Social Currency

Ben CameronBen Cameron is program director for the arts at the Doris Duke Charitable Foundation. He is a passionate advocate for artists and their organizations, and a powerful partner to all of us working toward a well-capitalized arts sector. NFF has worked with Ben and the Foundation on projects including Leading for the Future, a pilot initiative designed to help a group of artistically outstanding performing arts organizations strengthen their business in a shifting environment. The Foundation has also provided support for NFF's analysis of arts sector trends and opportunities; this year's survey is now open at http://nff.org/2015.

This is the second in our interview series with foundation leaders about the intersection of philanthropy and financial strategy. We're honored to work with leaders such as Ben, who are challenging assumptions about how grantees and funders can pursue a more vibrant and viable arts sector.

Antony Bugg-Levine: We've seen some of the arts organizations we work with emerge from the 2008 economic crisis with a new or renewed sense of purpose, while others are still hunkered down trying to make sense of all of the changes. What are you seeing in the field, and what excites you about where the arts sector and its funders are going?

Ben Cameron: For organizations that survived the crisis, many can draw confidence from the fact that their communities have validated their importance, funders have indicated an interest to continue with them on the journey, and there IS a future for them, even while it may be challenging.

I'm excited when I see organizations stand back and ask, "What are the possibilities that this new world is opening to us?" and think expansively, particularly about how changes in demographics and technology might be an invitation to embark on new activities. This also demands that organizations be absolutely rigorous and unsentimental, and stop doing things that are serving them less well in order to free up time, energy and resources.

I am also personally cheered by the work of Ron Heifetz at Harvard's Kennedy School, who is exploring how we think about the capacity of an organization to continually adapt and change in the face of challenges that we can't yet foresee. The tendency for many arts organizations and their funders to be reflective about long-term capacity — of which healthy capitalization is one key — seems to me to be a positive way of helping a more vibrant arts sector thrive now and in the future.   

It’s encouraging to hear that more people are moving out of crisis mode and able to think about the future. But we still get pushback from people who say that worrying about financial resilience is a distraction from the artistic mission. A lot of our work is about helping people realize that finance can be a means to achieving artistic mission. How do you approach this, and how do you encourage arts leaders to engage with this issue?

Arts organizations of course have at their center an artistic imperative. There has been an unfortunate tendency in the arts field, at times, to position the arts and management as adversaries and to see fiscal solvency as a strategy occurring at the expense of artistry, and there are very real examples of where conflict has occurred. Especially now, as funding is falling in certain sectors and the pressure to increase earned revenues is growing, tensions between artistry and management are again appearing, and artists, in particular, worry that box office imperatives are distorting artistic priorities. That leads to a defensive posture that on one hand is understandable, but in a certain way is a false dichotomy.

The best organizations we see are true partnerships between artistry and management. The artistic objectives and the impact the organization wishes to have on the community are absolutely clearly defined, and the management isn't there to impose programming on the artistry but to look very carefully at a responsible way those artistic objectives can be achieved.

Beyond a general focus on financial resilience, we have a shared belief in the importance of building the adaptive capacity of nonprofits — that is, not just to help them make some specific change, now, but to invest in financial health so that they are able to implement changes to advance their missions or to better serve their clients in the long term. The Leading for the Future Initiative that the Doris Duke Charitable Foundation and NFF partnered on piloted the idea of giving money to arts organizations with this aim. What did you learn from that and other similar work, and what does the Foundation do in terms of funding practices and strategies to support this aim of nimble nonprofits?

We've found that multi-year or sustained funding can be more valuable than annual grants. Some of the managers I've admired most over the years think in multi-year cycles. I remember Michael Kaiser, during his tenure at the Kennedy Center, saying that it's not just about a 5-year financial plan, but about having a 5-year artistic profile as well. Thinking beyond a 1-year budget allows arts leaders to think more strategically about which opportunities might be the right fit for which funders.

Similarly, David Hawkinson at Steppenwolf has said they use 3-year rolling budgets; the allocating and monitoring of that budget becomes an ongoing planning mechanism. Along with multi-year funding, we've learned a lot about the value of individually determined payout schedules, depending on the needs of particular projects.

