Earlier this year, CAC staff participated in a workshop sponsored by Assembly for the Arts, with the help of Grantmakers in the Arts around the topic of capitalization. The term “capitalization” was new to many in attendance, so we wanted to recap a bit of what was shared. We hope that the following takeaways can be helpful for nonprofits navigating difficult financial times, and funders wanting to maximize their impact.
What is capitalization?
Capitalization is accumulating cash to achieve an organization’s mission sustainably, over the long term. Of course, organizations need cash to pay the bills each year, but capitalization is about having liquid assets to move their mission forward, at the scale of long-range plans.
Capitalization enables nonprofits to pay their staff and artists on-time and with a living wage. It also helps them steward facilities and other fixed assets, and experiment artistically with new ways of serving the community.
As we navigate the continued pandemic and two years of potentially impacted revenues, capitalization can help organizations weather hardship. Organizations led-by and serving people of color have been hit especially hard by the twin crises of COVID-19 and structural racism. The last two years have magnified weaknesses and needs in a fragile cultural sector. Thinking big about your organization’s finances, not just about making ends meet with each program, is vital to emerging stronger.
What does a financially healthy nonprofit look like?
A financially healthy nonprofit has…
- operating revenue that reliably covers expenses and generates unrestricted surplus most years;
- flexible liquidity to pay bills on time and manage everyday risk;
- unrestricted reserves for unforeseen risk and periodic adaptation;
- organizational leadership that uses data to inform their financial and mission work planning side-by-side.
What can nonprofits do to move towards capitalization?
Consider whether you’re working under the best business model. There’s no right mix of earned versus contributed revenue, other than the one that reliably covers the costs for your organization.
Sustainability also depends on people and relationships: an organization can meet the criteria for financial health, even when running unsustainable operations. An investment in staff retention, by prioritizing compensation and opportunities for staff is also an investment in capitalization.
Be conservative with newfound liquidity (cash in the bank) from COVID-relief funding: invest in meaningful change but be prepared for revenue to stay low through 2023.
In our next blog post we plan to share some information on what funders can do to support capitalization in the nonprofits they serve.
Special thanks to Rebecca Thomas of Rebecca Thomas & Associates for presenting around this topic, and to Assembly for the Arts sponsoring this fruitful learning session.