Balance Sheet Analysis of the Louisiana Philharmonic Orchestra
Case Western Reserve University
SASS 425: Nonprofit Financial Management
February 19, 2022
Go to Part 1-3, Part 4, Part 5, Part 7, Presentation
The Louisiana Philharmonic Orchestra (LPO) is in New Orleans, Louisiana and its stated mission is “to transform people and communities through music” (Louisiana Philharmonic Orchestra, 2020, p. 1). The organization is cash poor and illiquid with about $2,300 in cash and equivalents. The organization had less than half of its annual expenses available as cash on hand in 2019 and far less than the amount necessary to cover nearly $600,000 in accounts payable. Cash on hand would not be sufficient to cover three to six months of expenses; in fact, it would cover less than one day of expenses, and this figure drops into the red if we include paying accounts payable. The LPO would be 38 days in debt if it covered accounts payable and accounts receivable with cash on hand at the end of fiscal year 2019, and this would threaten their ability to continue operating.
Because the LPO lacks cash assets, and nearly 60% of its assets are tied up in grants, pledges, and other receivables (it has no accounts receivable for any of the three years studied), it may be relying on more than $200,000 (5.42% of total assets) in investments that are not part of its endowment funds as well as over $960,000 in interest from its endowment trust (included in “other assets” which represents about 27% of total assets) to cover bills and emergency needs. Over $2.1 million in assets is attributed to grants, pledges, and other receivables – a figure that tracks with the organization’s reliance on direct public support as either its first or second strongest revenue stream along with program income. According to audited financial statements, these are broken into three sources: net contributions receivable (unconditional promises to give that are receivable within one year), net contributions receivable greater than one year (unconditional promises to give that are receivable in one to five years), and a state tax credit receivable which is a “musical and theatrical production tax credit for the state of Louisiana” (LaPorte, 2020, p. 3). These figures are based on money that has been promised (perhaps by individual and corporate donors and foundations) but not yet received and the organization’s calculation of how much the Louisiana Department of Revenue will refund LPO for qualifying expenditures during the fiscal year. Because most of its assets are not yet collected and may take several months to a few years to collect, the organization likely leans toward borrowing against these promises and its less liquid assets and using credit to stabilize cash flow in times of “trickles” of income – such as when the season is in pre-production and the LPO has not collected ticket revenue yet – and pay bills.
Fixed assets – land, building, and equipment – represent 9.4% of total assets for LPO. For the LPO, this type of assets includes “sheet music, musical instruments, production equipment, administrative equipment, and vehicles” (LaPorte, 2020, p. 10) It does not include land or buildings because rather than own property, the LPO is a tenant of Parish Hall (a collaborative work space by a New Orleans-based community development corporation) for its administrative offices and the Orpheum Theater (owned by an independent developer) and other venues in the area for programs. Based on the scope of activities (music and music events) and the lack of ownership of land or buildings, it makes sense that fixed assets are just under 10% for LPO. This also accounts for the fact the LPO paid $448,759 in 2019 for occupancy of its office space and performance venues. Though the LPO does not hold this type of assets and must pay for these spaces, the orchestra is spared the cost of upkeep and maintenance for property and plant which could involve high-cost repairs from hurricane seasons. The Orpheum Theater suffered damages from Hurricane Katrina that led to the theater being closed for 10 years and requiring $13 million in renovations (Fleming, 2015). The orchestra is wise to avoid the risks of owning such an asset which would likely detract from mission fulfillment and further challenge its ability to achieve liquidity.
Liabilities for the Louisiana Philharmonic Orchestra are valued at 52.59% of total assets. The organization has more assets than liabilities, but it is highly leveraged which presents a risk to long-term financial stability because there is higher doubt in the organization’s ability to pay its debts. While LPO did not have any debt from tax exempt bonds or own any buildings or land that would cause it to be liable for a mortgage, LPO did owe $800,000 in notes payable in 2019 – more than three times what it owed in notes payable in 2017. A safe presumption is the orchestra may have increased its borrowing to compensate for its cash on hand shortage and illiquidity.
