Discussion: How to properly capitalize your arts organization
From the Fall 2011 issue of Symphony Magazine
As part of the Red Alert! Plenary session at the League of American Orchestra's National Conference in June, Susan Nelson of Technical Development Corporation offered provocative new ideas about how orchestras might rethink their finances. League President & CEO Jesse Rosen and Ms. Nelson further explore the latest thinking on capitalization, holistic financial planning, and why risk is essential for orchestras:
ROSEN: Why has capitalization now come to the fore? We seem to have spent a long time living with an acceptance that performing arts organizations are undercapitalized and so be it -- we'll make the best of it. What has changed?
NELSON: I think there are two reasons. Over time, performing arts organizations have seen a diminution of their actual balance sheet - their net worth - because expenses have outstripped revenues. Over time, they've eroded their baseline financial support. This leads to another, more critical issue: audience behaviors are shifting, which has changed participation and people's patterns of how they purchase and give. Because we allowed our balance sheets to erode over the last few years, we aren't prepared to address those shifts. The capital structures aren't there. Funders are interested in why people aren't reaching their audiences. They are worried that we are in a time of major shift and want to see innovation and change - but they can't figure out what's happening.
ROSEN: Can you share a few of the highlights of what you learned in your Getting Beyond Breakeven study of Philadelphia-area arts organizations about their capital needs?
NELSON: We looked at the financial structure of more than 150 organizations that had been working with their funders probably for the better part of ten years. We found in the top level that over 75% of the folks in our sample were dangerously undercapitalized. They didn't have even baseline operating reserves or working capital at sufficient levels. There were, however, many people breaking even year-to-year - they just weren't getting ahead.... People told us they needed risk capital, operating reserves, and building reserves, but described how hard it was to get it in this current environment and how there were not a lot of venues to talk about it.
ROSEN: Where would the opportunity be for them to get out of that stuck place?
NELSON: The way out is planning for and creating surpluses in ways that are meaningful, and changing the way you think about planning that allows you to actually do that. A lot of people in our sample were not planning correctly - they had done a lot of planning, but on a very internal basis. They hadn't done a lot of external looking at their environment or at what their audiences want or what their marketplace would look like.
ROSEN: This concept of being well capitalized - which suggests creating surpluses, having multiple buckets of financial resource, not only for unexpected negative events but also for innovation and risky - all of this sounds like we need a lot more money. Here we are in this moment of tremendous stress on the resources that have traditionally been available, where there's less money, so how do we square this?
NELSON: We've seen people, even in these stressful times, figure out how to start capitalizing their business, and the number one thing I would say they do is focus on the core of what they need to do. They make sure that there's no extraneous work being done. You can find ways to streamline your cost structure and streamline your organization, which helps with capitalization. The other piece is about having a different set of conversations with your funders about how you get dollars in your system around risk and change. One of the things I heard from funders across the country, and from individual supporters, is that people really want organizations to have impact with their audiences, and they really want change, and that requires some risk capital.
ROSEN: Given that risk capital is so hard just to get... how does an organization get to a point where it can have significant risk capital?
NELSON: That's one of the things you need to talk to your funders and stakeholders and donors about: creating risk capital on your balance sheet. Right now, the system really only has one true vehicle for risk capital, and that is the grant cycle. By the time you push through an innovation idea to the time you get a grant, it could be over a year, a year and a half, and the chance to do it might have passed. Most grants come with the idea that you will succeed, and you want to keep that relationship with that funder, so you want to talk about success. But risk and making changes in how you provide your product means you need to fail, and you need to learn from those failures and move forward. So right now, we have a system of risk-capital dollars that actually doesn't help you take risks.
ROSEN: So foundations are not going to be your best friend in many cases of acquiring risk capital. You're suggesting individual donors [will be more effective]?
NELSON: Right. What's you're going to foundations for are more mature ideas that you know will probably work or that you've already tested or thought about. But for ideas that you can test in real time, individual donors, board members, quick supporters, money that you've built up - that is the money you need to do those things.
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