27 October 2016

Aside: This light is your light...

In his post-Emma Rice response, David Jubb suggested "we also need to ask ourselves whether we are descending in to a world that looks more like the Premier league? In which lofty Boards hire and fire team managers with impunity."

This is surprising to read because... well... surely that's exactly where we are?

A Premier League board is beholden to shareholders. Shareholders elect the board to run the club, vote at the AGM and ultimately have final say in the running of the organisation. This works in theory but falls down in practice because there is normally a single majority shareholder. Consequently an AGM vote consists of  the majority shareholder saying "I am voting for this, I control x%, this is happening." Hence the appearance of hiring & firing with impunity.

However, the board of a charitable company (limited by guarantee) can effectively hire and fire with impunity (lovely and supportive though they may be).

The main reason for this is because charitable companies (limited by guarantee) do not have wider members. They have trustees (who act as directors in a legal sense) who are normally recruited by the trustees themselves. This board of trustees may establish an executive board, who are also recruited by the trustees and maybe by other members of the executive board. Then they will have some committees, who will be set up by the board and will report to the board. In The Globe's case they also have a 'Shakespeare Council' (former trustees and board members) who preserve the ethos of The Globe (which is brilliant, even if you dislike the ethos they are preserving). The board will then recruit a CEO/AD/ED or whatever positions they deem suitable and those appointments will take care of running the organisation. It's very insular and (funding bodies aside) there's nobody holding the trustees to account.

This is all best demonstrated by the example of firing a popular Artistic Director. In an organisation with shareholders, if the shareholders dislike the board's action they can vote to remove a board member (or even the whole board). However, in the typical charity structure there is no recourse. At best, a board member could propose a motion to remove another board member but there is no wider body than the trustees with the power to influence the organisation.

There is a charity structure that allows for members to vote on important decisions: the Charitable Incorporated Organisation (CIO). Not widely used by established charities because it was only available from 2013 and is expensive and complicated to convert to, the CIO is not technically a company (no registration with Companies House required) but offers legal entity for the organisation and limited liability for trustees. It also allows for wider members to influence issues such as where money is spent, how the organisation is run and how trustees are appointed. The charity must not exist purely for the benefit of members (so needs to welcome anyone to join) or membership must be linked to charitable purpose (for example, an amateur sports team requiring membership to participate).

For the purposes of this blog at least, Emma Rice stepping down reveals an ethos/structure problem with arts organisations: audiences are increasingly encouraged (rightly) to feel a sense of ownership over organisations (particularly those in receipt of public funds) but ultimately have no influence in how the organisation is run.

Perhaps the question we should ask is 'when will an abundance of audience owned spaces oust 'our' lofty boards'?



* Without wishing to sound like another theatre blog, things are better in Germany: football clubs must be at least 51% fan owned to compete at the top level. 

24 October 2016

Theatre Royal Winchester 2015

A generous estimate of the correlation between an excellent CEO and excellent organisational performance is a coefficient of about 0.3 (a figure taken from Daniel Kahneman's work on the subject), meaning a good CEO enjoys good performance just 60% of the time.

Business writing normally consists of rise and fall narratives or comparison of individuals/companies to try and uncover a recipe for success; the importance of leadership is exaggerated consistently across both approaches. In part, this is due to the halo effect: aware of the success a business may recently have enjoyed, writers create illusory certainty by assigning success to the CEO. Alternatively, aware that a business is struggling, the writer condemns the CEO. The assumed causal relationship is that the CEO drives the business' success but the inverse is more often true: the business' performance causes a CEO to become revered or vilified.

Luck plays a vital role in the performance of any organisation. Observing success does not necessarily mean we are bearing witness to incredible leadership; the qualities of leaders cannot be accurately inferred from results. Even with perfect knowledge of a leader's ability, the performance of an organisation cannot be predicted with much more accuracy than a coin toss.

Rise and fall narratives offer simple causality and ignore luck.

"These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them." Daniel Kahneman.

* * * * *



Theatre Royal Winchester is one of several Grade II listed patent theatres in the UK but the last remaining example of a cine-variety space. It celebrated its centenary in 2014 and, according to the theatre's own website, is considered one of the most beautiful theatres in the south of England due to its Edwardian-style auditorium (capacity: 400, the smaller end of cine-variety spaces, some seating upwards of 3000). Cine-variety was an awkward moment in UK theatre history, involving film double bills, projection screens that could be lowered/raised, multiple variety acts, organs and sometimes entire orchestras. Admission cost about 50p (if that) to attend and many of those spaces ended up being bought out by cinema chains with the advent of 'talkies' because their overhead was too high: they ran themselves into the ground.

With Chief Executive Mark Courtice recently announcing his decision to step down at the end of 2016, it seems pertinent to examine what sort of impact his 5 year tenure has had on Winchester's Theatre Royal. The theatre itself is owned by Winchester Theatre Trust, who in turn lease the building to the operating company (The Live Theatre Winchester Trust). Where the following analysis mentions the 'Theatre Royal Winchester' (or TRW), it refers solely to the operating company unless explicitly mentioned.

Courtice's appointment as Chief Executive in 2011 was likely due, in part at least, to his experience of similar roles in similar theatres in similar parts of England, notably Chief Executive of Portsmouth's Theatre Royal (along with Administrative Director at Southampton's Nuffield Theatre). The first financial year for which Courtice was present at TRW was 2012 and the table below provides some key figures from his time in Winchester:


Top line analysis initially seems favourable, with income increasing ~40% over the period in question. Unfortunately, expenditure kept pace (increasing 34%) and TRW reported a deficit in three of the four financial years in question. Activity increased dramatically (performances up nearly 80%) but audiences less dramatically (16%), conveniently highlighting that there is no guaranteed causal relationship between increased activity and an expanded audience.

The erosion of cash on hand is an area of immediate concern and the effect of this steady decline on the organisation's liquidity is charted by the diminishing quick ratio. As a reminder, the quick ratio is a simple liquidity measure: a test of how likely an organisation is to be able to meet short-term liabilities using 'quick' assets (IE assets that are cash or close to being cash, trade debtors included). A ratio of 1:1 implies that an organisation has £1 in quick assets for every £1 in liabilities, a reasonable place to be for an arts organisation. TRW's 2015 quick ratio is 0.53, implying only £0.53 for every £1 in liabilities. An organisation can still operate with a poor quick ratio because the timings of cash flows are not taken into account but a ratio that consistently declines over time is a bad sign.

The number of staff employed at Theatre Royal Winchester is also worth flagging. Given the dramatic increase in activity, it is peculiar to see staff levels only increase by 1 over the 4 financial periods, whilst volunteer numbers practically double. The classic conundrum is that the sole trader (the most efficient model for any organisation) is not able to double their output by taking on an additional member of staff because increased complexity erodes output. Put another way, an arts organisation with 19 members of staff that increases their output by 80% would theoretically need to increase their staff numbers by more than that 80% (unless huge productivity gains have been made or economies of scope were previously being ignored). Rather than recruiting full-time members of staff, TRW appear to have taken up some slack by doubling the number of volunteers (valued at £45,624 in the accounts; additional staff would have likely cost 10 times that). It is worth considering that if staff turnover were particularly high, TRW would struggle to recruit quickly enough to increase the numbers of full-time staff appropriately. Whatever's happening, I suspect TRW has not been a pleasant arts organisation to work for over the past few years.

Before accusing Courtice of driving the car into the lake (and then climbing out the sunroof, jumping back to dry land without a splash on him and jauntily walking away to a life of consultancy), it's probably worth looking at some numbers from Theatre Royal Portsmouth during his tenure (performance and audience data was not available):



2005 was an exceptional year for the New Theatre Royal, largely due to ongoing capital works, hence large amounts of restricted funds were received in this period (this was prior to their 'back lot' project which was documented in more detail here). Note that once again we see a steady decline in cash and the subsequent erosion of the quick ratio as the organisation's liquidity dries up. By the time Courtice left the New Theatre Royal, the organisation had only £0.21 of quick assets per £1 liabilities. The quick ratio is not without flaw: it is based on the balance sheet (which is a snapshot in time) and it ignores cash flows. With this in mind, it's certainly worth examining TRW's most recent set of accounts to see exactly what sort of health Courtice will be leaving the organisation in.