Also, we regularly provide additional planning money to grantees in certain initiatives. The pressure to run an arts organization is so immense, and the changes so fast and furious and just keeping your head above water is so difficult, that when it comes to longer-term visioning, to undertake new directions or new platforms, few organizations have had the luxury to engage in significant planning activities, especially if they’re convinced no one will fund it at the other end.

In some cases, we approach grantmaking as an investment in a core set of principles and indicators, and then give people planning resources and flexibility in how they implement next steps.

That approach requires a trusting relationship between funders and grantees. Can you share more about how you approach "investing in a set of principles?" In today's environment, flexible grants are rare and powerful, particularly with the increased focus on measurable outcomes, which may in some cases be a good thing, but can also be limiting.

In the case of Leading for the Future, which is a good example of this, we started with the premise: In a rapidly changing environment, how do you think about activities, programs or capacities that may help you respond more appropriately?

We were particularly interested in two major changes in the arts environment: changing demographics, in the fullest sense, encompassing age, race, sexual orientation, physical ability and more, and technology and how it changes arts consumption patterns. Anyone applying to the program had also identified these factors as critical to their destiny.

We also looked for key indicators that gave us confidence that an organization we might give money to is one that highly prizes learning, is deeply self-reflective, is rigorous in the way it thinks, and has the capacity to implement change when it sees the opportunity. We looked at past examples of significant change, what the organization had learned and how that changed future behavior. And then, rather than asking for a plan, we looked at how they were approaching critical problems and what they saw as the key first steps.

All of that is what led us to make investments in the selected organizations, and trust them to grapple with the particulars. We continue to use this same logic in other specific initiatives today.

In many ways, the support you are able to provide is an exception. Resources for true exploration, or capital to pursue new lines of work, remain scarce. What do you say to funders who are skeptical of supporting this type of adaptation?

When people first started to talk about adaptation and its related term, innovation, there was a misperception in the field about both the degree of change on the table and the implications for current programming. Over time, there has become more confidence that what we are really looking at is incremental testing of activities, at a survivable scale, against a backdrop of ongoing activity. And so, some of the initial panic that "we've got to throw the baby out with the bathwater" has now been replaced with this idea that this may not need to be a revolution, as much as it needs to be a very deeply reflective evolution as we find our way into the future at a more appropriate rhythm and scale. And that is reassuring to a lot of people.

Our 2014 State of the Arts Sector analysis found that 47% of arts organizations identify "achieving long-term sustainability" as a top challenge. What can funders do to help management teams improve financial sustainability?

There is an opportunity, especially in this climate, for nonprofits to drive a different agenda as they pursue support from funders.                                                                                                                         

We are very interested in expanding the conversation about capitalization in the arts; Grantmakers in the Arts is doing a whole series of workshops around the country on this, and we hope there is an opportunity for arts organizations to say to funders, "Let's look at the balance sheet together and talk about our longer-term capitalization needs."

If a nonprofit doesn't understand its balance sheet and capitalization needs, it might be missing an opportunity. Also, the more the arts community can come together to talk about patterns that will increase healthy capitalization — beyond individual organizations talking one by one — the stronger that case will be made over time.

More so than "sustainability," I've been thinking in terms of "viability." Sustainability can often orient people to preservation of the status quo, or shut the door on potential short-term activities that could be breakthroughs for the organization for fear that they may not be “sustainable.” I'm more interested in how we can ensure that organizations have the nimbleness and capacity to respond even if some of their current activities may not be sustainable.

We hear many arts organizations say that they are comfortable talking to their funders about programmatic support, but not about general operating support, multi-year grants, capital support and other types of resources aimed at building the strength of the organization itself. When it comes to overhead, we don't believe there is a magic number that is right for all organizations, though we're often asked to weigh in on that. We believe that determining the correct levels of enterprise-level support comes down to how you answer the question, "What does it take to run an effective arts organization?" How do you think about this issue and address it with grantees and peers?

