Kresge Arts and Culture Program facilities investments and capital building reserves grant opportunity
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Kresge Arts and Culture Program facilities investments and capital building reserves grant opportunity
- 1. Understanding the Arts and Culture Program’s Facility Investments and Building Reserves Grant Opportunity October 2011
- 2. Agenda • About The Kresge Foundation • Institutional Capitalization Goals • Capitalization • Preliminary Application 2
- 3. The Kresge Foundation • The Kresge Foundation is a $3.1 billion private, national foundation that seeks to influence the quality of life for future generations through its support of nonprofit organizations • The Foundation works in seven program areas: • Arts and Culture • Community Development • Detroit • Education • Environment • Health • Human Services 3
- 4. The Arts and Culture Program • The Kresge Foundation’s Arts and Culture Program seeks to build vibrant communities enlivened by the presence of healthy arts and cultural organizations, creative and well- supported artists, and well-integrated arts and community- building efforts • The Arts and Culture Program is focused in three areas: • Institutional Capitalization • Artists’ Support Services • Arts and Community Building • This slide presentation addresses the Facility Investments and Building Reserves grant opportunity within the Institutional Capitalization Focus Area 4
- 6. About Institutional Capitalization • Through the Institutional Capitalization focus area, Kresge expects to see: • A shared understanding of basic definitions, principles and practices of capitalization • The adoption of capitalization best practices among organizations • Better capitalized arts and cultural institutions that are stronger and whose business models are more sustainable, where appropriate • Arts and cultural institutions that are well positioned to produce high quality, impactful, innovative and relevant artistic product • This focus area provides support in four areas: • Field-wide efforts to promote and adopt capitalization principles • Facility Investments and Building Reserves • Sector Leaders • Strengthening Arts Facilities Effectively (SAFE) 6
- 7. About Facility Investments and Building Reserves Why facility investments and building reserves? • The Arts and Culture Team’s Institutional Capitalization focus area uses facilities and building reserves as an entree to help organizations examine their level of comprehensive capitalization • While this grant opportunity places an emphasis on facility investments and building reserves, it is truly about comprehensive organizational capitalization 7
- 9. What is Capitalization? • Capitalization is the accumulation and application of resources (operating and working capital, operating reserve, risk capital, endowment and building reserve) to support achievement of an organization’s mission over time. Elements Needed by All Needed by Some Building Operating and Operating Endowment Risk Capital Reserve Working Capital Reserve Design, test, Deliver high Maintain Ensure and refine quality and adequate appropriate Steward necessary fixed assets effective effective supportive longevity of and collections programs programs infrastructure programs Source: TDC 9
- 10. Why Does Capitalization Matter? • Without adequate capitalization, your mission is at risk. Inadequate Inadequate Capital Inadequate Inadequate Inadequate Operating and Operating Fund Risk Capital Endowment Building Reserve Working Capital Reserve Passing up new Borrowing from Chronic deficits Roof has been program ideas. advance ticket Making payroll are covered by leaking for past sales. is an adventure. Warning endowment and 18 months. Inadequate Signs reserve draws cash flow to Permanently Collections with no way to Collections are handle drained lines of calls. replenish. crumbling. expansion. credit. Inability to Inability to Inability to Inability to weather risks, Inability to spend adequate attract talent or Underlying innovate or and/or inability steward fixed resources to maintain quality Risk realize benefits to deliver quality assets or create quality partners and from innovation. product over collections. programs. vendors. time. Source: TDC 10
- 11. How Well Are You Capitalized Now? • Capitalization is embodied in the balance sheet • The balance sheet records an organization’s accumulated financial performance over time • The Income Statement (the Statement of Activities) shows only one year’s revenue and expenses • The balance sheet also demonstrates the strength and availability of an organization’s asset base to support its future • Finally, the balance sheet shows an organization’s degree of liquidity Source: TDC 11
- 12. Unpacking the Balance Sheet • What are we looking for in your balance sheet? Income Statement Balance Sheet Elements of Capitalization Revenue Cash/Investments Requires Liquidity Expenses Receivables Operating Operating and Working Net Income Fixed Assets Capital Reserve Total Assets Payables Building Deferred Risk Capital Reserve Revenue Debt Net Assets Endowment Total Liabilities and Net Assets Source: TDC 12
- 13. What Are We Looking For in a Capitalization Strategy? • There are no cookie cutter answers • A capitalization strategy looks at four distinct pieces: • Mission and vision • Business model drivers • Time horizon • Marketplace • With this in mind, the strategy determines the types of funds required • It then articulates the necessary size of the funds, the timing of the need, and the method for obtaining the required resources Source: TDC 13
- 14. What Are Your Business Model Drivers? Audience Audience + facility Fixed Audience + high fixed costs costs Fixed Audience + facility + high fixed costs costs High flexibility Low flexibility Low capital intensity High capital intensity Source: TDC 14