Despite having a capacity of 400, an income of £1.7m and an audience of over 50,000, TRW does not operate a separate company for trading activities, meaning they are legally constrained to ancillary trading. The figures show the effect of this, with ~£150k of income derived from bar/catering/FOH, meaning an audience member spends, on average, an additional ~£3 per visit. There can certainly be good arguments for limiting operational complexity and Leicester Curve rejecting capital funding for a brasserie springs to mind. However, that decision was rooted in a stable organisation looking to add value elsewhere. Whilst I'm sure there's no need to link to yet another article about how some theatres are now more bar than theatre, it's also galling to look at a theatre the size of TRW and not see any immediate evidence that the organisation considers itself a destination. For a very loose comparison, Theatre by the Lake (Cumbria Theatre Trust) also has a 400 seat main house (and 100 seat studio), 70 employees, 237 volunteers but a turnover of roughly double TRW's. Theatre by the Lake operates a subsidiary trading company (TBTL Services) with a turnover of ~£650k. Stated audience numbers were 70,000, meaning TBTL has an additional spend per audience member of ~£9, triple that of Theatre Royal Winchester (note, Theatre by the Lake was picked for comparison purely because it has a 400 seat main house, it may be over/under performing itself but that's another post).


The makeup of TRW's 2015 income was 27% Voluntary, 9 % Commercial and 64% Operating. The growth in operating income accounts for the largest year-over-year change and this was largely due to increased ticket sales (audiences creeping up to ~51,000 from ~43,000 and 40 additional performances). Unfortunately, the increased activity was matched by increased operating costs, with production costs growing by nearly £200k. Box office costs also increased as the result of the year's increased activity (up to £15k from 6.5k), as did things like printing/postage/stationary (up to £19k from £7k - that's a lot of printing).

One of the most significant contributors to TRW's financial pain appears to be Hat Fair, the annual street art festival held in Winchester. In 2015, Hat Fair's production costs were £246k and Hat Fair income was stated as £132k for a total deficit of £114k. The previous year, Hat Fair lost £121k, so 2015 was an improvement of sorts. Hat Fair used to be a standalone NPO with a ~£140k annual grant (and standalone financial troubles) but joined with Theatre Royal Winchester in 2013 to alleviate their funding concerns (or preserve their artistic output, depending on how you look at it). The grant from ACE followed Hat Fair and the scale of the event seems to have been preserved for the time being. Hat Fair's annual results as a standalone organisation were actually fairly robust:

2013: -£19,073
2012: £30,344
2011: £39,611
2010: -£2,866
2009: -£34,935

Hat Fair relied upon a series of funds from regular supporters (ACE, local authority, stall holders etc.) and income was consistently around £300,000 prior to 2014's festival (the first in conjunction with TRW). It seems Hat Fair's reported income halved as the result of a move posited as securing the future of the festival. The most likely cause is that the festival's income was not actually reduced but the NPO grant (which of course comes in as unrestricted funds despite being initially awarded to Hat Fair) is now accounted for elsewhere by TRW. A highly cynical reading would be that the merging of Hat Fair and TRW was actually a move by TRW to secure unrestricted NPO funding, show Hat Fair as a loss-making exercise and then phase it out but retain the funding.


Those still paying attention may have noticed that TRW's balance sheet throws up a couple of points of interest. Firstly, it doesn't include any restricted funds.This is unusual in a NPO organisation, particularly one where the ACE grant makes up only about 8% of total income. This either means TRW are not pursuing any grants related to specific projects or are not following the principles of fund accounting. The former is alarming at a period in time where local authority funding is dwindling (TRW receives a combined £275,050 from Winchester and Hampshire County Council) and the wider funding environment continues to contract. However, the latter would contravene the Charity Commissions SORP and 'alarming' would be something of an understatement. TRW was a successful applicant for a weather damage grant in the 2016 accounting period we should expect the £5,000 awarded to show up as restricted funds in the next set of accounts.

Sadly, it appears there is further evidence of poor financial practice. The University of Winchester have a relationship with ZEPA (European Zone Artistic Projects) which supports exchanges between universities, allowing students to participate in artistic events throughout Europe. TRW have collaborated with the University of Winchester as part of ZEPA but it appears that the university identified a 'shortfall of income against expenditure'. At the time of the accounts being published, discussions were ongoing but TRW's maximum liability is listed as £23,000 (not included as part of the balance sheet as far as I can establish). Without knowing more about the project, it's difficult be specific but one must assume that either disputed expenditure was listed by TRW under the ZEPA project or restricted ZEPA income was reallocated by TRW.

TRW's previously discussed liquidity problems are emphasised on the balance sheet by the presence of increasingly negative unrestricted funds. Whilst an organisation can operate with a negative fund balance, it's an extremely precarious position to be in. The only way it works is if the organisation knows that funds will soon be received to carry the balance back to black. The problem is that the funding streams TRW is relying on are not reliable and it likely won't take a great deal to bring down the house of cards. Without a cash flow statement (larger charities will finally have to compile cash flow statements for 2016+ accounts) it's difficult to see exactly how close TRW are to the edge of that lake. The 2016 accounts will give us more of an idea but...

My guess is close.

And not because Mark Courtice has been unlucky.

5 September 2016

Aside: The cash-to-cash cycle

The cash-to-cash cycle is completely irrelevant to theatre.

It refers to the time between cash being spent and cash coming back in and it's normally analysed by businesses that make a physical product and who buy/sell on credit.

Let's say that you run a business making tiny raincoats for cats. First, you have to buy a bunch of raw materials (fabric, trim, thread, packaging). Those raw materials get made into the final product and then your inventory will sit in a warehouse until it gets sold to pet shops.

The cash is tied up in three areas:

Suppliers - You have to buy raw materials and pay for production up front because you're a new business. Also, you're niche and low volume so you have no buying power.

Inventory - It takes your factory 30 days to actually produce and ship the finished goods. It then takes you 30 days to sell through all your inventory.

Customers - You sell to shops and they all have credit terms of 30 days. All of them exceed this and you don't harass them for payment because you don't want to damage the relationships.

The cash-to-cash cycle above is ~90 days. Cash is spent immediately but inventory takes 30 days to arrive. Inventory then sits in the warehouse for 30 days. Customers take at least 30 days to pay, so it takes ~90 days to turn cash back into cash. This makes life difficult because you have operating costs and need cash to pay them.

All of that cash you spent at the start of the 3 months isn't really doing anything for your business. Maybe you're OK with that because it's going into stock and "speculate to accumulate" but you shouldn't be OK with it. You should be outraged and screaming at the above example.

Cash is absolutely the most vital non-breathing resource an organisation has and it needs to be used in the most efficient way at all times. Note, this is nothing to do with profit motive: it's about being smart with your resource allocation and using cash to keep adding value to the organisation's purpose (which, admittedly, may be the generation of profits).

So, how to improve things?

Suppliers - You negotiate payment terms, meaning you will have 30 days to pay for the product (which, conveniently, means you end up paying for the product as it arrives).

Inventory - You halve your production orders. Your margin takes a hit due to the lower volumes but your inventory now takes only 15 days to sell through.

Customers - You focus on collecting sums due in 30 days, and start adding late payment fees and interest. The relationships don't break down but shops pay on time (after a bit of grumbling).

You just halved the cash-to-cash cycle. Cash goes out, 15 days for inventory sell-through and 30 days for payment. 45 days.

How about a complete shift?

Suppliers - You keep your 30 days payment terms.

Inventory - You keep your production order the same size.

Customers - You start selling online, direct to customers. Turns out the internet loves cats, who knew? You decide to cut out the shops and just focus on selling direct because MARGIN! Web customers pay up front, so it takes zero days to collect payment.

You just cut the cash-to-cash cycle to the 15 days it takes you to turn the inventory, which means you have cash to tie up in development of that cat papoose you've been thinking about.

-----

Probably irrelevant to theatre.

Although...

Looking through some recent hawks analysis and doing some rough calculations; Paines Plough appear to take about 90 days to pay and collect whilst Underbelly take 80 days to collect but 120 days to pay. That seems like useful information to have.

Let's say you're an 'emerging' company making your own work.

You put your cash into development of a production. Perhaps your development time is 90 days.

