League of American Orchestras May 29 2015 VISION TO MOMENTUM The environment Orchestras are facing risks and opportunities that are shared Shifting demographics Rapidly changing consumption patterns ID: 355467
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Financing ChangeLeague of American Orchestras| May 29, 2015
VISION TO MOMENTUMSlide2
The environmentOrchestras are facing risks and opportunities that are shared:Shifting demographics
Rapidly changing consumption patternsExplosion of choices for leisure timeDe-emphasis of art in educationLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide3
The opportunityShifting demographics: art creates meaning and allows for shared experiences between and amongst peoples of different ages, points of view and cultural backgrounds
Consumption patterns: the changing subscription model results in more individuals attendingExplosion of choices: people want to be entertained and delightedEducation: there is demand to fill the gapLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide4
Orchestras are not capitalized to address these opportunitiesCapitalization is having the cash to do
what you need to do when you need to do itIt is having the resources to manage risk successfully and take risks when you need toCan you invest in the art and the program?
Can you invest in developing and sustaining audience?
Can you respond to external forces?
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide5
What is getting in the way?Talking about the under-capitalization of the arts sector for five years
While organizational leaders agree about the issue broadly, it is unclear if donors and boards understand the issue or their role in addressing itLeaders are often hesitant to address this issue openly because they fear it dampens enthusiasm and supportOrganizations that have been able to move forward have a unified board and staff
agreement about
the need to capitalize to make
change
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide6
Capitalization basics
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide7
Programmatic strategy
maximizes artistic quality and impact, scaled to demand and available resourcesOrganizational strategy includes adequate human and other resources to manage program and support activities (e.g. marketing, development, finances, facilities)
Capitalization strategy
articulates size and shape of capital needs to support programmatic and organizational strategies
Integrated Strategy
Mission and Vision
Artistic/cultural production
Theory of change for impact on audiences and other beneficiaries
Market
Customers
Donors
Competition
Resources
Talent
Space
Networks
Time Horizon, Business Model Drivers, Life Cycle
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015
Capitalization is part of an integrated planSlide8
Endowment
Facilities
Reserve
Risk Capital
Operating and Working Capital
Operating Reserve
Elements of Capitalization
Requires Liquidity
Balance Sheet
Cash/Investments
Receivables
Fixed Assets
Total Assets
Payables
Deferred Revenue
Debt
Net Assets
Total Liabilities
and Net Assets
P&L
Revenue
Expenses
Net Income
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015
How well capitalized are you now?Slide9
Transitional capital fundsLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide10
What is your capitalization stage?LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide11
How should you be capitalized for change?The amount of capital you need is dependent on your strategic vision, capitalization stage and your risk profile
Everyone needs working capital and operating reserves equal to the size and scope of operationsThe amount of risk capital is sized by your risk taking needsSome people need extraordinary infusions of capitalLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide12
Your risk profile impacts your capital needs
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide13
Risk in the context of capitalizationLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide14
Risk in the context of capitalizationProgram RiskExternal RiskAudiences
FundersShifts in the economyHuman capitalLeadershipProgrammaticPilotsNew opportunityChange in core offerings
Organizational
Marketing/development
Facilities
Change in scale or size
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015
Operational Risk
Strategic Risk
Risk Management
Risk takingSlide15
Risk management questionsFlexibility and liquidity: operating and facilities reserves
What are the core expense drivers in which we must continually invest?What is the balance between essential artistic/programmatic costs and fixed costs?What reserves do we need to replenish and when?What are the core income drivers, and what is the risk associated with each?How much is artistic risk a part of our business model?How do we account for external forces?
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide16
Risk taking questionsOrganizational risk, change & recovery capital
What is the scale of the organizational change that we are undertaking?Small vs. large programmatic riskCould use risk capital but may need change capitalTargeted organizational riskSame as aboveSeismic organizational risk Change or recovery capitalIs continuous artistic risk part of our mission and vision?
Risk capital is part of the ongoing mix of what we need
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide17
Risk aversion questionsRecovery
Is our business model working against us?Is what we do relevant and fundable in this market?What capital funds will stabilize us?TransitionHow do we implement changes to our business model?What market testing do we need to do?Strengthen/Deploy & MaintainAre we communicating our capital needs clearly enough?Have we identified and sized the risks associated with the projects we wish to undertake?
Are our financials clear and policies transparent?
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide18
What does this mean?
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide19
Are you ready to invest in change?Diagnose your financial condition
Understand your strategic positionDefine your risk management profile and your risk taking needsConfront risk aversionObtain the right type of capital to make change and take strategic risk
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide20
Diagnose your financial conditionLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide21
Diagnose your financial conditionDo you need recovery capital first? (Recovery capital pays off past debts, provides interim working capital, and moves unrestricted net assets out of the red)
Are your unrestricted net assets negative? Does it represent greater than 3 months of operating expense?Are you living on others’ money?LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide22
Diagnose your financial conditionLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide23
Understand your strategic positionWhat are the industry issues you are facing?What does your local market look like?
What programming investments do you need to make?What marketing investments do you require?Do you need to shift your model?LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide24
Understand your strategic positionDo you need change capital? (Change capital is required to both test and execute a new business model)
Change requires multi-year investment and the cash to fund the changeIf you are in any stage beside Deploy & Maintain, it is difficult to self-finance changeYou must be clear that the change you are proposing will ultimately improve your model and not leave you dependent on change capital infusions
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide25
Defining your risk profileRisk Management
Built-in high risk factors require higher levels of operating and facilities reserves:Challenging artistic programsHigh fixed costs (labor, facilities, etc.)Revenue dependenciesDependence on current leadershipChanging local economyRisk TakingA strategy that calls for continuous artistic risk taking requires dedicated risk reserves
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide26
Confront risk aversion: is your business model broken?Consistent losses over a multiyear period
Sometimes covered by one-off eventsFully borrowed lines of credit and inability to pay debt out of annual operationsSignificantly changing budgets or productions during a budget yearInability to invest in staff; frozen/diminishing pay levelsWhat Does It Mean?
Retest your vision and mission
Understand and scale to your market
Create a new capitalization plan that includes transition capital
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015
Sources:
Getting Beyond Breakeven
, TDC (2009) and
Capitalization, Scale and Investment
, TDC (2014)
How Do You Know?Slide27
The right kind of capital at the right timeLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide28
The players
LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide29
Who needs to be involved?Capitalization is a board issueIt effects impact and outcomes
It is at the core of fiduciary responsibilityIt grounds strategySuccessful organizations have board alignment and commitment to the integrated view of program, operations and capitalLEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide30
SummaryKnow where you standKnow the difference between a capital and a business model problemDiagnose the right capital challenge
Understand your marketUnderstand your risk profileRaise the right capital first LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015Slide31
Want to learn more?Read three stories of arts leaders embracing risk:
http://www.giarts.org/article/capitalization-and-risk LEAGUE OF AMERICAN ORCHESTRAS | MAY 29, 2015