but still be awaiting the funds.

If I have a deficit, how come I’m not broke?

It’s probably a timing issue.

This year’s losses might be floated by money that you made in the past.

Or perhaps next year’s money has started to arrive. This is common for performing arts companies that sell seasons on subscription: in the spring, when next year’s tickets go on sale, money arrives that might make you feel flush, but that actually should be carefully stewarded so it can be used to pay for the next season. In the same way, grant instalments might arrive early.

Perhaps the bank is in good shape despite your losses because you haven’t paid the bills yet. You may know that you’ve lost money, but still be awaiting invoices from suppliers.

Why is my budget different from my cashflow?

A budget captures revenues and expenses that “belong” to a certain year. A cashflow shows money flowing into and out of your bank account.

Most revenues are received, and most expenses are spent, during the year to which they belong. However, in the early days of this year, you might still be collecting some of last year’s money (e.g. grant holdbacks and other receivables), and paying some of last year’s bills. In the later days of this year, you might start to receive or spend money in preparation for next season. And you’ll probably find that some of this year’s transactions just can’t be settled till the early days of next year.

Besides these timing issues, cashflow involves tax transactions that are not part of your revenues and expenses. For instance, everywhere in Canada we pay GST or HST (depending on your province) on the purchase of goods and services. Cash flows out to pay the sales tax – but for most organizations it’s partly or fully recoverable. Only the non-recoverable part is an expense.

The budget document doesn’t care about the timing of cash payments: it is based on the idea of accrual accounting, where revenues and expenses are “accrued” to the year where they belong, and the actual exchange of money might happen either earlier or later.

The cashflow document is all about the timing of cash, without respect to which year various things belong.