You don't really have inventory, which is great: nothing to add here. Except that your tour will take time. So, maybe this should be the amount of time you're spending on tour. Let's say 30 days because bad routing happened (this assumes you got a tour without showing the work somewhere else and without more time passing between - we could add a year here if you've yet to start booking it).

Some of the theatres taking your work say payment will be made within 60 days because they're changing over their box office software or undergoing a refurb or are too busy to do it sooner. No problem, you're going on TOUR and you don't want to rock the boat.

That would be a cash-to-cash cycle of 6 months in a fairly optimistic example.

What about one of the venues on the tour?

Well, we know from the example above that they are taking 60 days to pay their suppliers (that's you).

They don't have inventory (ignore merchandise and the bar).

Their customers (your audience) pay cash up front so they don't have to chase them for payment (although they might have to chase some corporate or rental customers).

So, the venue's cash-to-cash cycle is actually negative: they have cash coming in before they spend it. Amazon's cash-to-cash cycle is famously negative as they take longer to pay suppliers for inventory than they do to turn inventory (a huge competitive advantage over bricks and mortar retailers). The insidious thing about negative cash-to-cash cycles is that if they're too negative then they imply an organisation is just using other people's money to fund their operating costs (a little bit like a pyramid scheme).

You could theoretically improve your cash-to-cash cycle by:

1) Shortening your development time (no - out of principle)
2) Shortening your tour (no - need to amortise those development costs)
3) Pushing venues for payment (ok)

The venue only really have one option to improve their cycle: delay payments.

Both parties cannot improve their cash-to-cash cycle at the same time.

Since the cash-to-cash cycle isn't applicable to theatre, this entirely conceptual conflict of interest probably isn't worth spending too much time thinking about.

Unless, of course, you think that cash generation is essential to running an organisation and can see that the dichotomy sketched out above is not sustainable for either party long-term. Perhaps it seems a classic game theory problem: operating independently, the venue stretches the artist to breaking point but then has no artist. Repeat until supply of artists is exhausted. Collaborating with cash-to-cash cycles in mind, venues would have to shoulder a worse cycle time (and may need to adjust models to suit) but the long term picture would be much better for the sector.

26 August 2016

hawks at the fringe: Summerhall 2013




Acquired by "eccentric millionaire" Robert McDowell for £4m in 2011, the sprawl of Summerhall has become a seasonal base for some of the most exciting theatre to be found at the Fringe. McDowell has frequently extolled the virtues of messy, large, flexible arts buildings and one can only hope that the irresistible rise of Summerhall has been noted by those providing funding to the current generation of large capital projects, which will no doubt be new, shiny, glass, 'coloured-light-at-night' buildings.

McDowell's background is perhaps not what you might expect. A Cambridge educated applied economist and banking consultant (specialising in BASEL II requirements: liquidity tests and systemic risk). He worked at Reuters for a decade, was a subject matter expert for Ernst & Young and a consultant for a Luxembourg based consultancy. On paper, he does not have the sort of CV that suggests he would be setting up an arts organisation anytime soon (although, given arts organisation's predilection for stipulating arts backgrounds on job descriptions, he likely didn't have much choice but to set up his own). His blog gives a taste of his background and makes for interesting reading if banking and economics are of interest (IE, it's even drier than the brouhaha found on these pages).

Given McDowell's background, the acquisition of the old veterinary college cannot purely be the stuff of whimsical fancy. In addition to the £4m upfront cost, my estimate is that a further £2m has been invested into Summerhall. Not small numbers for an organisation with ~45 permanent members of staff and that receives no funding from Creative Scotland. *

Summerhall are not a charity and McDowell is now the sole shareholder. Since Summerhall qualify as a small company, they are entitled to file abbreviated accounts (balance sheet + notes). The most recent set of accounts available covers the 2013 period and Summerhall Management Ltd. are well overdue on their last set of accounts (meaning a £1,500 fine and that the 2015 accounts due in September will also have to cover 2014). This means that there is a lot of speculation in what follows (even more than usual).



First thing to note is the value of the fixed assets. Although acquired for £4 million, the land and buildings will have been accounted for at 'cost' rather than 'market' value. Summerhall are the first organisation looked at on this blog that include any Intangible Assets (patents, trademarks or, less objectively, brand value and intellectual property).

There has been significant movement in the stock value. Normally, arts organisations have very little stock but this is likely related to The Royal Dick pub, the Cafe and the Summerhall Shop not being separate trading entities. Note that Pickering's Gin and Barney's Beer are both separate companies.

The Debtors number has increased to ~£450k which rings some alarm bells. We have to assume Summerhall operate 90 day payment terms (because 30 day terms would be incredibly worrying given that number), that would mean that Summerhall have monthly receivables of ~£150k (or annual receivables of £1.8m). Cash flow is dependent on actually receiving advisable. Summerhall likely have some bad debts included in the debtors number that will need to be written off at some point in the future.

Assuming 60 day payment terms for any debts that Summerhall actually owe (note that good businesses should be paying and collecting within 30 day terms for both debtors and creditors), the creditors number implies that Sumerhall's operating cost is also in the region of £1.8m. The change in the P/L account is fairly minimal (an increase of £30k) so similarity in operating cost and receivables seems likely.

This can also be worked backwards. If, for example, Summerhall actually took 120 days to pay creditors, that would imply an operating cost of ~£900,000 (half what was estimated above), which would mean that the debtors number implied 180 day credit terms being offered to Summerhall's debtors (artists, for example).

This is all speculation of course. McDowell put forward that August income in 2013 was in the region of  £750,000. Having never experienced Summerhall outside of the Fringe, it's difficult to estimate what percentage of revenue the Fringe would bring in but being an ardent fan of the power curve, it's tempting to assume an 80/20 relationship. This would make the £900k figure above a possibility.

Putting speculation about the past aside, McDowell's investment is clearly paying off artistically as Summerhall shows dominate this year's awards lists. The questions for the next accounts (when they actually arrive) will be all about cash. As a new business, Summerhall really needs to collect on those debtors and keep the cash rolling in: good cash flow management is imperative and if not done well it is the artists who will suffer. McDowell has clearly invested in Summerhall (as sole shareholder) because of the large audience the Fringe brings in and the lack of new, suitable venues in Edinburgh: very savvy commercial reasons. The artistic success is no doubt  helping commercially as Summerhall broke 2015 attendance records in the first two weeks of the 2016 Fringe but can McDowell actually build something that doesn't require more financial intervention from himself and that sustains itself in the long-term?

If not, he seems the sort of person who will have a plan B.


* Please note, these figures are not completely reliable. They are mostly taken from interviews or presentations given by McDowell but some of them are old and out of date (in some cases by a few years). However, this does mean that the numbers should be roughly correct for the accounting period being analysed. If not then, as always, I am happy to be corrected.

24 August 2016

hawks at the fringe: Critics

The 'Critics' panel at Summerhall.

Tough watching; an awkward, slow-motion collision|collision.

The internet has allowed for plenty of theatrical noise but demand for signal is strong.

The individual critic [as creator], perhaps, stands on the brink of something momentous?

The long tail.

1000 fans.

20 August 2016

hawks at the fringe: Paines Plough 2015



Regular readers may recall that Paines Plough were indirectly responsible for instigating this blog, largely because what they do sounds like it can't be done. Sustainable small-scale touring with new writing? Ignoring London? Building a pop-up theatre? All now standard practice for the 'UK's national theatre of new plays'.

Roundabout (Paines Plough's pop-up in-the-round theatre, shown above in Stoke-on-Trent) is back for another residency at Summerhall this year. Paines Plough now seemingly have such a strong presence at the Fringe that it could be easy to consider them ".. a huge company". Their presence at the Fringe is undoubtedly influential but with only 6 employees and annual income of under £900,000, Paines Plough are theatrical minnows compared to the likes of the National Theatre (£138m income) or BAC (£6m income).

2014 was an interesting year for Paines Plough, who have been taking great leaps forward since 2011's strategic decision to expend reserves to expand programming. From the outside, 2015 was largely about how Roundabout could be used to support and expand the activity of the charity in their 40th year. Over the period, the number of productions grew from 8 in 2014 to 12 in 2015 and the number of performances ramped up from 204 to 312. Excluding streaming and radio figures, audience numbers increased from 22,157 in 2014 to 27,811 in 2015 (around a 25% increase) so the Roundabout auditorium certainly appears to have been put to good use.



