Key Arts Organisation Funding Guidelines - part 6
KAOs are expected to demonstrate a sound financial position and are advised to seek independent expert advice from a qualified accountant to ensure long-term viability.
artsACT strongly encourages KAOs to build and maintain reasonable cash reserves through end-of-year surpluses. A benchmark for end-of-year surpluses is the achievement of a surplus of 10% of the annual gross income of the organisation. Repeated unplanned deficits will be considered to reflect unsustainable business practices and will be an important factor in the assessment of an application, and/or the viability of an organisation.
Cash reserves can assist organisations in their long-term sustainability, support any unforeseen circumstances or to establish any new initiatives. The level of cash reserves should be relative to the nature of the organisation’s activities, the risks associated with its activities, and the annual gross income of the organisation. A benchmark for cash reserves is the maintenance of a minimum of 10% of the annual gross income of the organisation.
It is also important for KAO budgets to have appropriate provisions, for example, for staff liabilities.
Financial ratios can also be highly valuable tools in assessing the financial position of an organisation from year to year. Ratio analysis is primarily used to compare an organisation’s financial figures over a period of time. Through this analysis, organisations can identify trends, positive and negative, and adjust business practices accordingly. A benchmark recommended for KAOs is to have a current ratio of 2:1; that is, for every $1 in current liabilities there should be $2 in current assets, demonstrating the organisation’s capacity to pay its debts.
KAOs receive two funding instalments per year. If available, CPI will be determined by artsACT and applied to each instalment based on a financial year allocation. artsACT will inform organisations prior to the July instalment of the amount for invoicing.