Builders & Buyers: Securing Capitalization for Nonprofit Financial Health & Artistic Vitality
Eddie Torres & Champ Knecht with Rebecca Thomas
One of the focus areas of Grantmaker's in the Arts (GIA) is Capitalization & Nonprofit Financial Health. GIA had the privilege to partner with Rebecca Thomas & Associates and cultural strategist, Sage Crump, to build a workshop that provides information on what funders can do to support the health and resiliency of nonprofit arts and culture organizations. GIA will feature the grantmakers’ Capitalization & Nonprofit Financial Health workshop online October 30th, 2024. You may register here. You can sponsor GIA’s bringing this workshop to your grantees and applicants by contacting workshops@giarts.org
In early 2024, GIA got to partner with Rebecca Thomas & Associates to bring GIA’s Nonprofit Financial Health Workshop to 300 nonprofit administrators and board members and nearly 100 grantmakers in New York City - thanks to the support of the Howard Gilman Foundation. These experiences have inspired our sharing these insights.
Capitalization refers to the accumulation of financial resources to fulfill mission over time. During the first few years of the pandemic, our national field provided more general operating support and funded significantly more BIPOC organizations. The nonprofit cultural field emerged from the pandemic better capitalized than ever before, making now a pivotal time to offer these workshops. The Capitalization & Nonprofit Financial Health workshop's goal is to ensure we don't revert to the bad "best practices" that led to our cultural community's state of vulnerability.
Capitalization requires a reliably profitable business model that contributes to adequate savings, ultimately advancing mission. A well-capitalized organization needs both revenue and capital, whether from earned or contributed sources. Business-as-usual money makes it possible for organizations to run their programs and pay their staff and artists year-in and year-out. Capital is money that organizations save and periodically spend to respond to challenges and opportunities. Organizations can also spend capital to change what they can do. The point of capitalization is not necessarily growth: it is health – for the organization, its artists, and its staff.
Figure A. Revenue vs. Capital
Organizations need to generate net revenue (also known as surpluses) from their operations to build this flexible capital. When there is only enough revenue to cover direct and indirect costs, the organization is likely to be poorly capitalized. This can result in little to no savings; and in response, a limited ability to manage risk and adapt.
Organizations can also raise capital through special fundraising efforts – such as capital campaigns. Oftentimes leaders focus capital campaigns on their facilities, and the field often conflates facility expansion with capitalization. There are plenty of good reasons to lead or fund a capital campaign when building operating reserves and investing in long-term strategic or artistic change.
Funders should consider: Are you a buyer or a builder? As originally described by the Nonprofit Finance Fund: If you’re a buyer, you’re paying for program delivery and other annual operating costs with revenue, which can be unrestricted or general operating. If you’re a builder, you’re giving capital to help an organization change or grow. Organizations need both revenue from buyers and capital from builders, however, buying and building serve different purposes.
“In the short term, we’re going to identify how much working capital we have. Since our revenue streams are not always consistent, we will now start doing scenario planning.”
If you’re a buyer, it’s important to remember that short-term funding is incompatible with capitalization practices. Long-term funding and planning are the most effective ways for organizations to maintain engaging programming and overall financial health. Funders should be wary of giving grant revenue cloaked in capital clothing. We frequently say, “Here’s your program grant to provide your services. Please tell me how you will – after using this grant for your programs – become financially stronger without my support.” This is a common example of granting revenue while setting capital expectations.
“There are a number of things we’ll be working to change, including better (and more frequent) reporting of financials to the board and a greater focus on reserves rather than endowment.”
Whenever we talk about financial health, these are commonly asked questions: “Should organizations build endowments? How can owning a building help bring stability?” Assets such as endowments or facilities may be necessary or helpful for some organizations, but they often do not increase profitability or liquidity. Therefore, they must coexist alongside adequate flexible savings to avoid financial risks. Before investing in the acquisition or growth of endowments or real estate, funders must consider the sufficiency of an organization’s liquid unrestricted net assets.
Among the recent better practices of our grantmaking field is the embrace of general operating support and increased support for BIPOC organizations.
In our workshop, we share data and insights from SMU DataArts about the financial and human capital of organizations of color, and we discuss best practices for BIPOC groups. Research has shown that BIPOC organizations have higher rates of liquidity (months of unrestricted working capital) than predominantly White organizations for various reasons. First, many BIPOC organizations are disciplined financial managers: they have had no choice but to operate within limited means, due to historically low levels of investment. Many do not spend more than is available because they’re accustomed to having so little. BIPOC organizations tend to have lower fixed costs so they can adapt their budgets more readily when revenue trends are weak, and they are likely to have fewer resources to spend on permanent salaries and facility ownership. Many normally have no choice but to pay staff poorly or rely on sweat equity. While this practice may allow them to set aside some liquidity, it is unfair to BIPOC workers.
The main take-away: many BIPOC organizations are commonly LESS of a funding risk than their White counterparts. Our national grantmaking field must treat BIPOC organizations as what they are – often strong financial managers and cultural innovators deserving of equitable investment of revenue and capital.
This moment is a great opportunity to keep our national cultural community – including our BIPOC organizations – well-capitalized and poised for health while meeting their artistic missions and serving and nourishing our communities.
The nonprofits who participated in GIA’s Capitalization & Nonprofit Financial Health workshop reported that following the workshop, their understanding of nonprofit financials has increased (97%) and that what they learned from the workshop has been useful in their work (96%).
The grantmakers who participated in GIA’s Capitalization & Nonprofit Financial Health workshop shared that the workshop was valuable to them and that they now had a better working knowledge of capitalization principles (92%).
“I just wanted to say how important what we learned was. Today our team discussed what we learned at length and the workshop has given us some needed tools for examining our financial strategies in the upcoming fiscal years. The time was right for this workshop. We look forward to sharing what we learned with our Board.”
GIA will feature the grantmakers’ Capitalization & Nonprofit Financial Health workshop online October 30th, 2024. You may register here. You can sponsor GIA’s bringing this workshop to your grantees and applicants by contacting workshops@giarts.org.
ABOUT THE AUTHORS
Eddie Torres is president & CEO of Grantmakers in the Arts.
Champ Knecht is director of operations & finance for Grantmakers in the Arts.
Rebecca Thomas founded Rebecca Thomas & Associates to help nonprofits and their supporters balance their societal aspirations with business realities. Rebecca speaks and writes about the relationship between nonprofit finances and mission success, and she advocates for improvements in the way money flows to the sector. Her essays have been published by SMU DataArts, Grantmakers in the Arts (GIA), Philanthropy News Digest, and the Chronicle of Philanthropy. Before founding RTA, Rebecca was Vice President at Nonprofit Finance Fund (NFF), a community development financial institution that brings together investments, knowledge and advice to unlock the potential of mission-based organizations. There, she led NFF’s arts strategy, designed and implemented national programs, and directed business and product development efforts. Among her achievements was running the six-year $15 million Leading for the Future initiative, a program that combined flexible capital with advice to help leading performing arts organizations transform their business models to achieve artistic goals. Earlier in her career, Rebecca was an award-winning Senior Economics Correspondent for Smartmoney.com, where she wrote about business and economic trends and appeared as a commentator on CNNfn, MSNBC, and Fox. She received her MBA from Columbia University’s Graduate School of Business and graduated with honors from Yale University.