The bulk of the Voluntary Income figure is the £315,620 Paines Plough received as an ACE Portfolio organisation. This represents about 36% of their overall income figure and the £ amount received from ACE puts them on the same sort of funding level as Tamasha (2015 income of ~£400k, 46 performances, audience of 3,577) and Pilot  (2015 income of ~£700k, 88 performances, audience of 14,776). The jump in Paines Plough's Theatrical Income almost all comes from the box office, moving from £124,731 in 2014 to £233,656 in 2015 (an 87% increase and worth noting that due to Paines Plough's collaborative approach, this does not reflect a true box office figure). 5 years earlier (2010), Paines Plough had box office receipts of just £27,475, which gives a very clear indication how much activity has expanded under James Grieve and George Perrin.

Project Specific Funding increased 37% in 2015. This was helped by ACE roughly doubling their small-scale touring network contribution (£60,675 in 2014, £121,346 in 2015). A similar amount (£121,625) was received for construction of Roundabout from a combination of the Andrew Lloyd Webber Foundation, John Ellerman Foundation, J Paul Getty Jnr. Charitable Trust and the Garfield Weston Foundation. In addition, contributions were also received from the Esmée Fairbairn Foundation (£24,152 to develop a new small-scale touring model over three years), Creative Access (£12,500 to recruit an individual via Creative Access) and donations/grants for The Big Room (£38,035 to develop five emerging writers).

Before discussing 2015's expenditure, it should be mentioned that Paines Plough have done something a bit unexpected with the balance sheet:


There's no sign of Roundabout.

Ordinarily, an organisation would capitalise such significant expenditure (this would involve adding it as a fixed, tangible asset to the balance sheet rather than listing it as an expense on the financial statement). Capitalising Roundabout would do two major things: firstly, it would smooth out the performance of the organisation in the annual accounts (arguably more relevant to companies with shareholders) because the expense wouldn't show up as spend, only the annual depreciation charge would be shown. Secondly, it would paint a much more accurate picture of the organisation: this is particularly important for charities because if they close, assets must either be used for their charitable objectives prior to closure or redistributed to another similar charity. By expensing Roundabout rather than capitalising it, Paines Plough appear to have spent a lot of cash on productions in 2015 but have nothing to show for it. In reality, they have a 168 seat theatre that isn't on the books (but would have to be redistributed to a similar organisation in the event that Paines Plough ceased activity).

In 2011, Paines Plough estimated the cost of Roundabout to be £90,000:

Labour: £30,000
Seating: £35,000
Stage: £10,000
Lighting: £5,000
Sound: £5,000
Steps into the space: £3,000
Outside wall / casing: £2,000

TOTAL: £90,000

Up to and including the 2015 period, £391,092 of specifically restricted funds were spent on building Roundabout. Perhaps costs spiralled, but it seems more likely that the initial design was improved upon and additional funds secured.

If (and this is a huge, hypothetical 'if'), Roundabout actually ended up costing substantially more than £400k to construct, there might be an argument for not listing it on the balance sheet as any decent auditor would quickly uncover the true cost of the asset and force a revaluation. However, expensing it would allow that extra cost to be buried in any vague category of expenditure ("other costs" for example). There's not really any reason to do this though, unless Roundabout cost £1.5m (clearly, it didn't) and Paines Plough decided to use all funds at their disposal to build it (clearly, they haven't).

Knowing that Roundabout is included in the 2015 expenditure (£293,968 on auditorium costs) and that Paines Plough significantly increased their activity over the year, the deficit of £166,904 certainly doesn't seem as bad as perhaps it looks at first. Support costs (mostly salaries and office overheads), governance costs and fundraising costs stayed about the same. Production cost changes are shown below:



Several of these increases would be expected given that the number of performances has increased by 50%: actor salaries, travel costs, accommodation and publicity for example. It then seems likely that the costs for Roundabout are buried in Sound/electrics and Other fees. The lack of significant increase to the Storage figure is good to see since it implies Roundabout is in constant rotation.

It seems most likely that Paines Plough will enter a (brief) period of consolidation in 2016, reducing activity (and production costs) slightly and seeing a resulting slight decline in box office income. With Roundabout now constructed and out on the road, it will be interesting to see what sort of additional project specific funding the organisation can attract and whether this can be used to maintain (or even increase) activity levels. Paines Plough are a great example of what a lightweight organisation can achieve without the tyranny of a building and I very much look forward to taking up a perch inside Roundabout at next year's Fringe.

16 August 2016

hawks at the fringe: Underbelly 2015



Underbelly was founded in 2000 by Ed Bartlam and Charlie Wood. What began as a single venue for a handful of Edinburgh shows has evolved into a sprawling live entertainment company that produces shows and festivals across the globe (along with a much expanded Fringe programme). In 2015, over 5 million people visited Underbelly events worldwide but only 215,000 of those were tickets sold at the Fringe. From the previous post, The Pleasance's audience in 2014 nudged past the 400,000 mark.*

Underbelly's diversification into live events has evidently been of huge benefit to the organisation. Whilst The Pleasance maintains a clear seasonal focus with annual success riding on Edinburgh box office, Edinburgh is only a small part Underbelly's undertakings for the year. Not having all their eggs in the Edinburgh basket allows Underbelly to spread the risk across their portfolio of events, theoretically stabilising annual revenue. Underbelly have also been cautious (historically) about taking on too much risk: commercial partnerships with Smirnoff and E4 being used to leverage new spaces into existence.

A quick word on structure: unlike The Pleasance, Underbelly are not a charity. They do not have trustees and the associated obligations, they do not have charitable aims/objectives and they have different reporting requirements when it comes to their accounts. Underbelly Ltd. is a private limited company (as opposed to a company limited by guarantee) with shareholders (as opposed to members): the majority shareholder (86%) being 'By Popular Demand Promotions Ltd.', a parent company owned by Ed Bartlam and Charlie Wood. The remaining shares are held by Underbelly's Non-Executive Director Thomas Page, a partner at law firm Cameron McKenna, who specialises in hotel/leisure mergers and acquisitions.

It seems safe to infer from the choice of structure that Underbelly Ltd. (and the parent company) exists to create value for the shareholders listed above. The following analysis differs slightly from the usual hawk fodder (where the organisations theoretically exist to fulfil their charitable objectives rather than create shareholder value) as a result. For example, 'turnover', 'cost of sales', or the 'profit/loss statement' are not terms readily applied to charities.

The 2015 accounting period examined below was extended by Underbelly and ran from 1st January 2014 to 31st January 2015, representing 13 months trading. Changes of accounting period are often done because a company wants a set of accounts to tell a particular story. This is 100% speculation but it seems likely that Underbelly would have extended their accounting period in the hope of the debtors number reducing (see the later balance sheet) before they had to file. It's probably what I would have done if I were them because:

Small businesses in the UK have to provide a lot less accounting information if they meet two of the following three criteria: fewer than 50 employees, turnover of under £6.5m and balance sheet assets of less than £3.26m (note: these numbers were revised upwards by the government in March 2015 to £10.2m turnover and £5.1m on the balance sheet). Being classified as a small business means an organisation can omit the p/l statement and cash flow statement, so the upward revision of those numbers means much less transparency (and don't even get me started on planned changes to scrap Companies House records that are older than 6 years). For the accounting period in question, Underbelly's turnover was ~£13m, employees numbered 25 and balance sheet assets were ~£4m (£2.75m of which comes under debtors, up from £1m in 2013). If the debtors number had come down, Underbelly would have only have had to submit a balance sheet (as their parent company did), and this would be a very short and highly speculative piece of analysis.

