Long Term Capital for an Arts Organization
June 18, 2012
Behind all arts programs and performances, lies the challenge for arts organizations of having financial stability in a continuing volatile economy. Should this take the form of a ‘reserve’ or longer term capital fund (‘endowment’). A reserve is attractive as the fund has flexibility and remains available to the organization at the discretion of the Board. An endowment has a long term focus, providing the security of an expected income, available to the organization without restriction and governed externally.
For the Executive Director or Board member, it is critical to think through the purpose of long term funds, who will decide how capital is to be managed and accessed. As an organization, you should understand your donors, what motivates their decisions to provide annual financial support and longer term gifts. At the end of the day, the yield from an operating surplus, reserve or endowment provides the means to help you ensure artistic vision and creative programming can continue.
A new dynamic phrase is emerging in the USA – ‘change capital’. This refers to financial support that supports improvements in the quality or efficiency of the arts organization’s programs, supports growth or ‘right sizing’ of an organization and enables the organization to take risks, innovate and remain vibrant. Characteristics of change capital are three fold:
- Funding is separate from regular earned or contributed revenue, and typically is received during a limited time frame
- Flexibility – how the organizations spends the funding is of lesser importance than what it achieves – does the use allow the arts organization to enhance how arts programming is delivered or build efficiency into its operating model
- Is the result increasing and reliable revenue that creates operating surpluses
Each form of capital – reserve fund, endowment and change capital have a place to help fund improvements in efficiency and quality of programming. They help to align the size and fixed costs of an organization with its sources of revenue (‘right sizing’) and are tools to help arts organizations take risks, be innovative and pursue new visions. A series of papers on capitalization of the arts that speak to this topic and illustrate how arts organizations put them to use can be found through the website of GrantMakers in the Arts – www.giarts.org – National Capitalization Project. All are worth reading, and the NonProfit Finance Fund paper titled “Case for Change Capital in the Arts” expands on the concept of change capital.