In 2008, Grantmakers in the Arts (GIA), Technical Development Corporation (TDC) and Nonprofit Finance Fund began leading discussion and research around capitalization and arts organizations. In 2012, MCF hosted a one-day workshop on the topic, and on Dec. 3, 2013, MCF presented a follow-up to fifty staff members of arts grantmakers and arts organizations alike at the McKnight Foundation. Here’s a recap.
Kate Barr, executive director of Nonprofits Assistance Fund, facilitated a mix of presentation and discussion to help participants gain a common understanding of the capitalization of arts organizations. Barr recapped the 2012 workshop by providing definitions of different types of capital, the role and purpose of each and how each fits into an organization’s business model.
All organizations need operating revenue and working capital. Most organizations need mission-appropriate fixed assets, operating reserves and risk/change capital. And some organizations need building and building reserves and endowments.
Healthy capital versus weak capital
Healthy capital should evolve with an organization’s current needs, while weak capital is universally destabilizing to an organization. Barr walked the group through reading a balance sheet. She provided clear tools and formulas to help understand if an organization has healthy capital or not. These included the Unrestricted Net Assets Tool (Instructions on the Unrestricted Net Assets Tool here) and the Days of Cash on Hand Tool.
Barr advocated for strategic plans that include a 4 to 5 year capitalization plan. This would include clearly assessing and understanding the starting point and determining the needs and potential sources. It is critical that boards are provided with education, so they can read and understand balance sheets and other financial documents.
The top six obstacles to capitalization are:
- Best practices
- Financial standards
- Access to capital
How can funders advance financial health?
Cindy Gehrig, president, Jerome Foundation, and Vickie Benson, arts program director, The McKnight Foundation, shared their thoughts on what funders can do to advance financial health and strong capitalization. Key points included:
- Funders are learners too, just like nonprofits, and it is important to learn together
- The importance of understanding the story behind the numbers
- The grantmaking sector is and will continue to move away from penalizing nonprofits for having operating reserves
Weak capitalization results in arts organizations that are risk-adverse and play it safe. Strong capitalization makes an organization healthier and more willing to take creative risks.
“A stronger balance sheet means more artistic freedom,” said Ben Cameron of the Doris Duke Charitable Foundation.
- Jennifer Pennington, MCF member services fellow