Underbelly's gross margin has moved up to around the 21% mark in the 2015 accounts (from ~17% in 2013), which is in the region one would expect for live entertainment. Gross margin (gross profit divided by turnover) is largely dictated by sector but the operational efficiency implied by improving margins is certainly something to be appreciated. For a very basic comparison, Live Nation's gross margin fluctuates from 25% to 35% depending on the quarter (a company producing cheap physical goods such as Primark would expect to have a gross margin of around 40%). Maintaining the same level of administrative expenses is a reasonable (but again basic) indicator of Underbelly's operations becoming more efficient and seems to be the key to the jump in the EBITDA number (Earnings Before Interest, Taxes, Depreciation and Amortisation). From a cursory look at the P/L Statement, 2014/2015 appears to have been excellent for Underbelly. Here's how that looks on the balance sheet:


Underbelly's fixed assets are mostly listed as plant/machinery which probably translates as staging equipment, inflatable purple cows etc.. As mentioned earlier, the debtors number is largely made up of box office income that is yet to be received. The jump in the creditors is due to Underbelly taking a £500k loan from the parent company (By Popular Demand Promotions), presumably for cash flow reasons. There was also a jump in 'accruals and deferred income', meaning Underbelly have either received payment in advance for an event not yet completed or have not yet invoiced for a portion of income received during the period.

Shareholders' Funds doesn't usually feature here. This figure represents the theoretical amount that the shareholders would receive if the company were to liquidate on the date of the balance sheet. Underbelly have issued 400 ordinary shares to date: 343 to the parent company (ownership of which is split 50/50 by Bartlam and Wood) and 57 to Non-Executive Director, Thomas Page. Underbelly paid out a total dividend of £235,000 (dividend per share of £587.50) in the 2014/2015 period compared to a dividend of £160,000 in the 2013 period (dividend per share of £400). Dividends are usually used to pay the directors in a tax efficient way in companies of this size and as such are a reasonable indicator of the directors' perception of their company's health. Increasing the dividend by almost 50% certainly says that Underbelly are performing their primary function efficiently.

One of the great things about looking at Underbelly's accounts is that they are obliged to include a cash flow statement. Charities have traditionally not had to submit these but that should be changing soon (if it hasn't already, I believe the changes were made in March 2015 so upcoming accounts should feature them). Underbelly's cash flow statement is not replicated here but it seems to show the same story outlined above (Underbelly have taken a loan from the parent company to help with cash flow whilst waiting for box office cash to come through). The most interesting thing to note about all this is that the directors are clearly very confident that the cash will actually come through.

They might both be 'Big 4' but Underbelly are very different to The Pleasance.


* Worth noting that there can be discrepancies when looking at Fringe ticket sales. Underbelly specify that the number they are reporting is tickets sold. However, The Pleasance do not make it clear whether their reported figures represent tickets sold or tickets issued. The issued tickets number would of course be inflated by including papering, industry comps, press and other passes.

9 August 2016

hawks at the fringe: The Pleasance Theatre Trust 2014

Quieter times

The Pleasance Theatre Trust has been responsible for operating the spaces surrounding the cobbled courtyard at Pleasance Edinburgh since 1985. Formally established as a charity in late 1995, the organisation provides an 'affordable, supportive and adventurous' platform for emerging and established artists. With over 200 shows on every day at Pleasance Edinburgh during the festival, a cemented spot in the "Big Four" and the lack of a public programme at Pleasance Islington during August, the organisation clearly has a seasonal focus.

There are many ways to deliver a substantial Fringe programme; establishing a charitable trust in order to do so is unlikely to be the most financially lucrative for anyone involved. Individual promoters and short-lived limited companies can perform astounding disappearing tricks with money that a 30 year-old charitable trust will not not be able to perform.

Pleasance Islington provides a permanent home in London for the Pleasance Theatre Trust, as well as performance spaces and rehearsal rooms that operate throughout the year. Pleasance Edinburgh only exists during August; for the rest of the year the various spaces are run by Edinburgh University Students Union. Importantly, as part of this long standing and amicable arrangement, Edinburgh University also run the bars at Pleasance Edinburgh and retain the resulting income. The Pleasance Theatre Trust does operate a wholly owned subsidiary (Pleasance Theatre Festival Ltd.) which operates the bar at Pleasance Islington. This subsidiary company carries out trading activities on behalf of the charity and profits are donated to the charity under Gift Aid.

The Pleasance Theatre Trust's financial year runs to the end of November and the most recent accounts available at the time of writing cover the period up until 30th November 2014. The 2015 accounts should be submitted by the end of August 2016.


The bulk of Voluntary Income was donated by the subsidiary company Pleasance Theatre Festival Ltd.: £98.352 in 2014 and £91,187 in 2013. This is in the same region as BAC's commercial trading operations (~£135k on average up until 2015 when it dropped dramatically) but a long way from Soho Theatre's million pound income machine. The remaining Voluntary Income was attributed to miscellaneous donations/legacies/similar, whilst Activities for Generating Funds consisted of income derived from hiring out the various spaces at Pleasance Islington. Investment income is unremarkable and largely the result of bank interest.

The standout figure on the financial statement is the income resulting from the trust's charitable activities. In both 2013 and 2014, ~£2m of income resulted specifically from productions staged by The Pleasance Theatre Trust. Approximately £1.9m of that comes from Edinburgh productions. As mentioned earlier, no income is received from the bar during the festival and note that The Pleasance receive no public funding. That income figure is all ticket sales (or artists topping up box office sales to meet the first call - see here for specific information about how The Pleasance work with individual shows, it's a minimum guarantee followed by at least a 55/45 split in favour of the artist). In 2014, The Pleasance Edinburgh's audience figure barely grazed past 400,000 people, down from 420,000 in 2013.

Venue 33

The trustees are keenly aware of The Pleasance's reliance on Edinburgh box office income. All future plans depend on the success of the Edinburgh programme and as a result, The Trust explicitly state their strategy for ensuring income is maintained and, where possible, increased: select a better quality programme year on year, leveraging the experience of theatrical entrepreneurship found amongst the trustees. Interestingly, the experience of the directorate and trustee body appears to dictate that "arbitrary targets... are not practical operational tools." So, it appears we must speculate that any income growth would be the result of the trustees gut feel for the programme. It seems safe to assume that The Pleasance will not deviate from their receiving house model (or any other strategic aspect) in the immediate future, so one does begin to wonder how those future plans will actually be implemented, particularly if The Fringe really has peaked.

In terms of expenditure, The Pleasance spent 2014 spending as expected; just over £1m was paid out for productions and direct staff costs (IE staff employed on a project basis), salaries for ~30 Trust employees made up about £400k, rent and rates spend was ~£200k and advertising ~£250k. Since The Pleasance operates from Edinburgh during August, staff members are relocated and their ranks swelled with help from ~200 volunteers. Pleasance volunteers are paid a stipend of £600 for expenses during the festival and have accommodation provided. Whilst volunteer stipends, accommodation and staff relocation probably costs The Pleasance in the region of £300k each year, it does help get around some of the thorny labour problems caused by extreme seasonal demand.


In terms of the balance sheet, the principle movement is clearly that unrestricted reserves were used to cover the operating costs due to the shortfall at the box office. The Pleasance blamed 2014's poor ticket sales on the proximity of the Glasgow Commonwealth Games. However, the 2014 Fringe broke 2 million ticket sales for the first time and the Fringe Society report lauded the games on the basis that it provided easier access to the world's media. Venues such as Summerhall reported an increase of over 20% on 2013's ticket sales. Clearly, 2014 was not a terrible year for all Fringe venues and it seems hasty of The Trust to attribute causation solely to the games.

This is particularly hard to swallow given the assertion elsewhere in the trustees report that the Pleasance's income figure is the direct result of Edinburgh programming quality and the trustees theatrical entrepreneurial expertise.

-----

Hopefully some of the upcoming 'hawks at the fringe' pieces will put this analysis into a wider context but since the 2015 accounts will be here before you can say "self-serving bias", I hope to revisit The Pleasance shortly.

11 June 2016

New Theatre Royal 2015

Large capital projects take time; evidently so do blog posts about them.

Buildings can certainly be troublesome: chip away at the bricks and mortardecode the space, detach the income targets and the value of large capital projects suddenly becomes very fuzzy. Of course, contrarian internet chatter shall ne'er deter the march of progress and a slew of large capital projects are planned or currently taking place across the country, including, but not limited to; The Factory, Glasgow's Citizens Theatre, Hull New Theatre, development of St Peter's Seminary, Chester Storyhouse, Edinburgh Rose Theatre, London Theatre Company, NT Future, Oval House, Colchester Mercury, Octagon, Polka Theatre. Plus, of course, a brand new Merseyside Shakespeare theatre (note: this post has been a work in progress for so long that some of the above projects may have actually been completed by now...but probably not).