- 15. What is Your Time Horizon? Immediate Medium Term Long Term (Individual View) (Organizational View) (Institutional View) Highly specific Artistic expression Obligation to persist as artistic expression – fulfills established civic anchor or long- often focused on a brand identity term stewardship of particular artist collection or art form Rented or borrowed Facility ownership Facility ownership facilities may or may not be often necessary supportable Highly flexible with Fixed Fixed costs must be Fixed costs Fixed Fixed costs limited fixed costs costs tightly controlled costs extensive and multi-faceted • Higher risk tolerance may be appropriate • Level of obligations call for low risk tolerance • Requires coverage of basic needs – working • Requires larger scale of basics and, often, plant capital, risk capital, and operating reserves. reserves and endowment to meet all obligations. Source: TDC 15
- 16. Importance of the Marketplace • A thorough understanding of the marketplace tests the mission and vision and predicts the resources available by asking: • Who is the anticipated audience? Is the product or service needed or wanted in the community? What level of support will they provide? • With whom might the organization be competing locally for audience and support? • These questions can only be answered in the context of the local community and are particularly important during projected program or facility expansions Source: TDC 16
- 17. Resources • Analyzing the marketplace also helps determine necessary operating resources for the environment • With whom is the organization competing for talent and key resources? How does that impact fixed costs? • What investments are necessary in marketing and development? • Organizations with facilities must also define long- term systems replacement needs • These organizations often operate with a systems replacement plan (SRP), which articulates anticipated need, but does not address the funding of those needs. Source: TDC 17
- 18. What Are We Looking For in a Strategy? Time Horizon and Business Model Drivers Mission/Vision Market Resources • Artistic/cultural production • Customers • Ongoing resources to • Theory of change for impact • Donors sustain operations and a on audiences and other • Competition facility if appropriate beneficiaries • Human resources • Key investments Planning process informed by Mission/Vision, Market, and Resources engages board, staff, partners, and supporters, and encourages a holistic understanding of the organization. Integrated Strategy Programmatic strategy maximizes artistic Organizational strategy includes adequate quality and impact human and other resources for marketing, development and space Capitalization strategy articulates size and shape of capital needs grounded in organization’s inherent business model drivers and strategic goals Source: TDC 18
- 19. What Does This Look Like Over Time? • Once need is defined – prioritize! • The capitalization strategy Elements of Capitalization identifies the needs and sources, and prioritizes Operating among them Operating Operating and Working surplus Capital Reserve • Generating reserves often implies surpluses. Break- Net Assets even budgets do not allow Surplus or Building organizations to implement a non-operating Reserve Risk Capital real capitalization strategy fundraising • Preserving the more capital- intensive funds is difficult without adequate operating Non-operating Endowment funds fundraising Source: TDC 19
- 20. 300000000000 Preliminary Application Facility Investments and Building Reserves 20
- 21. Getting Started • Read the supporting documents on the Kresge Web site: • Capitalization Philosophy and Terms • Guide to Strategic Planning • Guide to Building Reserves • Search the Kresge Foundation online library for additional reference materials. • Capitalization is a new topic for many, and we believe that reviewing these materials in their entirety before applying will help applicants 21
- 22. Eligibility • Who is eligible? • Organizations with arts and culture as the primary purpose of their mission • US-based organizations • 501(c)3 organizations not classified as a private foundation • Organizations with facilities that are government-owned, but operated by separate 501(c)3 organizations • Organizations with audited financial statements • Who is not eligible? • Organizations with an active grant from Kresge • Art-focused subsidiaries of larger parent organizations such as universities or human services agencies • Start-up organizations (less than two years of operational history) • Government-owned and operated entities • Organizations with compilations or reviews, or financial statements prepared on a cash or modified cash basis 22
- 23. What We Support • Organizations may apply for two types of grants: • Facility Investments and Building Reserves • Building Reserves • If seeking a facility investment, renovation and repair projects will be prioritized over new construction. • We do not fund reserves solely for equipment. • Grant amount will be dependent on the type of project and the size, scope and business model of the organization. However, grants will not exceed $1 million and/or a period of three years. • Some grants may be awarded on a matching or challenge basis. 23
- 24. A Highly Competitive Process • Spring 2010: 141 preliminary applications; 21 invited full proposals; nine Facility Investments and Building Reserves grants • Fall 2010: 134 preliminary applications; 10 invited full proposals; five Facility Investments and Building Reserves grants • Spring 2011: 152 preliminary applications; 22 invited full proposals; nine Facility Investments and Building Reserves grants 24
