In this week’s follow-up case study, we examine how limited and inflexible revenue sources leave organizations vulnerable to financial challenges when a crisis strikes. This week’s case study examines the Fine Arts Museums of San Francisco and how pandemic-related challenges knocked out a significant portion of their revenue stream. While many organizations were affected by the pandemic, nonprofits that rely on ticketed revenue sources were instantly and completely restricted from their primary funding structures. Always remaining focused on financial strength and flexibility prepares an organization to face even the most unexpected challenges, like a pandemic, and allows them to confidently serve their community in even the most trying times.

THE CASE STUDY

The Fine Arts Museums of San Francisco is a network of two museums operated by the same nonprofit organization. The organization oversees two unique museums, the De Young in Golden Gate Park and the Legion of Honor in Lincoln Park. The institutions are some of the most visited and respected arts institutions in the United States. Operating both museums on a $62 million budget, the unexpected nature and prolonged closures related to the pandemic wreaked havoc on the museum’s specific plan for funding. They rely heavily on ticket sales for general admission as well as specific galleries. The pandemic left this revenue stream at a full stop. Just when shelter-in-place orders were given in March, the exhibition, “Frida Kahlo: Appearances Can Be Deceiving,” arrived at the De Young Museum and was prepared to open to the public. Set to open on Saturday, March 21, there were also two days of parties and previews to celebrate the exhibit coming to San Francisco. Tickets, membership, concession, and gift shop sales associated with this gallery were expected to provide 15% of the year’s total revenue for the De Young’s parent organization, the Fine Arts Museums of San Francisco. The organization was also forced to cancel two major fundraisers in addition to closing its doors. The estimated 15% does not capture the canceled fundraisers or the projected losses from new shutdowns and other limitations. Because of the expenses related to the exhibit and several months of zero revenue, the loss could amount to $9 million, a large budget gap to fill. Meanwhile, museums are beginning to reopen and claw back lost revenue but must do so under rules that limit capacity and prevent the hosting of large events. This severely restricts their fundraising ability and their ticket sales.

In the context of nonprofit operations, a significant and sustained decrease in revenue creates a bleak outlook for museums and many similarly structured organizations. In a 2018 survey of 3,400 nonprofits by the Nonprofit Finance Fund, half said they had only three months’ cash on hand or less, and 19% said they had a month or less. The pandemic makes those cash reserves suitable for sustaining an organization for even less time because it presented challenges that simultaneously damaged revenue and raised costs for many nonprofits. Even organizations that are not directly supporting community healthcare and well-being as a result of the pandemic, still face increased expenditures for cleaning, masks, hand sanitizer, and other personnel/guest protection measures. The nonprofit industry is by its nature fragile and crises often affect them doubly by decreasing revenue while raising costs. By understanding their vulnerabilities, nonprofits must work to diversify their revenue while also making sure to have cash reserved for several months of expenses. For museums during the pandemic, many major institutions saw success by taking their galleries online and offering them free to the public. While this may not shore up costs entirely, presenting a donation banner alongside digital galleries is a way to have the organization out in the community fundraising, advertising, and educating when otherwise completely restricted.

WHAT DOES THIS MEAN FOR YOU

While the loss of ticket revenue is just one example of how a limited or inflexible revenue source can leave a nonprofit vulnerable, the same principle can be applied to all revenue sources whether an organization is overlying on their endowment, ticket sales, or a limited donor population. Focusing on the financial side of nonprofit work is essential to allowing nonprofit leaders, volunteers, and communities to enjoy their passion for building community, educating, and providing essential services. Next week, in our final blog on nonprofit vulnerabilities, we examine how the lack of donor development can jeopardize an organization’s legal public charity status and the benefits associated with the status.

Want to set your nonprofit or small business up for long-term success? NMBL Strategies brings over 30 years of executive experience on four continents in order to provide the most innovative and insightful solutions. Reach out to us today to learn what insights we can offer to your organization.

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