Rethinking the bottom line

by Jini Stolk

Peter Brown used to say that working capital in an arts organization is like a toilet seat at a party: constantly up and down. I think we can all agree that life is better when it’s up.

The performing arts are a volatile business and it can be incredibly difficult to regroup after a series of box office disappointments. Unless you have a cushion of cash to soften the blow during hard times and provide flexibility to take risks when times are better, this profession can involve constant financial struggle.

Thus the need for capital resources and a strategy to build them.

A number of smart people have written about capitalization in the arts and other nonprofits. They’re really just talking about accumulating resources to support the achievement of the mission, over time.Artistic reserves, operating reserves or working capital – all part of the same set of concepts – can make the difference between being able to invest in the art, build audiences, take risks and respond proactively vs. being hamstrung by debt and lack of cash.

It’s probably true that the only way for us to have a strong and continuing impact on society is to pay attention to our balance sheets. (Needless to say, a persistent deficit is a drag on the art and must be dealt with.)

Clara Miller, a longtime proponent of a strategic approach to creating financial health, says that while “successful coping” is often a central skill for nonprofit managers, “successful changing” requires access to capital, allowing organizations to adapt as the environment evolves. She argues that our core business strategies should include keeping funds available for upgrading technology, building talent (such as development staff!), refreshing our programs, and creating new artistic work.

Easier said than done? Obviously, building financial health at this level requires a long-term view, not just of organizational sustainability but of what’s necessary to achieve the mission. Without a strategy and an all-organization commitment to capitalization it won’t happen. Susan Nelson’s presentation to the Theatre Communications Group Beyond Breakeven: Why Capitalization Matters is a great guide to creating an effective and appropriate strategy.

Arts Action Research observed that creating surpluses out of day to day operations is more difficult than ever and recommend that anything “extra” – including new programs, new technology, debt retirement, a new facility, facility improvements, working capital and endowment – requires a capital campaign. They describe these as special major gift campaigns and say that every organization needs to always be in a campaign phase in order to meet ongoing needs. I think they’re right, and an added incentive is that fundraising campaigns are invaluable in building profile and organizational energy.

I was interested to see that Fractured Atlas posts their business model on their website: a mix of earned and contributed income, with core operations sustained by earned revenues, seed funding for growth and special projects coming from grants, and a Strategic Opportunities Reserve (a Board-designated fund built by a portion of annual operating surpluses) for special projects that can’t be covered by grants or operating revenue. Straightforward and simple, but they say that this model ensures they remain resilient and squarely focused on the needs of the community.

Just to note that the new provincial Ontario Nonprofit Corporations Act (if and when proclaimed) acknowledges the need for nonprofits to be able to build funds to invest in growth, but that recent CRA audits at the federal level seem to take a narrow view of profit by charities. If “no profit for nonprofits” ever truly takes hold as a Finance Department directive, we’re all in trouble.

For more on the role of capital in the arts, Andrew Taylor at Artful Manager has been writing some recent posts on the topic including The crazy world of capital.


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