Getting Beyond Breakeven: A Review of Capitalization Needs and Challenges of Philadelphia-Area Arts and Culture Organizations

This document reports the key findings from the “Review of Capitalization Needs and Challenges of Philadelphia-area Arts and Culture Organizations,” a study commissioned by The Pew Charitable Trusts and the William Penn Foundation and conducted by TDC, a nonprofit research and consulting firm based in Boston. The objectives of the study were to review the capitalization status, needs, and challenges faced by nonprofit arts and culture organizations in the five-county Philadelphia region; clarify how well these organizations understand these needs; and develop recommendations for how organizations’ financial health and capitalization could be improved.*

This study was commissioned and conducted in late 2007 and early 2008, before the severe economic downturn in the fall of 2008. In this context, the first question we address is a simple one: Why talk about capitalization, especially now when so many organizations are struggling just to survive? This is a fair question, especially in the nonprofit context. In the for-profit world, capitalization – embodied in an organization’s equity – is everything. For nonprofits, however, financial performance is not the sine qua non of exemplary overall performance, and balance sheet analysis cannot measure social impact or artistic excellence.

So why should nonprofit arts organizations care about capitalization? TDC posits that financial health and mission impact are linked for a number of reasons. First, undercapitalization is distracting and debilitating, making it challenging to maintain the focus and energy necessary to conceive and produce the highest quality artistic programs. The stress and distractions can take many forms: listening to angry phone messages from creditors, patching up systems in poorly maintained buildings, wondering how the next debt payment or payroll will be covered, scrambling to find replacement funding when a grant doesn’t come through or when the last show wasn’t a success.

Even more importantly, undercapitalization can chill artistic risk-taking. An organization one failure away from closing has a strong incentive to choose the tried and true over the experimental. Even before the radical downturn in the environment, the arts sector was at an inflection point, where rapidly changing consumer tastes and habits were challenging the traditional business models of arts organizations. Without adequate capitalization, cultural organizations are hard put to pursue innovative strategies to address the changes in the marketplace.

Finally, undercapitalization puts organizations at risk of failure, and of course, organizations cannot meet their missions if they don't exist. The squeeze of straitened resources and narrowing options resulting from the economic downturn has placed the risks of undercapitalization into sharp relief. Those organizations with solid capital structures have the capacity to last through the rainy day. Those that don't are already pressed. The purpose of having a discussion about capitalization now is not only to grasp the teachable moment. Rather, the forward-thinking intent is to help viable organizations to create realistic plans as they adjust their strategic goals to fit a new, uncertain landscape of funding and audience engagement.

This discussion of capitalization falls into a field primed both in theory and practice. TDC recognizes that there are long-time players in the sector who have been talking about capitalization for many years, including the Nonprofit Finance Fund and National Arts Strategies. This study has built on this invaluable thinking. (For further reading, we have included a list of resources we found helpful on page 9.) In our conversations with Philadelphia organization managers, service providers, and funders, TDC was heartened to find a culture that values and supports capacity building and strategic planning. We hope that the insights gained through this project will help to move that agenda forward.

*TDC interpreted “arts and culture” broadly to include a multitude of disciplines, reaching beyond the traditional fine arts. We sorted organizations into 10 discipline groups: art museums, arts education organizations, arts service organizations, dance organizations, historical museums and societies, humanities organizations, music organizations, natural history and other museums, theaters, and visual arts organizations.