Conversations on Capitalization: Overcoming the Obstacles

Earlier this month, Nonprofit Finance Fund (NFF) released a new analysis featuring the responses from the leaders of 919 arts and culture organizations who took our 2014 survey of nonprofit business health. The State of the Arts and Culture Sector report captures the challenges and triumphs of nonprofits grappling with financial pressures, changing demographics, new technologies, and opportunities to expand the reach of their programs. (The full data can be filtered by artistic discipline, geography and budget size through our online survey analyzer, available here).

NFF’s report identifies some of the systemic barriers that impede cultural organizations from building financial structures supportive of art-making and community engagement. One of these barriers is the missing dialogue between grantmakers and grantees: cultural organizations report significant discomfort engaging their funders in meaningful, candid conversations about their need for flexible capital to support liquidity, risk-taking and change.

Given this lack of open, honest dialogue, it’s unsurprising that our survey data also reveal a second systemic barrier within the arts funding system: an inability of cultural groups to secure the kinds of flexible capital resources that buttress their artistic ambitions. Only 11% of arts groups taking our survey reported receiving funding to help manage cash flow; just 8% raised flexible funds for growth and change; and a mere 5% secured money for reserves to invest in artistic risk taking.

Organizations such as NFF and Grantmakers in the Arts continue to educate funding communities around the country about how to make investments that pave the way for long-term artistic success. We know from experience that organizations cannot easily withstand economic pressures, respond to community needs, and create innovative programs if the funding system does not evolve in ways that broaden access to flexible capital.

While there have been modest improvements in the grantee/funder dialogue, we continue to ask: why isn’t the sector engaging in conversations about the full spectrum of capital needs? Why is funding so often misaligned with organizational needs?

There are many institutional and cultural reasons. Not to blame, however, is a lack of knowledge on the part of arts executives. By and large, NFF’s work with these leaders confirms time and again that they understand the importance of flexible, long-term money and the relationship between stable finances and dynamic art. At a focus group that brought together ten cultural groups in Philadelphia to discuss the data, one museum executive told us: “You have to know what your business is…you can create great art, but if you're not operating like a business, then you're not going to make it.”

Here, we’ve identified some of the real reasons why open conversations about capitalization aren’t taking place - and why funding flows, therefore, don’t address true, full needs. We also offer some suggestions for actions cultural grantmakers and organization can take to address these issues.

Reason #1: A major hindrance to genuine two-way conversations about business health is fear. Cultural organizations worry that if they speak candidly about what they really need, rather than what they think funders want to hear, they risk being passed over for alternative, sexier investments. So instead, they put forward ideas that stretch their human and institutional capacity - ideas that frequently take them astray from their mission. (Consider how many cultural groups, for example, suddenly assert that they do ‘creative placemaking.’) One youth-serving cultural organization in a Boston-based convening told us: “Our current strategic plan doesn’t focus on growth. It focuses on getting better at what we do and going deeper into what we do. It’s hard to get funders excited about this message.”

Action: Given the power dynamic inherent in the grantor-grantee relationship, it is the role of the funder to penetrate the trust barrier by creating a space for honest dialogue about true business dynamics and needs.

Reason #2: Another obstacle to transparent conversations - and more rational funding flows - is a lack of integrated strategic and financial planning by nonprofits themselves. Grantmakers who have taken a leadership role in making capital grants often tell us that organizations frequently come to them with sizeable requests for support without having developed the rigorous, multi-year financial roadmaps that shows how the market for earned and contributed revenue will ultimately pay for their artistic ambitions. Encouragingly, funders are subsidizing comprehensive planning efforts more and more, giving them greater confidence that their investments will play out as intended. (A word of caution: unless these plans are backed by adequate infusions of capital, they will quickly gather dust -- or worse, lead to unfunded mandates for growth).

Action: Cultural organizations should be encouraged to integrate revenue and capitalization goals -- informed by an assessment of resources available from audiences and donors -- into their strategic plans. Then, grantmakers who can should be willing to put sufficient, multi-year infusions of capital into these plans.

Reason #3: Ongoing confusion about what distinguishes flexible capital from flexible revenue also gets in the way of the effective flow of money to mission. Both kinds of funding are essential to nonprofit health and program impact, but each has a different purpose. Revenue is money (from earned and contributed sources) to pay for what an organization already does. Capital is saved, spent and replenished as a source of short-term liquidity or longer term funds for adaptation. Unfortunately, many nonprofit supporters give revenue, cloaked in capital expectations. A classic example is the gift of general operating support (revenue) that arrives alongside a list of expected outcomes for organizational change or growth. Or, the innovation grant (again, revenue) that encourages organizational risk-taking but that is overly restrictive about use, late in coming, or sized inappropriately to the opportunity at hand. In such situations, one can easily see where the grantor-grantee dialogue goes awry: Funders believe they are having candid conversations about risk and change, whereas cultural groups perceive they are recipients to just another grant with oversized expectations.

Action: Funders can be clearer about whether they are a source of ongoing revenue (supporting current programs and business operations) or periodic capital (investing in structural change). They can play one or both of these necessary roles, but one kind of money cannot substitute for the other. Cultural nonprofits need to do a better job articulating what they need and are asking for, within the context of their artistic strategy and organizational goals.

Reason #4: Finally, we hear from cultural organizations and supporters alike that capitalization is simply too expensive -- the purview of national funders who make sizeable investments in large, anchor institutions. In fact, nothing could be farther than the truth. Even the smallest of organizations can be encouraged to save for a rainy day, and capitalizing community-based organizations needn’t break the bank. (For example, seeding a cash reserve at three months of expenses for a nonprofit with a budget of $150,000 costs just $37,500.) Some funders may find it a more cost effective strategy to meet the complete capital goals of a handful of small organizations, rather than to address a fraction of the capitalization needs of a few large groups.

Action: Cultural groups should be encouraged to set surplus and savings goals each year as part of the budgeting process. Grantmakers who aren’t able to make capital investments can still support healthy capitalization by paying for planning, collaborating with other funders, or simply employing funding practices that support long-term financial health (for example, by providing full cost project funding or recurring general operating revenue.)

Overcoming these obstacles will not happen overnight. It will require cultural grantmakers and organizations alike to establish trust, embrace data-driven planning, educate themselves about the different roles money can play in advancing artistic goals, and accept that capitalization is not a fad, but a way of life - for every cultural organization.

What else gets in the way of candid dialogue about true, full capital needs? Please send us your feedback.

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If you are interested in learning more about Arts, Culture & Humanities results from NFF’s 2014 State of the Sector Survey, join a free webinar this Thursday, September 25th at 3:00 pm EST. Click here to register.

State of the Arts: Exploring NFF's 2014 Survey Results

Thursday, September 25th from 3:00-4:00 pm EST