Portsmouth's New Theatre Royal officially reopened in March this year following their own large capital project. The theatre is a Grade II listed building, originally built in 1854, re-built in 1884, 1900 and arguably again in 2015. The most recent building works repaired damage done by a fire in 1972, returning the theatre to its former glory with a new fly tower and a 10 meter deep stage. The auditorium was increased in size from 500 to 700 seats and new offices, dressing rooms and a studio theatre (a learning centre developed in collaboration with the University of Portsmouth) were added in the vacant back lot.

The New Theatre Royal has seemingly staggered from closure to closure over the last 100 years. A lull in popularity in the late 1920's (attributed to the rise of radio, evidently the Netflix of the 20s) and rising operational costs nearly forced closure. It became a cinema in 1932 and operated thus until 1948. It closed in 1956, reopened as a rep theatre for a couple of years and then closed again. It was reopened as a boxing/wrestling arena and bingo hall. From 1966 onwards, the theatre seemed destined for demolition as squatters moved in and the fixtures and fittings were moved out; the 1972 fire seems somewhat inevitable with the benefit of hindsight. Damage from the fire was not repaired and the building was not protected by the owners or the council. Volunteers were allowed to enter in 1975 to secure the building and a Trust was established to fight (successfully) against the pending demolition of the building.

In 1980, ~£1mil (~£3.8m adj.) was spent on repairs on what was a dangerous husk of a building: the roof about to collapse and the balcony unsafe. The money spent made the auditorium and foyer structurally sound and helped restore some plasterwork. In 1994, the main dressing room block was demolished and 'temporary' (although it seems they were there for 20 years) dressing rooms were installed at the back of the theatre. In 2004 the theatre went dark for six months as the auditorium was scaled up from a capacity of 370 to 525.

The first mention of the 'back lot' project appears to be in the 2009 accounts, following a full structural survey of the theatre made that year (although one must assume that the dream existed before that date). Planning permission was granted in 2011 and initial estimates were that work could be finished by the summer of 2013. In reality, the theatre went dark in February 2013 and reopened in October 2015 (a 'soft' opening: the official opening took place in March 2016 as mentioned above). The oft stated overall aim of the project being to develop a 'theatre quarter' in the city of Portsmouth.*

Before getting into the New Theatre Royal's 2015 accounts, it's worth recapping the recent history of the back lot project.

In 2009, an initial agreement was reached with the University of Portsmouth to develop the vacant back lot (essentially a poorly functioning car park at the time). Part of the initial agreement involved the sale of land to the university, as well as the university contributing about 80% of the project costs. The New Theatre Royal appointed a professional fundraiser to the project to help raise the ~£4m required for their share of the project (the total cost being estimated at ~£24m, the remaining funds coming from the University of Portsmouth).

In 2010, architects Penoyre & Prasad were commissioned. The money from ACE began to flow, with an initial tranche of ~£100k. Over 70 applications were made by the New Theatre Royal to various trusts and foundations.

In 2011, the development agreement between the New Theatre Royal and the University of Portsmouth was extended. It now included development company Watkin Jones who intended to build student accommodation on the site. The idea behind this was that NTR would own the freehold, Watkin Jones would lease from NTR and then sub-lease to UoP. The ACE money from 2010 had been spent but ~£250k from Garfield Weston and £30k from Heritage Lottery came in. Lottery funding of £939,000 was also received in October 2011, with planning permission finally granted in December 2011.

In 2012, Watkin Jones pull out of the tripartite arrangement. This means the loss of  their ~£500k contribution to the project and delays whilst another partner is sought.  The NTR side of the project is split into two stages as a result - the structural works and the refit of the auditorium (which will follow at a later date). The Partnership for Urban South Hampshire (PUSH) funding starts coming in. The application to PUSH was based on the space becoming home to 10 new touring companies and 85 gallery exhibitions by 2013, a target missed by a country mile. Around this point, a transfer of ring-fenced restricted funds was made to the general unrestricted funds pot, with 'consolidation' the stated intent. Reading between the lines, this likely means there was no cash to pay the bills.

In 2013, the loss resulting from Watkin Jones abandoning the project was restated at £600k, a further £750k was secured from ACE. A bridging loan was then required from Parity Trust (to be explicit, this should again be read this as 'there was no cash to pay bills'). The construction contract was awarded to ISG (who also built the 2012 Velodrome). PUSH money comes in (~£500k). Further transfers totalling ~£200k are made from restricted back lot funds to unrestricted general funds. The second stage of works (auditorium refit) appear to have now been abandoned. The theatre goes dark.

In 2014, work was ongoing. Cash was clearly in short supply as £1.5m of restricted back lot funds was again transferred to unrestricted general funds. It's worth remembering that throughout all of this, the New Theatre Royal was (and remains) part of ACE's National Portfolio with annual funding of around ~£100k. The theatre continued their outreach work, retained a skeletal staff and clearly worked hard to make it clear that the lights were off but somebody was home.

In 2015, major delays to the project meant missing the planned March 2015 opening. The Foyle Foundation increased their support and ACE stepped in with additional financial intervention. The theatre finally had a soft opening in October 2015, most likely because their future NPO status depended on hitting that date. Official opening occurred in March 2016.

The 2015 financial statement for New Theatre Royal Trustees Ltd. (governing group) is shown below:


Clearly, there is money coming in and pure bottom line analysis suggests cartwheels are in order. In reality, almost all of the income was from voluntary income and relates to grants intended for the back lot project.

The percentage of income derived from charitable activities is exceptionally low due to the theatre's closure and the high level of fundraising. What is worth noting is that the level of expenditure on charitable activities remains relatively high at £377,479. Around £72,000 of that has been booked as 'Production costs - marketing and advertising' which can only be described as a terrible return on investment. Another ~£34,000 was attributed to touring company fees, ~£190k for staffing costs and the rest in miscellaneous fees (such as legal, audit etc.) or expenses (travel, printing etc.).

The reason that the financial statement shows a significant surplus for 2014 and 2015 is that, as a large capital project, expenses relating to the back lot project have been capitalised rather than listed as expenses in the period in which they were incurred. This means that the cash received in relation to the capital project is written onto the balance sheet as a fixed asset in 2015. That asset is then depreciated over a set period of time and at a set rate.


The New Theatre Royal were not obliged to provide a cash flow statement this year but should do so in the next accounting period. This is due to a change in financial reporting standards. In order to opt out of preparing a cash flow statement, organisations must be considered micro-entities which means they must hit 2 of the following 3 criteria for 2 years in a row: turnover less than £632,000, Balance sheet total under £316,000 and less than 10 members of staff. In a sector that should pride itself on financial probity, it's surprising that more organisations don't publish cash flow statements. As it stands, we can only infer that the New Theatre Royal were not in a healthy place operationally.

Buildings are certainly troublesome.


*Field of Dreams

9 March 2016

Aside: Subsidy Vs Investment (ACE 2018+)


Part I

Excellent pieces have already been written by Stella Duffy and James Doeser regarding ACE's future funding plans. Both should be read before wading through what follows.

Let's start from James Doeser's suggestion that we once again find ourselves in 2009.

If you visited the ACE website for most of 2009, the strapline read "Arts Council England is the national development agency for the arts in England, distributing public money from Government and the National Lottery." If you visited it in the latter part of 2009 then you would have seen "Developing, promoting and investing in the arts in England." If you look today, you will see "Championing, developing and investing in the arts and culture in England."

The proposals for 2018+ may have a familiar scent but the ground has clearly shifted since the change of strapline seven years: ACE is now an investor rather than an agency. Also, there's no mention of 'public' or 'government' anywhere on the homepage (ignoring anything that pops up on the news/Twitter feeds). Semantics perhaps, but it matters because... well... you are what you say you are.

Subsidy is markedly different to investment. When we speak of investing, we are talking about allocating a specific resource in the hopes of gaining a specific outcome. Money flows to the best value propositions (based on risk, reward and time). The associations we have are things like long term thinking, due diligence and money management. Investing is about sniffing out potential, envisioning growth and reaping rewards. At the very core, investment is about identifying inefficiencies in the market and profiting (financially or culturally). It takes place in an environment where those seeking investment must clamour for the attention and approval of the investor. Due to resource scarcity, many will fail and those that succeed are typically those whose values are closely aligned to the investor.

