Powerpoint (pdf format): STA Capitalization Presentation 1 9 15
Why are we here today?
A shared interest in the health of the performing arts sector – making it sustainable and durable
Recognition that many organizations are facing a number of challenges
Belief that capitalization affects these efforts
Strategic: shifting audiences, engagement patterns (how they consume culture); increasingly competitive (family spends same amount of money on fivefold more choices than 50 years ago)
Changing philanthropic landscape – older donor is aging out, younger donor looking at us differently; how to engage with younger donors
Operational: Core costs grow without a corresponding increase in revenue
High investment in facilities; not getting any cheaper – theatres have no cash and are completely invested in their buildings
Long-term dependence in sweat equity
Ongoing financial weakness (result of all the above)
Why does capitalization matter?
Simple answer: provides the resources
“No money, no mission”
Capitalization is the glue that helps connect
How do you take risk?
What is Capitalization?
Accumulation and application of resources to support achievement of an organization’s mission over time
Having the cash to do what you want, when you want to do it – if you don’t have the cash to fix something/pay someone, they’re gone
Elements of effective capitalization
Post a surplus
Surplus = net assets
Right kind of cash? What is left after you take out the value of your building
Elements of Capitalization
Working capital and operating reserve
Change & recovery, risk & opportunity
Facilities and equipment reserve
Business model: how an organization makes and spends its money in service of its mission
- Artistic vision and strategy
- Local market
- Time horizon and lifecycle
- Business drivers (audience, facility, collections, and other fixed costs)
- Revenue composition
- Revenue predictability and reliability
- Expense composition
- Surplus size/reliability: if you cannot post a reliable surplus, you have a broken business model
Revenue and capital serve different purposes
Revenue funs regular operations
Capital provides liquidity, reserves, and the ability to take a risk
Operating revenue exceeds expenses
Innovation and change possible
How well are arts organizations capitalized?
Arts sector is under-capitalized and inappropriately capitalized
Proven by studies from NFF and TDC and out work with organizations across the country
A specific analysis of the Philadelphia, Boston and Detroit sectors showed that, on average, 70% of organizations were inadequately capitalized
Lots had trapped endowment – little bits of money locked up to no good end (under 10 million)
On average, people had three weeks of cash
Problem: after 3 days in the monkey cage, it starts to smell ok
Funders thought organizations didn’t know they’re broke
We found that the majority of nonprofit leaders understand their financial position
–Neither discipline nor budget size is a factor
Many can point to the corrosive effects of poor capitalization, but feel powerless to address it
Where’s the disconnect?
Internally focused planning
–3-yr strategic plans required in Philadelphia – they were terrible (well-written wishlists; no sense of external world)
–Growth was always based on “I want,” not demand; assuming an audience is dangerous
Incentives of funders/supporters and organizations are often misaligned, undermining the goals of solid capitalization
Structural, behavioral, communications barriers
An Integrated Plan
Stars with mission and vision
Looks at market, tests cost of resources
Think about time horizon, business model rivers, life cycle
Example: Boston has 2 foundations and they don’t give a lot of money
Understand size and shape of your population
Who’s competing with you? How likely are they to take your dollars?
Benchmarking good for inspiration, not confirmation
–Chaotic capital markets result in an environment in which funders and donors do not support program and capitalization alignment
Donors may have different goals than you
Limited understanding of what drives individual business models
Absence of an equity ethic means limited investment dollars for R&D, risk, and change
Funders supporting programmatic outcomes, which may not support the mission
–Poor best practices, perpetuated by organizations and funders alike, hollow out already lean balance sheets:
Surpluses and reserves perceived as lack of need
Projects rarely cover full costs
New ideas supersede business as usual
Expectations of success stymie risk-taking
Misaligned incentives create conditions in which it is often difficult for organizations to be transparent
Did we manage the money as we aid?
Are we hiding financial performance? (only want to hear about success)
Are we perpetuating broken business models?
Mission and vision
Organizations must have a clearly articulated mission and vision
They should have a well-defined approach and methodology to fulfill that mission
Board and staff must agree upon the mission and approach
What are your business model drivers?
More drivers = less flexible = need more cash
Small and nimble is good
What is your time horizon?
Immediate (smaller, individual expression, plan in yearlong pieces)
Medium Term (branded organization, fixed costs must be controlled)
Long Term (civic anchor, much less flexible)
Not an aspirational chart
Analyzing marketplace also helps determine the cost of doing business:
Marketing and development investments
How do you change this?
Sizing and funding capital needs
What do you need to hold on to talent? Fixed costs?
What hole do you need to cover if things go bad?
Risk or opportunity capital
Most people that fund it don’t spend it – if they do, it’s a bailout
Sizing transitional capital needs
Recovery capital: “Can’t function until you clean it up” capital (paying off past debt, moves URNA out of the red, provides interim working capital, funded by people who love you)
Change capital: required to test and execute a new business model (covers planned deficits and one-time expenses temporarily until revenue reliably covers full costs)
Prioritization depends on your capitalization stage
4 stages: Recovery, Transition, Strengthen, deploy and maintain
Risk in the context of capitalization
- Program Risk
- External Risk
- Shifts in the economy
- Human capital
- Loss of leadership
- New opportunity
Risk aversion is about living in recovery stage or transition stage, being overly cautious
Risk management questions
What are the core expense drivers that we must continually invest in?
What are the risk associated with each?
–How much is artistic risk part of your business model?
What reserves do we need?
What is the scale of the organizational change that we are undertaking?
Small vs. large programmatic risk
Targeted organizational risk
Risk avoidance questions (don’t live in it!)
Is our business model working against us?
Is what we do relevant and fundable in this market?
What capital funds will stabilize us?
How do we implement changes to our business model?
What market testing do we need to do?
Are we communicating clearly?
Are financials clear?
Crafting and disseminating message
How do these four factors shape your internal and external messages?
Taking the lead
-All messaging begins with these questions:
Why does it matter?
How do I know it will work?
How much money do I need?
Answers are reflected in your strategy
How do you know it will work?
Moving toward effective capitalization
Determine appropriate types and amounts of capital
Distinguish capital from revenue in organizational plans, financial reporting, and fundraising strategies
Remember, supporters give to mission
Focus on enterprise health