EXCLUSIVE: NPOs profitability in dramatic decline

Arts and culture organisations that receive core funding from Arts Council England recorded a significant collective deficit, highlighting the impact of the myriad of financial pressures they are currently facing.

An investigation by Arts Professional and MyCake, a financial benchmarking company that provides insights and advice to third sector organisations, found arts organisations making up the 2023-26 National Portfolio were collectively in the red by £63.1m in 2023.

The data is based on a constant cohort of 573 current NPOs that have data available for the 2018-23 period. Of the full 677 NPOs that data is available for 2023 the deficit is even higher – coming in at £86.5m. There are a total of 995 NPOs but many are yet to file accounts for the most recent financial year.

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While some of the organisations broke even or made a profit last year, the number that did has shrunk at an alarming rate. Nearly one in five NPOs (18%) had expenditure levels 20% or more above their income.

The stark figures follow several difficult years for arts and culture organisations, with the Covid pandemic being followed by the cost-of-living crisis and rampant inflation stoking costs.

Meanwhile, many NPOs have faced either reduced or standstill funding awards from Arts Council England.

They have also had to contend with cuts to the funding they receive from local authorities which are having to deal with rising demand in statutory services such as adult and children's social care.

The majority of NPOs are registered charities. While they do not need to make a profit in order to keep shareholders happy, anything more than small losses over the course of a year can be a sign of financial difficulty. 

While a small annual deficit is not usually a cause for concern, larger losses can be a red flag. 

Some charities do plan to run a deficit some years, for example to invest in their activities or grow fundraising, in the knowledge that they can cover it by dipping into their reserves or through future income.

But, according to the National Council for Voluntary Services, if charities record a deficit but don’t have reserves to meet the shortfall, there is a risk they may become insolvent.

Arts Professional and MyCake's research found the proportion of NPOs where expenditure exceeds income by 10% or more has risen sharply. Pre-pandemic the figure was consistently below 20%. It currently stands at 37%.

Conversely, the proportion of NPOs reporting a surplus where income exceeded expenditure by 2% or more dropped from 48.4% in 2022 to 25.4% in 2023.
 

Previous research conducted by MyCake found that 47 former NPOs have closed in the last six years.

But current NPOs are also experiencing difficulties, with Arts Council England taking the step in January of extending the its 2023-26 National Portfolio investment by an additional year in response to "external challenges" the sector is facing.

"We hope this will provide some certainty and security which will allow organisations to plan, look at new business models and increase collaboration," a statement issued by ACE at the time said.

Financial concerns

Manchester-based NPO Contact Theatre posted a deficit of £980,000 for the last financial year amid ongoing financial concerns.

The theatre's annual report revealed that its reserves dwindled to less than a month of operating costs, while Arts Council England has raised its risk rating. It said that inflationary pressures on the cost side, combined with "commercial and fundraising setbacks" had resulted in a greater deficit than anticipated. 

In October last year it emerged that Northern Ballet, which receives £3.29m a year from ACE, was in serious financial difficulty, prompting it to make the controversial decision to perform some of its 2024 programmes without a live orchestra.

Based on its accounts, London's Southbank Centre is one of the more financially healthy NPOs. It posted a loss of £600,000 in 2023 - representing a 1.1% deficit on an income of £53.3m and has largely balanced the books over the last five years with income of £245.5m and expenditure of £245.8m for the period.

Writing for Arts Professional in April, Soutbank Centre CEO Elaine Bedell said the gap between Southbank’s earned income and costs has been exacerbated by inflation and tripling energy bills, adding that it is "getting wider".
 

Its funding from ACE has been cut by 41% in real terms over the past decade.

New bars and restaurants have been created, both within the venues and leased around the site, to make its business model more “robust” but Bedell says £50m is required for urgent repairs to the complex.

Bedell has mooted offering naming rights to the site to raise money, and she was among NPO leaders taking part in UK government-backed trade delegation to Saudi Arabia designed to capitalise on opportunities for businesses in the country.

'Calamitous'

Equity’s General Secretary Paul W Fleming said a lack of funding for arts has had "calamitous" consequences. 

“Since the introduction of the National Portfolio over a decade ago, we’ve seen a drift toward funding bosses and buildings by ACE - a strategy turbo-charged by the Covid-era Cultural Recovery Fund,” he said.

“Combined with Equity’s analysis which shows UK-wide arts council funding has been cut by 16% since 2017 alone, these findings show starkly that the strategy of not investing in arts and artists is a calamitous one.

“Whoever forms the next government must set out a plan to move us towards the European average of spending 0.5% of GDP on this economically vital industry- as well as reforming ACE to a structure of sustainable funding focused on the workforce and the art they create.”

Jack Gamble, Director of Campaign for the Arts, said: "This analysis shows publicly-funded organisations are not immune from the wider economic pressures of recent years. 

"The Arts Council’s investment hasn’t been able to keep pace with rising costs and inflation, and now accounts for a smaller proportion of organisations’ total income – but without that investment, things would be far worse.

"Public funding unlocks potential, enables new activity and helps organisations grow. It is a crucial part of the solution.”