- 25. Criteria and Review Process Step 1: Competitive assessment of preliminary applications for alignment with the Arts and Culture Program’s values: • Create opportunity and enhance access to arts and culture through authentic and relevant programs that exemplify excellence in the field; that involve people of all social and economic backgrounds; and increase participation of new and non-traditional audiences. • Exhibit a high level of community impact through work that contributes to a vibrant arts and cultural ecosystem and exemplifies excellence in the field; benefits the broad local community and reflects the diversity of the community population; advances community building efforts; and embodies key principles of community planning to enhance quality of life. 25
- 26. Criteria and Review Process Values continued: • Stimulate innovation through work that furthers best practices in the field; uses new and possibly untested approaches; and brings multi-party, interdisciplinary approaches to problems that defy solution by a single sector. • Support institutional transformation and the capacity to profoundly influence the overall organization and its operations; or create new business models to strengthen financial stability. 26
- 27. Criteria and Review Process Step 2: Competitive assessment of the overall quality of the preliminary application and the strength of the comprehensive capitalization strategy including: • Evidence of planning, including but not limited to external market research and analysis for earned and contributed revenue, benchmarking research, system replacement strategy • Evidence that the proposed project fits within the larger capitalization strategy and that it is the next appropriate step in that strategy, and that the organization understands how the proposed project will impact the future operating budgets and balance sheet • Evidence of a realistic fundraising plan, if appropriate to the request • Assessment of the liquid unrestricted net assets available for operations The determination as to whether to request a full application is assessed on the competitiveness of the overall preliminary application. 27
- 28. Competitive elements • Competitive preliminary applications demonstrate the following: • Values that are addressed in a detailed way and which align with those of the Arts and Culture Program • A capitalization strategy that aligns with the organization’s mission and strategic plan, and which: • Accurately diagnoses business model drivers • Defines the needs and plans for each type of fund, and prioritizes among them • Includes a strategy to build surpluses and reserves over time • Building reserves strategies based on a realistic plan, accurate data, and policies which address use, withdrawal and replenishment • Realistic fundraising plans, when appropriate to the request • Evident collaboration among the CEO, CFO and Development staff in completing the application • Unrestricted Net Asset Tool correctly completed 28
- 29. How to Apply All Facility Investments and Building Reserves grant applications must be submitted through our online application system. Visit the Facility Investments and Building Reserves page on the Kresge website and click on “Apply Online” in the Quick Links section. This will take you to an instruction page and provide access to the online application. 29
- 30. Current Preliminary Application Deadline • Deadline for the Fall 2011 call for applications is Thursday, March 1, 2012, at 5p.m. Eastern Standard Time. • This is the final call for applications for this grant opportunity. • Within 10 weeks of the part-one submission deadline, we will contact all applicants. At that time, we will invite those with promising requests to complete the second part of the application process. • Final grant-amount decisions will be made after review of the two-part application and conversations with the potential grantee. In most cases, awards do not exceed $1 million and cover a period of up to three years. 30
- 31. www.kresge.org The Kresge Foundation 3215 W. Big Beaver Road Troy, Michigan 48084 info@kresge.org 248.643.9630
Editor's Notes
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: TDCUnderstanding capitalization is a key element to formulating a feasible strategy for your organization to meet its mission over time.Capital funds can be divided into five basic types, each of which has its purpose. The purposes range from: smoothing cash flow cycles, mitigating unforeseen risks (like insurance), taking risks to innovate, and responsibly stewarding key assets required to meet your mission.Not all of these funds are relevant for all organizations.
- Facilitator: TDCWe often see signs of poor capitalization reflected in common organizational issues that consume our attention on a day to day basis: such as lack of cash, inability to try new programs, chronic deficits or poor building conditions…but these are actually simply warning signs of much larger issues at playWe are putting the mission – the art itself -- at riskThis creates an ever declining spiral to deliver on mission:Lack of ability to innovate, attract talent, to offer consistent programming, risk of dilution of quality of product, and an inability to steward our assets or collections.What are the impacts of chronic undercapitalization:Survival mode: No strategic thinkingStress: Staff burnoutConstraint: Inability to adapt to change, weather economic downturns, to innovate, or explore opportunities.Mediocrity: Artistic quality can be compromised because of risk-averse behavior and the distraction of dealing with poor capitalization.Failure: All of the above can potentially lead to organizational collapse.