I think increasingly, we need to address the question of long-term capitalization, and the totality of the costs needed to undertake a given project. In the current climate, this mantra that the administrative costs shouldn't exceed X-percent of a grant — a number that may be measured by an organization outside of the arts sector and then used in ratings — seems to me deeply problematic. I'm inspired by Jim Collins, author of Good to Great and Good to Great and the Social Sectors, when he argues that these kinds of percentages are arbitrary and that if you want the equivalent of a championship sports team, in a nonprofit sense, then you will need to individually determine what the appropriate percentage of administrative costs needs to be in order to achieve those results.

Certainly, no one wants to see callousness or indifference to very real considerations of appropriate salary levels, but at the same time, this insistence that overhead can't violate 15 percent is deeply short-sighted and damaging to the health of nonprofits over the long term.

In the arts, our desire to be efficient, to operate at minimal costs, and some very real disincentives historically that we have bought into, has led many groups to shortchange true long-term infrastructure needs. So, nonprofit arts organizations minimize those costs, and funders have been intolerant of much higher.

I've started to wonder whether greater transparency about the micro, even while we are all being encouraged to look at the macro, might position organizations better in terms of helping people understand the genuine costs of doing the work. For example, often budgets will capture a big lump sum of "artistic salaries." If you also say, what this really means is that dancers are making $200 per week or even less, that is a much more useful number in order to advance an understanding of the true cost of doing work and how that can reverberate into a negative impact on artists.

I think a lot of the freneticism in the arts scene is because some funders want to "buy at discount" and not at the true cost. Nonprofits must bring an understanding of true costs and a willingness to share that information, and funders must think more generously about the full costs of projects.

We think about that a lot in terms of making a distinction between buy money, which pays for programs and the associated organizational costs, and build money, which works on an enterprise level to support goals such as growth and adaptation.

In cases where we are playing a role to help a grantee build or change, we ask, "What will your organization look like the day after our funding ends?" If you don't ask the question about where you will be, you can't plan backwards to determine what you should do now. There is a tendency to treat this year's income statement as a way to get through this year at breakeven, but if that is your approach, you can't begin to adapt in a proactive and intentional way.

Peter Culman of Center Stage has one of the most interesting perspectives on budgets and finance. As I was getting started, he impressed upon me that the budget should be a manifestation of your desires and your purpose. Looking at the budget as a manifestation of purpose and values  — as a philosophic statement — rather than a set of numbers divorced from that reality, sparks a different conversation.

When it comes to adaptation, if you are really saying that your organization is going to change, those new priorities should find realization in the budgets. If you are saying, we are going to move in a whole new direction and our priorities are going to shift, but in the budget your relative proportions remain the same, that can't help but call into question whether you are authentically pursuing a new direction or not.

Thank you for sharing your perspective on the interplay between artistry and finance. You and your work at the Foundation demonstrate that one can be passionate about the artistic mission as well as thoughtful and rigorous about long-term financial viability. 

This month, NFF released its fifth annual State of the Nonprofit Sector Survey. Of the nearly 6000 respondents, more than 900 hailed from the arts and culture sector, representing 47 states.

The data provide a wealth of information about how arts and culture organizations are managing through an unprecedented time of economic and artistic flux. Current trends point to lasting changes in the way the sector operates and is funded. The arts specific survey results are available in their entirety here. I also encourage you to check out our online Survey Analyzer, where you can further filter the data by state, sector, operating expense and other dimensions.

These are the headlines.

Arts & culture organizations continue to operate with thin margins and low liquidity: 

“As the economy declined, we chose to sustain programs as much as possible to help maintain our local economic impact and community service. Consequently, we depleted our cash reserves that were normally used for capital maintenance and expansion projects. Today, these reserves are completely wiped out and our capital needs are mounting up.”

