Capitalization & Sustainability

Powerpoint (pdf format): STA Capitalization Presentation 1 9 15

NOTES:

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

 

Multiple challenges

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

Endowment

 

Key terms

Business model: how an organization makes and spends its money in service of its mission

Influenced by:

  • Artistic vision and strategy
  • Local market
  • Time horizon and lifecycle
  • Business drivers (audience, facility, collections, and other fixed costs)

Comprises:

  • 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

 

Effective capitalization?

Operating revenue exceeds expenses

Risks managed

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

 

Structural

–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

 

Communication

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

 

Resources

Analyzing marketplace also helps determine the cost of doing business:

Talent

Fixed costs

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

Endowment

 

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

Operational Risk

  • Program Risk
  • External Risk
    • Audiences
    • Funders
    • Shifts in the economy
  • Human capital
    • Loss of leadership

Strategic Risk

  • Programmatic
    • Pilots
    • 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!)

Recovery

Is our business model working against us?

Is what we do relevant and fundable in this market?

What capital funds will stabilize us?

Transition

How do we implement changes to our business model?

What market testing do we need to do?

Strengthen

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

Evaluate strategy

Engage everyone

Determine appropriate types and amounts of capital

Distinguish capital from revenue in organizational plans, financial reporting, and fundraising strategies

Remember, supporters give to mission

Post surpluses

Focus on enterprise health

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