10 Budgeting

Budgeting

This chapter will briefly cover budgeting for individuals. Something that you need to be able to do in order to plan financially, particularly if you are going to work in the freelance world. As well, there is a bit of insight on production and operational budgets (plus resources for those who want to dig deeper into this area). It is good for everyone working in any aspect of theatre to at least understand what some of the budget realities are for theatre companies and producers. Unfortunately, dollars or lack thereof do impact everything from hiring to scope and scale of a production.

If you are going into production management, administration, or other aspects of management, then you will need to have a much deeper understanding of budgeting and do some further financial training.

Individual

The basic concept of budgeting is to anticipate what revenue you have coming in and what your expenses are going to be so that you don’t run out of money. I know someone who looks at their bank balance and if there is money they will spend it, but they haven’t planned for the fact that they need to cover their phone bill the next week. This leads to unnecessary stress. A part of budgeting is the need to estimate or anticipate upcoming bills. You may not always know exact numbers in advance, but you at least have parameters to prevent going in the hole.

Activity: As an exercise, try to map out just a simple monthly budget for yourself.

• What are your regular monthly expenses?
  – Rent
  – Groceries
  – Travel (gas or bus)
  – Phone
  – Entertainment
  – Loan Repayment/Interest
  
• What is your monthly income from the various jobs you might work and other sources?

In comparing expenses to income, are you spending more than you earn? Or are you able to save any money for unplanned incidents like repairs or a month when you won’t have steady work?

I’ve had students who hate numbers and budgets. After doing this exercise in class they said that they realized why they never have money to spare.

As an example:

In this example, you will be $25 short for the month so if you do this budget exercise in advance you can cut back on entertainment or pick-up extra shifts at work to make sure you don’t go into debt. It is important to know what areas are not flexible, like rent, and what you can adjust. Ideally, if you are saving up for something you’ll budget long-term to put away a bit each month. As you get more work, as noted before, it is good to put away money in case you will need to pay taxes when you file them, for annual membership dues for professional associations, and for emergencies. The alternative of living off a credit card or overdraft can lead to higher interest rates and more expenses in the long run.

Here is a great resource – https://www.ragstoreasonable.com/

Another tool is a balance sheet, which can be used for individuals and companies. See the attached example. This takes into account your assets, like existing bank balance and things you own, but also your existing liabilities like a credit card debt.

As an individual artist if you apply for a grant to write a new play or do professional development, you will be asked to do a budget for whatever project you are seeking funds to support. if you decide to self-produce, a more complex budget will be required. Learning to do a realistic project budget is important in the granting world. See the Funding/Grants chapter and the following attached examples:

• Small Collective Budget Example
• Professional Development Budget Example
• Midsize Independent Theatre Production Budget
• Annual/Operating Budget
• Individual Artist Playwriting Example Budget

Most granting agencies now provide a digital budget template or they have you fill in the numbers on-line, so it may vary in look from the examples, but the principles are the same.

Organizational

Financial Management from a theatre company’s perspective is similar, but you are dealing with a larger scale and more items. Being fiscally responsible is required of an organization so that they can pay their bills in a timely fashion, continue to operate, and meet their mandate. I’ll reiterate that in theatre this often means really stretching a dollar to be as efficient as possible. Many have spoken about theatre companies running on a scarcity mentality. This is the constant feeling that you have no money and therefore need to spend as little as possible.

As noted under Funding, there are three main sources of revenue. Public (grants from the government), private (donations, corporate support, fundraising), and earned revenue (ticket sales, merchandise, program ads you sell).

It is good to understand the difference between cash and accrual accounting. Cash basically means you record both revenue and expenses when they actually occur, in other words when you receive the payment or you pay for something. Accrual is based on when the transaction occurs regardless of the money coming in or out, for example the date you invoice someone for a fee rather than the date that they pay you.

Most businesses keep a monthly overview of expenses and expected revenue to make sure they have enough cash on hand to pay anticipated bills. A cashflow statement (see example) will track this over time so you can see how it changes at specific times of the year and can estimate needs on a monthly basis. Accounting software such as QuickBooks or Simply Accounting run these reports for you as long as all financial data is being entered regularly.

A few other statements that are good for basic financial understanding are a balance sheet and Profit-and-Loss or P&L statement (see example). The balance sheet as noted above captures a moment in time showing what in that moment are the assets as well as liabilities (amounts owing or losses), these will always balance each other out. Looking at a P&L statement allows you to see profits or losses over an indicated period of time while including all assets and amounts owing, rather than just the money in the bank.

Assets for a company might be cash, investments, inventory that has a value, monies you are owed (receivables), prepaid expenses, property, equipment, and even artwork that has a real market value. My company once had art prints donated to it, they were valued at $8,000. This became an asset listed on our financial statements even though it was not liquid (cash we could draw upon). However, they had a value and could technically be used as collateral or become cash if we sold them.