--Arts, Culture & Humanities NPO, FL

  • 42% of survey respondents reported an operating surplus in 2012, compared to 44% in the previous year.
  • The outlook for 2013 is more uncertain: just 28% predict ending the year with a surplus. 50% say 2013 will be the same as or harder than 2012.
  • The sector remains divided between the 'haves' and 'have nots': 60% of arts organizations reported three months or less of cash on hand. While 20% added to reserve funds in 2012, an equal number drew down already limited liquidity.
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A piece in yesterday's New York Times sounded a note that's all too familiar to our consultants at Nonprofit Finance Fund.  "For Arts Institutions, Thinking Big Can Be Suicidal” highlighted a new study by the Cultural Policy Center at The University of Chicago showing that the enthusiasm for fancy new buildings and extensive renovations has put an incredible strain on arts institutions.   

This Edifice Complex is indeed omnipresent in the cultural sector. In our 30-plus years advising and financing arts organizations at NFF, we’ve seen scores of organizations jeopardize the long-term vibrancy of their programs because they focused on getting the building built rather than having a healthy organization inside it. In our experience, the institutions that undertake facility expansion successfully run capital campaigns that place the facility expansion in the context of the organization’s overall vision and strategy. These campaigns have several things in common.

First, they are grounded in a reality-based business plan, meaning the organization has done a reasonable job of market-testing demand for its expanded programs within the new space. Because growth of artistic programming rarely, if ever, leads to increased earned revenue sufficient to cover expense growth, successful organizations are able to attract a “market” of reliable paying customers and donors who together will meet the larger institution’s full annual operating costs…every year, forever.

Second, we are increasingly seeing campaigns that include two or more years of flexible capital to pay for the temporary deficits likely to be incurred as the organization’s programs grow ahead of revenue expansion.

Third, the campaigns go beyond fundraising for classic restricted endowments (which need to be quite sizable to generate meaningful annual income) to include one or more cash reserves that can be designated by the board of directors, then spent and replenished for a number of purposes, including the long-term care and feeding of the facility, future rainy days and creative risk taking.

There are many organizations that complete beautiful building projects without having achieved all of the above. Many of them are in an annual struggle to pay their bills and maintain their facilities while delivering imaginative artistic programming. Our advice to our clients, with great respect for their desire to remain energized, competitive and relevant, is summed up well by Duncan Webb in the New York Times article, “Don’t build what you can’t sustain.”

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Learn more about NFF's work with arts organizations here.     


Great art is often created without lots of money and can be enjoyed for many years. Great arts organizations without the right kinds and amounts of money, however, struggle to see another day.

Mission success for nonprofit arts organizations is reflected in the creation, sharing and appreciation of meaningful work.  Each organization has a different artistic vision and goals, as well as its own strategy for reaching and engaging audiences.  Behind every successful organizational strategy there should be a sound approach to obtaining and stewarding the financial resources required to support mission execution over time. This is a capitalization plan. At its essence, a capitalization plan serves as a roadmap for ensuring an organization has the cash and other assets it needs to manage risk and pursue opportunity.

Strategic plans often lack a rigorous financial foundation. They fail to consider the long-term financial resources needed to support program goals. And when they do include a financial plan, they often conflate regular revenue (ongoing) with capital (periodic), or neglect capital needs altogether.  While financial projections that quantify the future revenue and expenses associated with a strategy are critical components of any strategic plan, they are not enough.  Consideration must also be given to the organization’s long-term balance sheet –or capitalization– needs. 

A capitalization plan is really just an approach to building the right balance sheet. It should consider the kinds and degrees of artistic and organizational risk an organization can and wishes to tolerate, as well as the creative ambitions to which its leaders aspire.  Specifically, a capitalization plan should address an organization’s financial health and goals in the following three areas: liquidity, adaptability and durability.

  • Liquidity: having adequate cash to meet ongoing operating needs
  • Adaptability: access to flexible funds to adjust to evolving circumstances
  • Durability: assets to address a range of future needs

Capitalization planning is not one-size fits all

While the amount of adequate liquidity may differ by organization, cash is king for all nonprofits, regardless of size. Many organizations also need periodic access to flexible capital to pay for adaptation –whether related to growth, restructuring, program revitalization or even downsizing. 

