Dialogue on Capitalization
October 08, 2014
South of the border, a US based organization Grantmakers in the Arts undertook over the last four years research on the important topic of the role of capital in an arts organization. This can summarily be described as “having the capital to execute strategy” or perhaps a little more elegantly, “Capitalization is the accumulation and application of resources in support of the achievement of an organization’s mission and goals over time. A well-capitalized organization has the ability to access the cash necessary to cover its short and long term obligations, to weather downturns in its external operating environment, and to take advantage of opportunities to innovate”.
As we all remember, the recession and market decline in 2008 resulted in significant challenges and financial stresses for arts organizations. The original research work undertook to build knowledge about funding practices and how to achieve financial sustainability. The research and reports in great detail are available on the Grantmakers website.
In 2014, the organization surveyed arts organizations to see how the fruits of the research are being put to work by arts and cultural organizations. If nothing else, the research stimulated many organizations to have a conversation about their overall financial strategy – how to strategically secure and use resources to do their work over time. Key elements of capitalization are beginning to find their way into board/staff discussions, such as:
• The different kinds of capital required by an organization
• Distinguishing between regular revenue sources ( fund current operations/programs ) and capital ( funds that provide for liquidity, adaptability and durability of the organization )
• Importance of building liquidity for any organization and to create it by saving
• Understanding how the behavior of funders can impact the organization’s finances
Good Business Practice
A key outcome of the original research, which is increasingly accepted by funders, was that good capitalization of an organization begins with the generation of operating surpluses to be used as capital the organization may access to successfully achieve their mission/vision. Past views that an organization generating an operating surplus does not require funding is in decline – the understanding has grown with funders and Boards that achieving surpluses and cash reserves are a critical part of good business practices. Capital should be viewed as a strategic asset that enables an arts and culture organization to take a risk, adapt its mission/vision and change to be financially viable over the long term.
Good Capital Management
Change is occurring to improve the capitalization of arts organizations. The report does say that some Boards are still reluctant to provide change capital or other forms of unrestricted funding, continuing an older view that an arts and culture organization should operate with very low overhead and run at a deficit. Shifting to good capital management practices ( e.g. establishing reserves ) involves all dimensions of an organization – education of board members as well as arts management staff is a continuing need. The work to better understand the role of capitalization will continue. The work of Grantmakers in the Arts is important as it frames the issues, opportunities and possible solutions in a way that is easily understood.