Not only was LPO highly leveraged, but the organization also operated at a loss in fiscal years 2018 and 2019. This would exacerbate the doubt in the organization being able to pay off its monthly notes as they came due. Because the orchestra’s fixed assets consisted of equipment, materials, and vehicles the organization needed to carry out its programs, those assets would not be available to liquidate while the orchestra still functioned. However, LPO could potentially liquidate $200,473 in non-endowment investments and its $986,552 in endowment interest listed under “other” assets – depending on the guidelines of the endowment. If long-term debts suddenly became due, liquidating these assets could help LPO meet their financial obligations.
Net assets are what an organization is worth. Rather than being what the organization owns (assets), net assets represent what would remain if the organization liquidated all its assets and paid all its liabilities. The percentage of financial worth compared to the total asset value is important for the financial health of nonprofits because when that percentage is higher, people can trust that the organization has better financial health (is worth more) and is able to pay its debts. When that figure is lower, the organization is in financial trouble (worth less), is more leveraged, and there will be less trust that it can pay its debts, manage its resources well, or continue to offer programs and services.
The Louisiana Philharmonic Orchestra’s 2019 net assets at the end of fiscal year 2019 included several endowments worth $962,471 held at the Greater New Orleans Foundation, according to Schedule D Part V of that year’s form 990 and audited financial documents (LaPorte, 2020, pp. 13-14). Compared to many orchestras around the country that were formed 50 to 100 or more years ago – such as the Arkansas Symphony Orchestra (1966), San Diego Symphony (1910), or New York Philharmonic (1842) – the Louisiana Philharmonic Orchestra is relatively young, having been founded in 1991. Still, the small size of its endowment reported is somewhat surprising, as one might anticipate an endowment of at least low-six figures for a symphony that is in a metropolitan area, has been in the community for 30 years, and has annual expenses around $6 million. The endowment size may be clarified some by notes in the audited financial statements:
Several endowments have been established at the Greater New Orleans Foundation (GNOF) for the benefit of the LPO over which GNOF has variance power. GNOF utilizes an endowment spending policy to determine the amount available for distributions. Future distributions are subject to that policy. As such, these funds are not recorded as assets on the LPO’s financial statements. As of […] 2019, these endowments were valued at approximately […] $2,907,524 (p.13). These funds are separate from the $962,471 interest held in the endowment trust, and if they deem necessary (such as if the LPO ceases to exist), the Greater New Orleans Foundation may redirect these funds.
Basic Overall Analysis
The Louisiana Philharmonic Orchestra lacks liquid assets, is highly leveraged, and achieved a negative net income for the two most recent fiscal years on record. The organization does not have enough cash to pay expenses and debts for one day, and if the flow of income stopped, it would be over a month in debt if cash and accounts receivable (it has no accounts receivable) were used to pay expenses and accounts payable. Grants, pledges, and other receivables account for nearly 60% of the organization’s assets, yet these assets may take several months or years for the organization to collect. In the interim, the organization will still have expenses to cover and debts to pay, which is likely leading the LPO to borrow and increase its liabilities each year. The organization’s net assets to total assets ratio is 47.41%, meaning the organization owns less than half of its assets without debt. These all indicate an organization in poor fiscal condition and low financial worth that is not sustainable as it is currently operating.
Fleming, E. (2015). Orpheum Theater Reopens After 10 Years And $13 Million In Renovations. WWNO Public Radio. Retrieved from https://www.wwno.org/show/all-things-new-orleans/2015-09-18/orpheum-theater-reopens-after-10-years-and-13-million-in-renovations
LaPorte. (2020). The Louisiana Philharmonic Orchestra Audits of Financial Statements June 30, 2020 and 2019. Retrieved from https://app.lla.state.la.us/PublicReports.nsf/0/A01C8636F8FD9F2486258685006EC461/$FILE/00022C31.pdf
Louisiana Philharmonic Orchestra. (n.d.) About the LPO. Retrieved from https://lpomusic.com/about-section/about-the-lpo/
Louisiana Philharmonic Orchestra. (2018). IRS Form 990. Retrieved from https://pdf.guidestar.org/PDF_Images/2017/721/189/2017-721189023-0ee8aeb9-9.pdf
Louisiana Philharmonic Orchestra. (2019). IRS Form 990. Retrieved from https://pdf.guidestar.org/PDF_Images/2019/721/189/2019-721189023-202021969349304662-9.pdf
Louisiana Philharmonic Orchestra. (2020). IRS Form 990. Retrieved from https://pdf.guidestar.org/PDF_Images/2019/721/189/2019-721189023-202021969349304662-9.pdf