Wednesday, 7 March 2012

Capitalization: From the Dept of Easier Said Than Done But Nevertheless


That many arts organisations are 'over-extended and under-capitalized' has been a common refrain in recent years, stemming from Mission Models Money's early work, amongst others. Sometimes those terms confuse or annoy some people - they can feel a bit abstract. This week I received Arts Insights, a free publication from the US Arts Consulting Group. This has the best beginner's guide to capitalization I've seen. They define the benefits thus 'Capitalization is the accumulation and application of resources in support of achieving an organization’s mission and goals - over time. It means you don't live hand to mouth. It means you have a cushion against the unexpected. It means you can take a risk. It means you can think big AND deliver big.' 

They also clarify: 'The freedom to think and act strategically, to take big risks, or to make big changes depends upon the organization’s underlying financial health, not its annual operating budget, and upon its reserve funds rather than the annual fund.' 

Even this has major implications for financial and strategic planning. That one year budget you're about to agree? It could be worse than meaningless without scrutiny of plans for reserves and carry forwards, no matter how elegantly it balances appetite and income.

As well as looking at some analyses of what the financial picture 'ought' to look like, according to research, including reserves, working capital, artistic risk funds, and endowments the report suggest five steps. These are, in summary,

1. Learn to read a balance sheet, and use the skill at board level.
2. Build a 'surplus' into each annual budget.
3. Create a big picture strategic plan
4. Set out purpose and controls for your funds
5. Create a capitalization plan - how you're going to raise the money, just as you would for a building-based 'capital' programme.

Step 2 is so fundamental and challenging, and a mindshift for both funded and funders, that it bears repeating in ACG's own words:

"Develop Your Next Operating Budget With A Surplus At Year-end, Not As A Contingency Fund, But Rather As Your New Definition Of 'Balanced'."

(Capitalization mine.) A new definition of balanced: that feels like something we need.

Of course, the point for us - assuming there are few bankers reading this - is not simply to have capital, but to use it, so step 3 is also vital. What would capitalizing allow you to do, or stop doing if you're constantly managing cashflow?


1 comment: