Under-capitalized and oversupplied

There was some useful and difficult discussion today at the Grantmakers in the Arts conference, much of it surrounding the charge to reframe how arts funders think and talk about capital and capitalization.

Many funders will admit, in private, that their expertise and interest lie on the program side of their work, rather than on balance sheets and income analysis.  Others will complain that an emphasis on financial health and performance distracts from the larger purpose of their work — enabling compelling and transformative arts and artists. Still others claim from experience that healthy financials and vibrant artistic work don’t always track together — that, in fact, organizations with the strongest balance sheets are the least innovative and risk-taking.

These are hard questions, and worth wrestling with. Kudos go to GIA and the capitalization team for tee-ing up the ball.

But there are two assumption embedded deeply in the summary report and the resulting conversation that feel like deep and distracting sand traps:

  1. That arts organizations are under-capitalized, for the most part, and;
  2. that arts are over-supplied in many communities.

My blogger colleague Arlene Goldbard has already engaged the second point, suggesting that many are willing to claim oversupply, but few are able to suggest which arts groups should be chopped. Many also claim that participation rates are dropping even as nonprofit arts organizations are forming and growing. But, other evidence suggests that arts participation is growing in many ways — it just happens that it’s not growing where we’re looking or where our revenue models require (think amateur arts, community arts, personal practice).

But I’ll take a shot at the first assumption: that arts organizations are, on average, under-capitalized.

The first answer is: perhaps, but so what? Arts organizations are primarily small businesses. And small businesses are predominantly under-capitalized — in any industry, sector, or community, for-profit or nonprofit. Nothing unique to the arts there, and lots of productive ways to make things better.

The second answer is: wait a minute, let’s be sure we’re defining our terms. Capital, writ large, is any asset that enables the production of goods and services — buildings, equipment, cash reserves, and such. We all know many arts organizations that are struggling under the weight of their buildings, their equipment, and their overhead — especially as income sources constrain. These organizations aren’t under-capitalized, they are mis-capitalized. They’ve got too much capital in one form (buildings, equipment) and not enough capital in another (working capital, accumulated cash). That’s a much more nuanced problem than under-capitalization, and worthy of a much more nuanced response.

The Nonprofit Finance Fund’s Clara Miller made the challenge quite clearly during her presentation this morning. Healthy financial operations are all about relationship, context, and balance. “Too much” or “too little” of any piece means nothing out of context with all the other pieces — mission, revenue, expenses, value, capital, cash.

The same can be said for “over supplied” and “under supplied” arts in any community.

A productive answer requires a productive question. I think our most productive questions when it comes to capital, cash, supply, or demand will avoid such bundled assumptions about what’s “over” and what’s “under” in the current state of the arts.