Overview of Arts Organization Capitalization Needs

The pandemic has brought new attention to the precarious capital positions of many arts organizations. As is typical with economic disruptions, those who entered the pandemic in the most tenuous financial positions have struggled the most and will have the most difficulty exiting the period and returning to health.

The Advisory Board for the Arts has recently completed a body of research about the capitalization of arts organizations, which found that the capitalization challenges many arts and culture organizations are now facing now are reminiscent of those coming out of the Great recession.

Their research was intended to:

• Provide an understanding the financial literacy of arts organizations

• Determine the sufficiency of their capital positions, and

• Assess appropriate capitalization levels given arts-organization risk profiles

The research concluded that while financial literacy was generally strong, capitalization levels amongst arts organizations were woefully insufficient. For example, most arts organizations had much less cash on hand than the four-month minimum that most experts recommend.

They also found that a decade after the Great recession, capitalization had not improved. As the pandemic hit, arts organizations on average found themselves in worse capital positions than when they entered the 2008 downturn. this raises the question: if both arts organizations and funders understand their inadequate capital situations, why do the capital positions remain so precarious?

To find an answer, the Advisory Board for the Arts explored two questions:

• How much and what kind of arts capitalization are appropriate for arts organizations?

• What rules of thumb exist for capitalization levels for arts organizations, especially for endowments?

The findings recounted in the report include:

1. A high-level summary of current capitalization levels for arts and culture organizations

2. A description of different kinds of capital, and an assessment of the prevalence of each

   type, according to capitalization experts

3. Advice from experts on rules of thumb for healthy capitalization and capital priorities

   when tradeoffs must be made

4. Advice from experts on the size of endowments and whether endowment funding is a

   worthwhile pursuit right now

5. Final thoughts on capitalization and the sustainability of the arts business model

Access the report here.