Some of this also applies to subsidy: resource is scarce so competition ensues and the successful are closely aligned to the values of the distributor. Where it differs is that subsidy is used specifically to encourage activity that would otherwise not occur because of the efficiency of the free market. The activity that the subsidy is used to fund will likely not have direct benefits for the fund distributor but there will be several intended (and likely some unintended) fuzzy outcomes. Subsidy is about providing an incentive for the market to alter it's behaviour (which is why it's so difficult to remove once in place without major corrections in the market) and investment is about identifying market players with potential.

As a quick example, the US government push billions of dollars in Boeing's direction in order to preserve their manufacturing base in the US. EU governments have similarly provided high levels of subsidy to Airbus to allow them to remain competitive. The problem comes because subsidy in a competitive market cannot be removed by either government whilst the other continues to provide it. Subsidies escalate over time as a result and the underlying dollar auction structure becomes painfully clear.

On the other hand, the £45.5bn the government put into RBS in 2009 should be considered (a terribly managed) investment rather than the 'subsidy' it appears to have been written off as.

This is part of the problem: subsidy is seen as throwing money away (it's almost always written about in those terms) and in the face of austerity, ACE cannot be blamed for shifting their language. Focusing on creating value and specific outcomes makes sense and they have most likely done a lot of good making the economic case for arts and culture as a result.

Our quest might be 'Great art for everyone' or Stella Duffy's suggested 'Arts for, by and with everyone' or John Knell's 'ensure that more people get to make and experience culture'. Regardless of how we frame it, we should accept that we need subsidy because reliance on the free market cannot possibly deliver those goals. Money must be spent on things that have fuzzy outcomes and limited audiences and that's the case ACE should be starting to make with the new funding proposals.

Investing is a top down approach: money trickles down to those who best argue they create the most value.

Subsidy is a bottom up approach: money is used as an incentive to fuel specific, desirable outcomes and behaviours.

ACE must be clear about how, why and when they are doing both in 2018 and beyond.

28 February 2016

New Diorama Theatre 2015


The New Diorama Theatre was built as a Section 106 planning requirement, a mechanism that makes a development proposal acceptable, in planning terms, that would otherwise be deemed unacceptable. Following consultation with residents regarding the redevelopment of Regent's Place, British Land added to the community's infrastructure by building the 80 seat New Diorama Theatre in 2010. The NDT's 2014 accounts were notable because of the lack of reliance on ACE (only 12% of the NDT's ~£270k income came from ACE in 2014). The 2015 accounts show another very solid year for the New Diorama, who continue to demonstrate that "sometimes it pays not to be funded".

Interestingly, 'lack of core ACE funding' has been removed from the 'major risks' section of the annual accounts. In the financial statement below, it's worth focusing on the Project Specific Funding line (where the NDT's ACE funding shows up) and keeping in mind that the New Diorama received only £25,863 from ACE in 2015. Of that income, £11,994 was specifically for captioned performances via StageText and £12,549 was a GFTA award that is being administered by the NDT to ensure it is spent and allocated correctly. The final £1,320 was the remainder of an organisational development grant received in 2014.



The most significant change in the NDT's 2015 Incoming Resources is the £29,121 growth in Voluntary Income. Several key relationships remained in place for 2015, with British Land increasing their support from £25,000 to £27,145 and Santander/Carat maintaining their combined season sponsorship of £20,000. However, Fundraising/Donations/Individual giving actually dropped from a combined total of £30,747 in 2014 to £24,472 in 2015. The substantial overall increase in Voluntary Income results from the NDT successfully securing a larger number of one-off grants from a variety of sources, none of which are over £15,000. A total of £64,166 was raised through these funding relationships in 2015, compared to £30,915 in 2014.

The fundraising success of 2015 should certainly be celebrated but could prove to be a double-edged sword in 2016. Funders often make only one annual grant to applicants so the relationships themselves need to be carefully managed. In practice this generally emerges as a 'one year on, one year off' rotation. The surplus shown in this year's account may also make it harder for the New Diorama to fundraise. The NDT are building on 2015's fundraising success by offering a fundraising masterclass. The demand for this masterclass of course resulting from the increasingly competitive funding environment in which organisations find themselves, which will in turn be heightened by the masterclass itself.

Such a competitive environment could potentially prove particularly problematic for the New Diorama and the nearby Camden People's Theatre. Due to their similar size and geographical proximity, funders could conceivably limit awards as they look to balance their investment (assuming both organisations will be approaching the same funders in the years to come). A textbook game theory problem (if only one organisation applies, their success percentage is higher than if both organisations apply; as a result, both parties will likely apply at every opportunity and reduce the overall funds received by both organisations), the optimal solution for both parties would come through rigorous collaboration.


Theatrical Income very much remains driven by venue hire (£62,214 in 2015, down from £77,060 in 2014), with the cafe/bar making an important contribution as well (up to £36,877 in 2015 from £30,000 in 2014). There was a £7,944 increase in fees/box office, up to a combined total of £32,343 in 2015 from £24,399 in 2014. It's important to note that the box office receipts only represent funds received for NDT's in-house productions, not for any of their 0/100% box office splits with artists. In those instances, the money doesn't actually flow through NDT and consequently isn't shown in the accounts (it would be fascinating to see annual receipts for all the work that flows through NDT and one must suspect it would put some larger venues figures to shame).

This highlights the central principle behind how NDT operate and why they're worthy of analysis. the organisation is incredibly lightweight; only 3 full-time staff members with total salary costs of £84,303, office overheads of  £68,778, some admin costs and some governance costs that total ~£20k.  This sets a relatively low platform from which to start presenting work. By working hard to fundraise to this level, NDT can then leverage their operations and their space to really benefit theatre makers. This has been formalised in the new Artist Development Programme.

2015's surplus of £44,510 seems an excellent result for the New Diorama but it should be noted that a large amount of deferred income was released in this accounting period (£63,400) and only £31,003 was carried forward (deferred income relates to box office and performance fees received in advance). Coupled with the administration of a £12,549 GFTA award, the surplus starts to look a little less spectacular but examination of the balance sheet shows that the New Diorama will be operating from a much stronger financial base in 2016:




The significant reduction in creditors is due to the previously mentioned reduction in deferred income and also 'Other creditors' falling from a liability of £30,851 in 2014 to £1,033 in 2015. This puts the New Diorama in an excellent position in terms of total assets less current liabilities. The depreciation of the fixed assets is also worth considering, particularly since the NDT do not appear to have made substantial additions to their equipment over the last few years. Given their new Artist Development Programme, we could expect to see capital additions over the next few years as the space will have to meet the expectations of the artists.

Additional consideration must be given to the New Diorama's Artist Development Programme and the possible implications. Given how the NDT is set up (lightweight, allowing work to flow through it), the programme shouldn't be particularly expensive to offer. However, given the attention garnered (25,000+ downloads and 'possibly the most exciting artist development scheme Britain has ever seen') it seems likely that the NDT will attract a huge number of applications. In turn, these will give way to relationships that need to be managed. Coupled with the addition of new space and the previously mentioned possible capital additions, the really tough question is going to be working out how much of a time sink the development programme will be to administer for such a lightweight organisation.

The 'Cash Flow Fund' strand of the NDT's Artist Development Programme has been lauded as a 'Bank for theatre companies' which might make for a catchy headline but is incorrect. The core idea of a bank is that it is licensed to hold customer's deposits; those deposits are then leveraged in various ways (the old 'savings + loan' model where customers took risk by depositing with the bank and in return the bank would pay out interest on those deposits). Since the NDT hold nothing on deposit, they cannot be called a bank and doing so does them a disservice given the reputation of the banking industry. This is not a banking model because it is an entirely one sided risk proposition (can you see a small arts organisation calling in the bailiffs to recoup funds?). NDT's 'Cash Flow Fund' is something very different, something much more humane. It's a formalisation of what venues have been doing informally for years: providing liquidity to emerging artists to reap artistic rewards rather than financial ones. Maybe this is 'social lending' and perhaps NDT's formalisation will eventually pave the way for something as radical as a large scale peer-to-peer social lending platform where 'investors' look for cultural or social returns rather than cash.