- Facilitator: TDCBefore you can determine your capitalization strategy, you need to understand your current capitalization position. We call this the diagnostic.This brings us to an oft-neglected and misunderstood part of the financial statement – the balance sheet.
- You have all likely heard of Maslow’s hierarchy of needs. There is a similar hierarchy of needs with regards to capitalizing a nonprofit organization. (Not an indication of requirement)Looking at the chart, the top 2 types of capital are constant and ongoing needs. Under some circumstances, debt (for example a line of credit) can substitute for working capital. However, lines of credit are intended to meet short term needs. They should not be permanent. At the next level down, we’ve shown two additional types. If you’ve got a building, you need to plan for its long-term renewal. This is a building reserve.And if your art requires significant regular investment as with a theatrical or dance production, it is beneficial to have risk capital. These funds need to be truly risk-able. Debt is not appropriate here. Many grants are not either. Without risk capital, as we noted on the slide before, the organization suffers from an inability to deliver an excellent product to its audience.But these two funds don’t matter if the org doesn’t have the op reserves first. At the bottom of our diagram, we’ve shown endowment. This is the deepest form of reserve, and typically supports organizational needs with a long term time horizon – like a collection. In the absence of ordinary, more flexible funds to support operations, typing up substantial dollars can be counterproductive and frustrating.These funds are all unique and distinct. Don’t double-count. The perfect storm can and does happen!Looking at the balance sheet, we want to see all of these forms of capital reflected in the cash or investments. Once we discount what cash is restricted for program needs or deferred revenue, we check: do you have operating and working capital? Can you cover payroll and basic bills in down cash cycles or are you heavily borrowing from next years receipts.Then we would look for a reserve … at least a month of operations …preferably three months…Then we look at the rest of cash and investment available to see if it covers any other capital requirements you have called out. For example, a building reserve or the risk capital reserve over and above operating needs.This is why we ask you to think about unrestricted net assets. Do you actually have the cash and the flexibility within it to do the work required.
- Facilitator: TDCOnce you have completed the diagnostic, then you can think about what you need to build or adjust to progress your organization’s agenda.The answers need to be customized to you, your current situation, and your goals.A capitalization strategy is the piece of your strategic plan that talks about resources – What do you need? Why? When? Can you get it?
- We mentioned mission and vision as the starting point. We imagine that you all have lots of experience with articulating these. So let’s move to the question of business drivers and time horizon.Again – there’s no cookie cutter, but we have synthesized our thoughts on how to think about your capital needs through some overarching principles.Business driver. What does this mean? In the simplest of terms it refers to those factors that fundamentally drive your business such as audience, facility, collections, or other high fixed cost items such as a labor contract.The more commitments you accumulate the less flexible you are and the more capital you will need to fulfill your mission.
- Pulling together business model drivers with time horizon, we get a full picture of three different types of organizations – immediate, medium term, long term.First important note -- This chart does not represent a lifecycle progression.While an organization can jump categories, it doesn’t have to.Why is time horizon important to a capitalization strategy? Time horizon of an organization is important to understand in order to decide what types of funds are most relevant. Remember, some types of funds are related to short term needs (cash, operating reserves), and everyone needs them. Alternatively, permanently restricted funds (endowments) are only appropriate when you have a long term vision. Examples:Indie: small dance group – reflects choreographer’s vision. To institutionalize that vision once that person departs requires more resources)Org: might be operating well for 30 yrs., and then you may start to see yourself as part of the community fabric and think of yourself in the “institutional” category. Careful – requires more resources. And that fact may just not be trueThose with a longer time horizon have lower risk tolerance and, paradoxically, often face larger risks b/c of higher fixed costs. Need for higher reserves.In the recession, we’ve seen indies/smalls do better. The switch to institutional is difficult. It requires a robust capital structureSpecific discipline, type of program, and scale of expense matter - determine working capital levels based on timing and scale of cash flow needs.You may mostly be driven by audience and have an immediate view or mid term view You may be driven by audience and facility and have mid to long term viewYou may be driven by audience, facility and collection/or stewardship of particular art formAs you move along the spectrum your cost structure becomes more fixed, and your risk tolerance lessens.. you have bills to pay and commitment to meet For example you may have a following who is counting on a particular experience season after season (and which you, in turn, count on for revenues), and a brand identity in which you have invested? Or are you a civic anchor? Do you have a collection or art form you are stewarding in perpetuity? Does your art form have high fixed costs or long-term commitments (like a labor contract), then you face larger risksSo your capital needs are set based on flexibility, risk tolerance, and scale of risks faced.
