A Summary of the Berkshire Museum’s Finances
Updated July 10, 2018 to reflect the most current information from the fiscal year ending June 30, 2017.
There have been a lot of questions about the Museum’s finances since the announcement of the Berkshire Museum’s New Vision plan in July of 2017. We are sharing some facts and details with you that we hope will help you understand the circumstances that led to the Board taking bold action and moving forward with the New Vision. Each year, the Museum’s financials are audited by an independent CPA, whose practice includes both large and small museums and nonprofits, then submitted to the State Attorney General’s office as required by law. These audited statements may be found by clicking here and entering “Trustees of the Berkshire Museum” in the Charity Name search box.
All of the data in the graphics below can be found in these audited financial statements and has been approved by the Museum’s Finance Committee as well as the independent CPA who audits our finances. We’ve added some definitions of accounting terms that appear in the statements to help clarify our situation.
Museums, like other enterprises, have a common (but not universal) business model in terms of operating revenue (income), non-operating revenue, operating expenses, and non-operating expenses.
Operating Revenue (Income) includes earned and contributed revenue received and used to support the Museum’s operating expenses. Earned revenue includes amounts received from admissions, gift shop sales, program service revenue, education programs, traveling exhibits and other sources. Contributed revenue includes amounts received from contributions, memberships, annual appeal, special events, government grants and other miscellaneous revenue.
Operating Expenses include amounts paid to employees and for materials, services, and other costs (including depreciation) in connection with the museum’s program services, management and general and fundraising activities in support of the museum’s mission. A detailed listing of the Museum’s operating expenses can be found in the Museum’s financial statements on the Statement of Functional Expenses.
Non-operating revenue, which is often restricted to a specific use, includes capital campaign donations and pledges, investment income and loss, and restricted endowment donations.
Non-operating expenses include uncollectible campaign pledges and capital campaign expenses.
Depreciation is a non-cash expenditure of a museum or any entity. Depreciation reflects the periodic expensing of the cost of an entity’s capital expenditures that are not allowed to be expensed when paid for, but are required to be expensed over time. Depreciation should be considered an expense when determining sources of funds to cover operating costs as it represents the building of reserves to cover future repairs, replacement and capital expenditures, especially if an organization has a significant infrastructure it must maintain. Including depreciation as a reserve when budgeting is a financially responsible approach and a recommended standard for any organization, especially where real estate is involved, and is a common practice for any organization. For a longer, but clearer explanation of what depreciation is and why it matters, click here.
Net Assets are simply the excess of the Museum’s total assets over its liabilities. Net assets can be unrestricted, unrestricted board designated, temporarily restricted or permanently restricted.
Structural (Operating) Deficit – If the difference between annual operating revenue from all sources and the operating expenses a museum incurs from delivering its services perennially produces a shortfall (a loss), it is commonly called an annual structural operating deficit. Most cultural and educational not-for-profit organizations always operate with an annual structural operating deficit. Cultural and educational organizations cover this structural operating deficit with funds from their reserve/endowment investments.
At the Berkshire Museum, there has been an average structural operating deficit of approximately $1.15 million annually over the past decade. Annual structural operating deficits are common to most museums and other educational institutions and, if a museum cannot draw on government funding and it is not able to ‘cover’ the deficit with earnings from investments, then the institution has insufficient reserve/endowment investments and must find a means to increase the reserve/endowment investments to provide enough investment revenue to support the structural operating deficit.
Another finance-related document that is available online are the museum’s IRS form 990s, but the 990s do not tell the entire story. 990s do not differentiate between operating and non-operating revenue and expenses. Such details are key for anyone who is trying to analyze the museum’s (or any cultural or educational organization’s) financial position and operating results.
The 990 is primarily used for donors and other not-for-profit organizations to evaluate how much of an organization’s total resources are dedicated to program activities, fundraising, and management and general expenses. The 990 also reports who the directors and officers are. It is by no means a tool from which one can derive a complete picture to develop an opinion regarding the financial position and operating results as a whole.