The New Diorama Theatre are implementing some fascinating strategies under the leadership of Artistic Director David Byrne. Some of them, such as the Cash Flow Fund, seemingly provide little benefit (or indeed, obvious cost) to the NDT in the short term but much very substantial benefits to artists. However, in the long term the New Diorama stands to make massive gains: is there an emerging artist in the country that wouldn't want to work with a theatre whose development programme has a clear trajectory, is financially transparent, provides a vibrant environment where artists outnumber administrators, attracts their peers and actively takes risks on their behalf?

With a solid financial base, a board that are clearly open to innovation and the Artist Development Programme likely attracting an array of exciting artists (and presumably, as a result, additional funding), the real challenges for the New Diorama will likely come from implementing the artistic development programme and ensuring that the organisation is not put under additional strain from an intensive approach to fundraising. One solution could be to look for additional commitment from a major funding partner: British Land finding a way to lower overhead costs or increasing their annual grant of ~£25k would certainly seem to make sense for both parties (property prices around successful theatres are notably higher so there's plenty of incentive for British Land). This would also be in line with similar arrangements between Wandsworth Council and BAC or the National Theatre and ACE.

An alternative, of course, might be to consider a NPO application.

21 February 2016

Aside: What's going on over at ENO?

It seems somewhat appropriate that the timeline on the 'About' page of the English National Opera website stops at 2012.

In January 2013 it was reported in the FT and other publications that ENO's 2011/12 accounts showed a £2.2m deficit. The article drew attention to previous cuts that were made in 2007 and ENO's statement “After two previous bailouts totalling almost £20m we are very clear that we will not be bailed out again.” The shocking 2012 results were attributed to a global slowdown in audiences and the difficulty of filling a 2,400 seat theatre. Below are ENO's audience numbers for the last 10 years (some figures vary depending on the set of accounts used):


The average capacity over the past 10 years is 74%. The average implied ticket price is £39.25. The average box office receipts are £9,158,900 and the average annual audience 234,545.

What's clear from this data is that ENO's box office receipts have been volatile. The average absolute YoY change in box office receipts is about £930,000 (or ~10% of their average receipts). This volatility makes demand forecasting difficult, which in turn makes supply planning harder (but not impossible). ENO's capacity numbers are not terrible but there is no doubt room for improvement. There is a strong argument that the average ticket price is too high (audiences pay more for quality but not if they feel they are taking a risk: volatile box office receipts being a signal that perceived quality needs to go up and/or price needs to go down). Getting that average price down may help stimulate demand, increase the capacity capacity percentage, get more people in the building and reduce the volatility of the box office revenues.

ENO staged only 115 performances in 2012, had a higher average ticket price than the preceding few years and consequently suffered a very low annual attendance. They did receive less funding from Arts Council England so perhaps it's understandable that low audiences and the cuts were blamed. The major problem actually seems to be that those 115 performances had an average cost of £303,000 each, substantially more expensive than the 134 performances staged in 2011 at an average cost of £247,910 each. This represents a 22% jump in production costs. ENO's spend on productions over the last decade is shown below.


It may be stating the obvious, but reducing the number of performances makes it much harder to amortise those increasing production costs.This can be seen most clearly by comparing 2012 to 2015 in the table above. The spend on productions is equivalent at £34.8m but 32 additional performances in 2015 make the cost per performance much healthier. 2015's attendance was higher than 2012's, the capacity % was lower, average ticket price lower but ultimately box office receipts were up.

ACE Chief Executive Darren Henley's recent article implies that ACE has lost patience with ENO and it's easy to see why. ACE has been pouring money in but liabilities have increased, unrestricted reserves remain low and ENO reaches relatively few people. ENO receive a similar core annual grant to the National Theatre but the two are worlds apart in terms of reach and financial performance (despite productions involving Hytner and Norris at ENO).


ENO need a very rapid turnaround if they are to make it through the next few years. They clearly cannot survive without the full support of ACE but are in a situation where the Chief Executive is publicly declaring that they must "adapt or die." The outward signs are not promising, with cost cutting and a reduced programme appearing to be the leadership's dominant strategy. There are several things ENO needs to do urgently:

1) Stop the flow of negative press.
2) Get the chorus onside: don't trim the chorus, find more opportunities for them to perform.
3) CEO Cressida Pollock needs to step forward as a prominent, positive spokesperson with a plan. Generating hope and excitement are key.
4) Appoint (and retain) an exciting Artistic Director.
5) Focus marketing on showing ENO's value to London, the UK and the rest of the world in an attempt to reverse the feeling that they are an elitist drain on the public purse.
6) Fund-raise fiercely off the back of these things.

Anyone would think it's the first time an opera house has had such problems.

20 February 2016

Aside: ACE investment: 2018 and beyond

"In the long-run, we are all dead." - John Maynard Keynes

Keynesian economics asserts that boom and bust cycles are to be expected, markets are not completely efficient (being subject to short term irrational fluctuations) and that public financial institutions can and should intervene to rebalance the economy. The quantitative easing implemented by the Bank of England, the Federal Reserve and the ECB from 2008 onwards is rooted in the work of John Maynard Keynes. Broadly speaking, Keynes argued that when business cycles were in a lull (bust) then governments should spend to stimulate the wider economy, getting into debt if necessary.

There is, of course, another side of the coin: Milton Friedman believed and taught that governments must play a lesser role; never interfering, removing regulation, allowing the market to dictate terms and staying out of the affairs of business.

One of these economists was founding chair of the Arts Council (and on the dark side of that coin, director of the British Eugenics Society).

Keynes' involvement in what became ACE (yes - the Royal Opera House got most of the initial public funding and of course London got the rest) is worth keeping in mind when considering ACE's future plans (read more about Keynes and ACE).

ACE's proposals for 2018 onwards are available here. I don't know enough about funding museums or libraries so what follows is theatre-centric.

Whether we consider it  'subsidy' or 'investment', ACE's various streams are stimuli for the arts. Classical economics dictates that stimulating supply will fuel demand (if you build it, they will come) and prices will thus stabilise. Keynes believed this may be true in the long run but that in the short run prices could be very sticky (the duration of long and short run is debatable: the short run could in fact be several years). For example, an unemployed actor is never going to ask for a pay increase - they will instead take work where they find it. This means that with an abundance of unemployment amongst actors, production costs remain depressed, contrary to Baumol's oft-stated economic dilemma (which was of course that performing arts need to be subsidised because wages go up but productivity gains cannot be made (unless of course you go holographic!)).

 In times of depression, governments can adopt a Keynesian approach by either increasing spending (borrowing to do so) and keeping taxes neutral (the approach favoured by the left) or reducing spending and decrease taxes (the approach favoured by the right). Lowering taxes and increasing spending has been done by both sides, mostly when starting a war.

Momentarily consider ACE as a pseudo-government and 'cultural footprint' the equivalent of 'real GDP' (I acknowledge that ACE cannot borrow more than it has so this is flawed but please stay with me).

Is this theoretical arts economy operating at full potential? I think not.

Is there excess capacity to create more art? I think so.

I struggle to see how continued focus on supply side subsidy will get the ecology where ACE wants it to be. There must surely be stimulus on the demand side as well, not just the supply side?

One way of doing so would be to put absolute faith in the power of the market, cut all subsidy and instead provide each citizen with an annual £11 voucher for the arts. This was a serious proposal from the Adam Smith Institute and absolutely not something I'm in favour of.

Perhaps there's something instead in the 'Cycle to Work' scheme. Introduced to reduce pollution and increase health, the government's scheme allows employees to loan bicycles from their employer as a tax-free benefit. The bike industry as a whole has certainly benefited from this government incentive to get more people riding bikes more often, why couldn't this be the case for the arts? There are some interesting art incentives that sit squarely on the demand side such as Art Pass or Own Art.

There is of course some risk to stimulating demand because it's incredibly hard to remove that stimulus once injected. If you overdo it, prices will soar. We'll then be in a situation where every article in every publications is rightfully about Baumol's visionary dilemma but for the time being though, I think there's more to learn from Keynes.