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Today, with the help of a particular kind of money--Change Capital--Alvin Ailey American Dance Foundation is attracting new revenue by building a technology platform and internal capabilities that maximize opportunities for patron and audience engagement.  Merce Cunningham Dance Foundation is raising money upfront to wind down its operations in a graceful way and leave a meaningful legacy. 

These are success stories.  But, when grantmakers and grantseekers fail to make the distinction between different kinds of revenue and capital, the consequences can be dire: desired outcomes aren’t met, organizational infrastructure is hollowed out, and communities go underserved.  Given these risks, the nonprofit field and funder community need greater clarity about the role of each type of money and what they can separately and collectively achieve. 

First, some definitions:

General Operating Support

GOS is unrestricted revenue, meaning it can be spent at the organization’s discretion – on anything. It might be used to fund programming, to offset administrative salaries or to pay the rent.  In a universe where many grants are tied exclusively to specific programs or projects—often without paying for an appropriate share of the infrastructure required to deliver them—GOS is a rare form of flexible revenue that can pay for mission-critical expenses that few (sadly) are yet willing to support. As such, annual GOS is an essential element of a healthy revenue mix for any organization. It is typically raised from select foundations as well as individuals and corporations, often through special events.

Capacity Building Revenue

Grants for capacity building, whether formally restricted or not, are revenue typically earmarked for building new organizational knowledge, staff and infrastructure. Board development, expansion of the marketing department and the purchase of new technology would all qualify as capacity building expenses.  GOS is often but not always used to pay for capacity-building activities. In that sense, the two can overlap. The difference is that capacity building dollars usually have a specific non-programmatic intention.  They are typically raised from foundations.

Change Capital

Change capital is a concept we developed at NFF to describe a flexible form of capital, distinct from revenue.

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Attendance at the TCG Fall Forum on Governance is comprised of primarily executive directors and board members, with a sprinkling of representation from artists and staff members from the nonprofit theater world.  So, after a day of terrific conversations, it was with great pleasure that I gathered a handful of them together for a panel discussion: “So You Have a Deficit, Now What?”  What followed was a refreshingly frank discussion punctuated with practical lessons applicable to the work of any nonprofit administrator: 

Preliminaries
We began with a few general concepts:

  • Talk of deficits demands a consideration of assets, but some valuable assets don’t appear on a balance sheet.   Assets can also include intangibles such as:  audiences, knowledge, staff members, a board of directors, openness to change, technological tools and savvy, diversity of background and age among your staff, board and stakeholders, civic and business partners, your “brand”, organizational self awareness, and, critically, when seeking to overcome deficits, knowing your impact. 
  • When considering “health” metrics at NFF, we think in terms of “months of cash” on an Unrestricted Liquid Net Assets (ULNA) basis.  If you strip away all of the buildings, property, equipment, temporarily restricted, and permanently restricted items from your Net Assets, how much cash is left for operations?  It can vary, but a rough starting point for an ideal is a 3 month cash/ULNA reserve.  
  • Deficits can be “financed” through a variety of means including: accounts payable, mortgage debt, drawing on reserves, foregone wages, employee furloughs, and over-extended lines of credit.  It can be difficult to ascertain whether an organization is operating at a deficit, and structural operating deficits can be masked by a period of operating at sub-par capacity levels in order to keep expenses in-line. This will not be sustainable.

Managing Costs and Revenue

Tracy E. Long, General Manager of Adirondack Theatre Festival started off the panel by describing an initiative to overcome a $29,000 shortfall on a prior year’s performance, an 8% deficit on the annual budget.  While the scale may seem relatively small, the deficit posed a significant challenge to their cash flow and was an ongoing concern.  Long took on the deficit by addressing both revenue and costs: 

Revenue side

  • Increase ticket revenue on the margin by raising ticket prices by $3 each.
  • Develop theater projects with partners to share costs but generate new and increased revenue.
  • Respond to board member interest in hosting a “Brewfest” with board member spouses and another nonprofit to generate fundraising revenue. 