- In addition to fixed costs, risk comes into play when you think about your market context. You can’t control behavior of your audience or funders. Strategic business planning considers market information. Ideally, your organization is building on your knowledge of the marketplace every year. Without a detailed understanding of your audience and who else is competing for their time, attention and dollars, you can’t meaningfully project how well your programs will do, and thus can’t make informed decisions about scale of delivery – should you go into the 2,000 seat hall? Should you add another performance? Should you add a gallery or program? Who is your competition in this area, what is their pricing model, what is their reputation? This includes both profit and nonprofit organizations.And markets don’t just measure the users of your product, but also supporters of your product. How large is your giving base, what is a realistic measure of the foundation, corporate market. Who are you competing with for these funds?We don’t have crystal balls, but we can consider goals in the context of facts and make a judgment about whether they are feasible.Often applicants try to measure their “market” by benchmarking peer organizations. While lessons can be drawn from peers, benchmarking will not help you to clearly define your particular situation, which is a focus of this application, or in developing an appropriate capitalization strategy. Benchmarking is helpful for understanding field wide trends and getting interesting ideas from people who have solved similar problems.But, projecting your sales revenue because your colleague in City X or neighborhood Y reached that number last year is not relevant.How do you do this? Market research can seem mysterious.Nonprofits often don’t have access to psychosocial profiles from big market research firms. We often need to just talk to our audience – through surveys, focus groups, interviews. You can get data about their preferences and, often, about the competition directly from your audience. You can also look at your internal trendsIt’s also important to stay up to date with the preferences of funders and donors – generally the more one-on-one process we call cultivation.
- Facilitator: TDCAfter you know what you are doing and the scale feasible given the marketplace, you then can think about the resources the organization needs to realize the program at that scale.Resources includes talent (artistic and otherwise), technology, materials. You may need to invest in branding, development activities, or more/revamped facilities. These may be one-time investments or ongoing expenses you will need to cover every year.Facilities needs – you can fund these through rules of thumb like funding depreciation, but the gold standard is a SRP, again because it contains specific information about your facility.This process of identifying resource and capital needs is an iterative one.You size the resource need. Reconsider given the market.May need to adjust some piece of this given realities of costs, market, and extent of compromise that the mission can take before it becomes something else.Balancing act.
- Facilitator: TDCHere’s what you get when you pull it all together – an integrated strategy.You need a process that will engage all of the key stakeholders.Best strategy in the world will not work without support and understanding from those who will make it happen.The strategy will address the program, the organization, and the capitalization.
- So with your integrated strategy in hand you would have a capitalization strategy and it would articulate your hierarchy of needs. A solid capitalization structure is achieved over time. You can’t deal with all of the needs at once, and they must be addressed in order. For example, pursuit of a building reserve, while necessary, may be fruitless if the organization does not have enough operating funds to meet daily expenses, as the reserve will likely be tapped to meet those day to day needs.In looking at a fully formed cap strategy we would expect to see:Top line – a sustainable steady-state annual budgeted surplus to support the growth of these funds.Of course, some organizations find themselves way behind and may need to use non-operating fundraising to ramp up or get back to the starting line.Middle – your steady-state also needs to support this. You could kick-start or catch-up with non-operating fundraising, but ongoing surpluses need to feed this over time.Bottom – this is where you need direct infusions of non-operating capital to create the a sufficient corpus to generate meaningful annual support.Of course, wise money management is required to protect these funds from risk and inflation over time. This includes stable maintenance of other funds so that you don’t raid endowment for other needs.When you are thinking of your application, think about this framework, and remember to address all of the appropriate issues.Even if you are asking for just one piece of this (e.g. plant reserve), you should explain how you’ve already addressed your working capital and operating reserves to demonstrate that you will use these funds as indicated.
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: Kresge competitive analysis of the organization's articulated alignment
- Facilitator: Kresge
- Facilitator: Kresge
- Facilitator: TDC or Kresge
- Facilitator: KresgeAttachments include:Demographic data sheetUnrestricted Net Assets ToolFacilities Budget and Campaign Sheet, if applying for a Facilities Investment GrantCurrent budgetCurrent auditCultural Data Project profile (for organizations in CA, IL, NY, MD, MA, OH and PA)
- Facilitator: Kresge Organizations with competitive preliminary applications will be invited to submit full applications. For those organizations that submit promising preliminary applications but require additional support to complete their analysis, planning grants may be made available.The size of the grant will be dependent on the type of project and the size, scope and business model of the organization. Some grants may be designed as matching or challenge grants. Additionally, full applications will be reviewed to see if other funding methods may be appropriate. In general, multi-year Institutional Capitalization grants will not exceed $1 million and/or a period of three years from the time of the grant award.