Financial Planning

A few things that companies have to do or consider for good financial planning:

• Some funders provide monies in advance, others holdback a percentage until you do a final report, and others require copies of invoices/receipts to prove expenses before reimbursement. This is important when you think about cashflow, as many companies have to spend funds that they have not yet received.
• Many grants outline specific things that the funds they have provided can be spent on. You need to track things and use these restricted funds for only their outlined purpose. Your budget that was submitted with the grant has to be followed or adjustments approved/explained. If you do not have enough qualified expenses for the grant amount provided, you will have to return funds.
• Budgets are for planning and projecting in advance, so once you set a budget you try to follow it to make sure you don’t spend more than you are projected to earn. Financial statements are done after the fact as part of reporting.
• It is important to have a contingency plan or financial cushion in case you don’t earn your anticipated revenue or in case expenses are higher than anticipated.
• It is also important to regularly update budgets as things change. Most companies will do a quarterly report and compare real spending/earning every three months to the budget to make sure they are on track. This sometimes results in needing to update the budget, knowing you need to spend less or perhaps even having the good fortune of being able to say yes to more spending.
• Likewise for a production, regular budget check-ins with each department and subsequent updating to make sure things are on track, is crucial.

Budgeting

Students have often asked how does one anticipate revenue and where do budget numbers even come from. It is more than a guess, it is based on looking at past actual numbers and having experience to know what is feasible. However, something like COVID or an unforeseen cancelation could come along and completely blow up your budget. This is one of the biggest challenges in theatre, you can’t be fully confident about your anticipated revenue as it is so unpredictable. No one can guarantee how a show might sell or prevent all external factors that might affect earned revenue.

If you are tackling your first production budget, perhaps self-producing for the first time, then it is important to create a realistic budget. Do the research for the expense side as these costs are often set fees or non-negotiable costs for things like lumber. Also talk to those who can assist you by sharing their experience. What is reasonable to expect in ticket sales? Usually, 50% to 65% is a good conservative number. If you budget for a full house that’s very risky, and if you count on it you will likely end up with a budget loss. Also be realistic about your odds of getting an arts council grant. What is your contingency if you are not successful? Many independent companies have to wait for news on their arts funding before they can even announce a production, since they simply cannot proceed with the project if they don’t get the grant.

Financial know-how and experience are important skills. All those in leadership positions need to be well-versed, and in particular a GM and Production Manager will need to be able to develop strong and feasible budgets. Others, including Board members, at least need to know how to read statements to identify any red flags. Hiring an independent auditor or an accountant to do a review engagement annually then allows an external professional to have a look and make sure everything is above board.

A few basic budgets are included to give any beginners a sense of what these look like.

Annual/Operating Budget

• Most will budget conservatively or budget based on risk that is reasonable
• A company may be carrying an accumulated surplus or deficit from previous years.
• In creating an annual budget, you will want to reflect past years and explain major differences. Each season can have different needs, but a Board will want to understand these.
• For theatre companies receiving Canada Council for the Arts operating or multi-year funding, they will have to use an on-line system for annual financial and statistical reporting called CADAC (Canadian Arts Data / Données sur les arts au Canada)

Project Budget

• This should be done for each show no matter the size.
• If you apply for a grant you will need a strong project budget as part of your application.
• This type of budget should always have a zero balance, even if the company itself is investing dollars they have from other revenue this should be reflected as revenue to accurately counter all the expenses.
• Many places limit administration to 10% for a project. Funders in particular often want to fund the project, show, or program and won’t want to see a huge chunk of the expenses be administration.
• You are often creating multiple versions of the budget for various applications to reflect the ‘ask’ versus how much you feel you will successfully be awarded. For example, if you are asking an arts council for $10,000 you need to put that in the revenue for the budget you submit to them, but you may have a version of the budget without this amount so you know how you will manage if you do not get the grant.
• As noted, you generally would never budget for more than half potential box office income as this is risky. You’d need to make a pretty strong case to be able to say the show will sell out and rely on those dollars in the budget.

Considerations

Other funders have their own budget templates, so you often have to be able to input budget numbers in the way each would like to see it. Non-arts council federal Departments sometimes want to see it as a cashflow to decide on when payments will be made to you. They will also have different categories than you’d see in a typical theatre budget. See the Department of Canadian Heritage budget template for the Community Support, Multiculturalism, and Anti-Racism Initiatives Program as an example. As well, Human Resources and Skills Development Canada template for their Young Canada Works Program.

There is a difficult balance between growth and being realistic. Most funders want to see growth, but doing more and more can eventually lead to challenges if you don’t have the resources (staff, time) to maintain all the programming you initiate.

One shift to make note of is that for the longest time the subscription model was a way of having cashflow and predictable revenue for the year. However, subscriptions have been dropping and COVID really took a bite out of them, so it has become riskier to rely on. This effects both the advance income companies have to work with and ability to accurately predict income. In a summer 2023 survey of 69 member companies that PACT did, they had seen costs go up by 35% in the last five years from wages to hard costs of goods (fabric, lumber, paper…). However, only 25% of these companies were seeing the same number of audience members. This means costs are up but ticket revenue is down. There is also the very real challenge of owning and running a space and having to undertake maintenance costs for upkeep. A venued theatre has several additional costs to finance.

Finally, on the income front, there is also the reality of how government budgets will affect the theatre. A cut to funds to an arts council will affect all those receiving grants. Knowing what each annual federal budget is offering, in terms of public funding for the arts, is an important part of keeping abreast of developments that can affect your theatre company and the theatre community as a whole.

As an example check out Mass Culture’s federal budget analysis.

Like it or not, theatre is often all about the numbers.