Cost Side

  • Decrease rehearsal periods for plays that could still be produced effectively with shorter advance time,.
  • Change the design on printed materials to result in lower printing costs.
  • Cut the full-time production manager and move to a “variable” staffing method – hiring as needed for theater tech and sharing the management tasks among the remaining staff.

Accumulated vs. Structural Deficits
Michael Gennaro, Executive Director, Trinity Repertory Company, began by making two important points:

  • Even well managed companies are beginning to fail.
  • Accumulated deficits and structural deficits are different and managing them requires different strategies. 

Michael drew from his experience with the Pennsylvania Ballet as his first example.  When he went there he found an accumulated deficit of $2 million on a $6 million operating budget.  In that instance Michael suggests the first step is to analyze what makes up the debt you are inheriting and evaluate any creative strategies you can employ to get rid of it.  At the Pennsylvania Ballet, the debt was almost completely financed through accounts payable, so Michael negotiated a “work-out” with the vendors to pay a percentage on the dollar of outstanding bills and thus retire the deficit.

In his current tenure as the Executive Director at Trinity Rep, he inherited a more challenging scenario:  Three separate lines of credit were maxed out or frozen, and the building required an expensive update to meet fire code standards.  Together, they amounted to more than $3 million dollars of accumulated deficit with the cost of deferred upgrades to the building generating a structural deficit.  In this instance he took the following steps:

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Will a community revitalization strategy centered on the arts awaken us from the economic doldrums?  If the first 34 ArtPlace projects are representative of that approach, then the answer is yes. 

It’s hard not to feel worn down by the news lately.  The statistics are sobering – our unemployment rate is still above 9% and the poverty rate rose to 15.1% - the highest level in almost two decades.  The stock market is down since January of this year, and it’s not clear that President Obama’s jobs bill will make it through Congress successfully.  In our work with nonprofits all around the country, we are seeing this news unfold right in front of our eyes – with continued weakness across the sector.

ArtPlace

But in New York City, an abandoned East Harlem school will soon offer 90 housing units for artists and 13,000 square feet of community space for arts-related non-profits – while simultaneously promoting the neighborhood as a major Latino cultural capital.  In Wilson, North Carolina, an Art Park is taking shape – featuring Vollis Simpson’s enormous whirligig sculptures—and spurring the development of an “industrial artisan district” that will both attract artists and provide skilled workforce training.  And in Detroit – where unemployment well exceeds the national average – the creation of the Sugar Hill Arts District is allowing for a rebirth of Detroit’s cultural identity.  A planned redevelopment of vacant property and an outdoor arts venue will create jobs and increase attraction to the downtown.  Likewise, adjacent to the Watts Towers in Los Angeles, three houses will be rehabilitated to showcase the work of visiting artists and attract new visitors. Projects like these – bubbling up around the nation –further validate the nonprofit (and now the cultural) sector’s role in boosting employment, revitalizing communities and realizing neighborhood change.  

And it’s not just grant money that will drive community and economic development.  As part of the ArtPlace initiative, NFF will also administer a $12 million loan pool available to organizations advancing place-based work.  What we have learned during NFF’s 30 year history as a lender and advisor to cultural organizations is that knowing how and when to use debt is a key component to managing an organization.  The loan pool will provide an opportunity for organizations possibly left out of the credit market to use debt as part of their strategy for growth and development. 

While creative placemaking is not a new vehicle for economic change, ArtPlace takes a novel approach – bringing together an innovative public-private partnership (with NEA and seven other supporting federal agencies), critical grant funds (ten private foundations), and access to credit (six financial institutions) so that a full complement of capital is available in making all of these communities vibrant places to work and live.   

We don’t need a golden ticket to realize successful economic development.  We need more of the innovation and partnership inherent in ArtPlace, and if we can foster more initiatives like this, I’m confident that we will succeed.

