THE CASE FOR CHANGE CAPITAL

Inappropriate capitalization, or mis-capitalization, is a widespread problem in the nonprofit arts sector. This means that organizations have poor liquidity, limited adaptability and are not durable in the long run.

Project Summary

Over the past five years, Helicon has partnered with the Nonprofit Finance Fund to manage the Leading for the Future Program (LFF), a national initiative funded by the Doris Duke Charitable Foundation. LFF program was designed to enable 10 artistically excellent organizations to undertake innovative strategies in response to a rapidly changing environment.  All were offered the opportunity to use large-scale financial investments to enhance their programs and generate reliable recurring revenue. A major component of the program was the use of change capital – funding to enable the organizations to realign revenues with the full costs of their operation, and generate reliable surpluses beyond the term of the investment.

As part of its work with NFF, Helicon helped write two monographs – Case for Change Capital in the Arts, and Change Capital in Action: Lessons from Leading Arts Organizations—as well as a “tip sheet” for funders and organizations to use as a quick reference guide.  These publications review key principles of capitalization for nonprofit arts organizations, provide profiles of the work conducted by participants in the LFF program, and provide handy reference tools.  These tools can help cultural organizations analyze and improve their capital structures, and can advise funders who want to help cultural organizations improve their financial health.

  • Clients

  • PROJECT

    • Change Capital in the Arts

  • WHAT WE DID

    • Research
    • Organizational Development
    • Strategy
    • Trends
    • Philanthropy

Over the past five years, Helicon has partnered with the Nonprofit Finance Fund to manage the Leading for the Future Program (LFF), a national initiative funded by the Doris Duke Charitable Foundation. LFF program was designed to enable 10 artistically excellent organizations to undertake innovative strategies in response to a rapidly changing environment.  All were offered the opportunity to use large-scale financial investments to enhance their programs and generate reliable recurring revenue. A major component of the program was the use of change capital – funding to enable the organizations to realign revenues with the full costs of their operation, and generate reliable surpluses beyond the term of the investment.

As part of its work with NFF, Helicon helped write two monographs – Case for Change Capital in the Arts, and Change Capital in Action: Lessons from Leading Arts Organizations—as well as a “tip sheet” for funders and organizations to use as a quick reference guide.  These publications review key principles of capitalization for nonprofit arts organizations, provide profiles of the work conducted by participants in the LFF program, and provide handy reference tools.  These tools can help cultural organizations analyze and improve their capital structures, and can advise funders who want to help cultural organizations improve their financial health.

  • Clients

  • PROJECT

    • Change Capital in the Arts

  • WHAT WE DID

    • Research
    • Organizational Development
    • Strategy
    • Trends
    • Philanthropy

The Work

Revenue – earned, contributed, restricted or unrestricted – pays for regular programming and operating expenses.  Capital – whether generated through surpluses, accessed through debt, or provided as contributed investment – builds liquidity, adaptive capacity and/or durability.

Nonprofits requires both revenue and capital to survive and thrive.  Revenue is required year in and year out.  Change capital is periodic in nature, invested to achieve a desired change over a specific period of time, after which the organization should be stronger and no longer need that investment.

Transformative change requires a well-conceived plan and sizable amounts of change capital.  The magnitude of the capital investment should be tailored to meet the need, ambition and market conditions of the organization.

Change is not linear, and involves trial-and-error and nimble responsiveness to unfolding circumstances.  A three- to five-year timeframe may be appropriate to achieve meaningful improvements in an organization’s business model and balance sheet. Change capital can cover temporary deficits en route to an improved business model.

Revenue is not capital

Revenue – earned, contributed, restricted or unrestricted – pays for regular programming and operating expenses.  Capital – whether generated through surpluses, accessed through debt, or provided as contributed investment – builds liquidity, adaptive capacity and/or durability.

Capital is episodic; revenue is forever

Nonprofits requires both revenue and capital to survive and thrive.  Revenue is required year in and year out.  Change capital is periodic in nature, invested to achieve a desired change over a specific period of time, after which the organization should be stronger and no longer need that investment.

Changing a business model is expensive

Transformative change requires a well-conceived plan and sizable amounts of change capital.  The magnitude of the capital investment should be tailored to meet the need, ambition and market conditions of the organization.

Conclusion

The experience of the LFF program confirms that change capital is not a panacea, nor appropriate for all organizations.  It is best applied when these conditions are present:

  • The organization’s finances are generally healthy, and Board and staff understand different forms of capital.
  • Leadership is stable, and staff is collaborative, nimble and self-critical.
  • The link between artistic development and change capital is clear to all.
  • The organization has the capacity to manage informed risk and is thinking about its appropriate next stage of development, not just about growth.
  • The change capital amount is appropriately sized for the organization and its change plan.
  • The organization has the potential to generate reliable recurring revenue and is serious about developing a long-term financial plan.

Learn more:

http://nonprofitfinancefund.org/LFF