Twenty-five percent of annual operating expenses. That’s what the National Center for Charitable Statistics recommended in it's Operating Reserve Policy Toolkit for Nonprofit Organizations, published in September 2010 in partnership with the Center on Nonprofits and Philanthropy at the Urban Institute and United Way Worldwide.  Grantmakers in the Arts, in January 2010, launched their National Capitalization Project and at their October meeting in Chicago released a summary document which stressed the importance of well capitalized organizations and added, “…we repeatedly came back to the fact that the most common source of capital is accumulated surpluses. We agreed that getting organizations to achieve a surplus would require encouraging a significant shift in nonprofit practice and culture, a challenge we thought well worth undertaking.”

Nonprofit Finance Fund has long been a proponent of healthy balance sheets, but as the reports and recommendations mount, it’s clear that NFF is not alone in suggesting a course of action that considers the creation of reserves.  While reserves alone do not comprise total capital structure, they are an indicator of the degree to which an organization is prepared for the day to day and long term challenges they may face.   Capital structure is the nature, composition and magnitude of the assets, liabilities and net assets comprising the balance sheet – or in other words the financial and physical platform from which the organization’s mission is accomplished.

The provocative question is, how will nonprofits develop healthier balance sheets?  And perhaps more pointedly, how patient are we willing to be?  While generating operating surpluses may be ideal, it will take time and patience to realize a well capitalized sector utilizing this approach.  Our third annual national survey of over 1900 nonprofit leaders (funded by Bank of America) is telling on this point: 

Nonprofit Finance Fund

Annual Survey of Nonprofits 2011 (excerpted) 

All Nonprofits

Arts Nonprofits

Organizations reporting break-even or deficit levels in 2010

56%

59%

Organizations expecting 2011 results at or below break-even

70%

73%

Organizations closing the year within a 5% margin above or below break-even

56%

59%

Organizations expecting 2011 results within the 5% margin

60%

66%

Organizations with 3 months or less of cash in reserve at the time of survey (early 2011)

60%

65%

So, is capitalization via accumulation of operating surpluses the answer?  In simple terms, if we are waiting for the sector to build (or re-build) balance sheets independent of new philanthropic dollars, it will take a minimum of five years for those functioning at the 5% surplus level to generate even the equivalent of three months of additional cash reserves.

At NFF our recently released paper, The Case for Change Capital in the Arts, sets out a series of definitions, strategies, and sample cases from our work with Leading for the Future (funded by the Doris Duke Charitable Foundation) that can inform the conversation about capitalization.  In today’s economic environment, in the midst of the conversations and changing dynamics in the field about capitalization for nonprofits, the time for an equity ethic, an embrace of philanthropic equity if you will has arrived.   While we have many tools to teach nonprofits how to create new strategies for operating that generate surpluses, the sector has been struggling for a long time with inadequate capitalization.   Asking nonprofit leaders to generate operating surpluses to build healthy balance sheets will also require asking ourselves if we are providing the proper support for that expectation to be realized.

National Black Arts Festival, one of the ten arts organizations participating in our Leading For the Future (LFF) initiative (with Doris Duke Charitable Foundation),  produced a fabulous video about their efforts to expand outreach to new audiences using Change Capital.  You can see the list of other participating organizations here and read some of the early lessons of the LFF initiative in the Case for Change Capital report and Financial Reporting Done Right, a companion guide to accounting for capital in nonprofit organizations.

 

Last week, we published a series of documents stemming from the early results of our Leading For the Future initiative, funded by Doris Duke Charitable Foundation.  You can download the Case for Change Capital in the Arts here and the companion document, Financial Reporting Done Right, right here.  Together they showcase the lessons of the work done so far and provide a road map for foundations and their grantees who might like to put some of the lessons into practice themselves.  The Case for Change Capital in the Arts made Nell Edgington's 10 Great Social Innovation Reads for May and got a thorough airing on Andrew Taylor's Artful Manager blog as well.   

In late April, we gathered the participants in the initiative together in New York City to talk about how their capitalization experiments are going.  We had a chance to interview two of the organizations in greater depth.  Earlier this week, we posted Rebecca Thomas' interview with Charles Dillingham of Center Theatre Group.   Below, you'll find Rodney Christopher's interview with Polly Carl and Martha Lavey of Steppenwolf Theatre Company who share how they've invested their change capital over the last two years.