"How can we reverse the downward spiral?"
As a banker, Eric Holterhues is struck by the fact that the cultural sector mainly concentrates on the short term: financing its operations, whereas what is important is to have a vision that will last longer than the next four years. If it is the mission of an organisation to provide society with a particular service, this ambition must also be able to be financed in the medium and long term. It is all about sustainable financial entrepreneurship.
When considering that art and culture are at a turning point – and that’s where we are, now that one of the most important finance providers, the government, is withdrawing – we immediately tend to look for solutions and focus on discussions about funding. However, when such serious developments as the ones we are seeing nowadays affect the financing of art and culture, it seems to me a good idea to take two steps back before we answer these questions. The first step is to establish the mission and ambition. Only then can we define the financing question.
Step 1 – What is your mission?
In the summer of 2011 I attended the Summer Intensive Program in Arts Administration at New York University. The impressive thing about this programme was not so much that we learned all sorts of techniques for acquiring money in different ways, but the focus there was on non-profit organisations’ missions. What is your mission? What is your organisation’s purpose here on earth? How do you serve the community? The latter is a little different than the more point-blank question: what is your target group? It is asking how you as a cultural institution are literally of service to a community. How does your institution give added value to your community? What is its role in society? This mission points you in a direction: your ambition. In my opinion, certainly now that the landscape is changing so fast, every cultural institution should first ask itself these questions: What is our mission? What is our goal?
Step 2 – Define your financing question
Once your mission and goal are known, another question needs to be answered before you start looking for sources of funding. This is the financing question: what do you need the money for?
It strikes me that the cultural sector mainly concentrates on the short term: financing its operations. And that’s no surprise, since that is the greatest concern at present: how are salaries, productions, exhibitions, gas, water and electricity to be paid? Apart from the short-term financing question: the operational budget (which is the most urgent), there are two more questions every sound business and non-profit organisation has to answer. The financing question for the medium term relates to investments. Which investments are needed to fundamentally improve operations in the medium term? Which investments can I make that will lead to sustained higher income and/or lower costs in my operations? The long-term financing question is that of building up reserves. These reserves will ensure continuity for the longer term. Theoretically they will not be used and the revenues they generate form a source of income for the operational budget. In times of need, if the funding for operations or investments falls short, a claim can be made on these reserves.
Apart from hammering on about the mission, repeated warnings were given in New York about not confusing these different financing questions and not raiding a surplus from one to pay the other. The financing questions regarding operations, investments and strengthening reserves are separate issues with separate sources of funding.
Step 3 – Specify which source of funding is for which financing question
Once the ambition has been expressed and the consequences it has for the short, medium and long term have been identified in a business plan, it is time to look for operational funding, for buffer equity and for investments, in that order.
It is important that operational funding does not become dependent on one dominant source of income. Sound operations are built on several sources of funding. Compare it to a company: its turnover might be excellent, but if that turnover is only coming from one client, the company is very vulnerable. If that client were to withdraw its business, the company would collapse, certainly if there are no reserves.
A whole range of sources of funding is possible for financing operations. This might include the institution’s own income from ticket sales, sponsoring by industry, gifts from private foundations, or gifts from friends.
To guarantee continuity for the longer term, it is wise to build up sound buffer capital or an endowment. In an ideal world, an institution has two years’ worth of annual turnover to fall back on; this will allow it to withstand hard times and the revenues such capital produces will provide a source of income for operations. Building up buffer capital or an endowment can provoke conflicts with subsidy providers. It would be good for the sector not only to lobby for a subsidy for its operations, but also for permission to accrue equity.
Equity is generally accrued from the operational surplus. However, in non-profit institutions, this surplus is zero, or very limited, since they operate on zero-based budgeting. The dominant sources of funding for equity are therefore wealthy parties such as patrons and sponsors: parties who are prepared to commit themselves to an organisation for a period longer than a few years. These are gifts: sums of money donated by others which are permanently placed on deposit at an institution (in the case of patrons, this could be money from bequests). Equity in business is further underpinned by issuing shares. An alternative for issuing shares is to issue bonds.This is a very common construction in the United States for funding hospitals and schools but also for cultural institutions. In both cases - shares and bonds – money is placed temporarily with an institution: after some time you get your money back, with interest. The institution can use this money to finance investments it wishes to make and/or to underpin – temporarily – its reserves. It is important that banks start to offer products to make this possible; Triodos Bank is looking into whether this is possible.
Investments are essential to be able to fundamentally improve your operations in the medium term. A theatre might want to renovate to become more attractive to the public, a museum might invest in a new museum shop to give it an additional source of income, or a musician might invest in a musical instrument that will help him to make better music. In other words, investments that lead to systematically better operations in the medium term because they provide for an increase in income. Investments that lead to structurally lower costs could be, for example, investments in a new heating installation that is more energy-efficient than the old one, or investments in a new security system so that savings can be made on gallery attendants.
Nowadays, the financing of investments in the cultural sector is dominated by gifts from authorities, industry, private individuals and funds. Outside the cultural sector, however, this role is played by banks and investment funds, who traditionally fund investments. When the cultural sector is threatened by a shortage of funds, it would be a good idea for it to look at the possibilities banks and investment funds offer too. Triodos Bank is the only bank that has specialised in this and actively makes this known. We have a team of account managers working with artists and cultural institutions on a daily basis and we also try to develop a stream of new products that enable a bank to finance the cultural sector.
Step 4 – How can ambition, financing questions and sources of funding be integrated?
The various money issues and the sources of funding that play a dominant role in them may be separate pathways, but they reinforce each other too: one can serve to drive the other. From a banker’s viewpoint, I can see a number of possibilities: banks are comforted by the idea that buffer capital is being accrued when they finance investments. It ensures you have a back-up when times are hard so that when economies have to be made or when a subsidy is withdrawn, you always have something to fall back on; this gives banks confidence to do business with you. A wide circle of friends gives subsidy funds the confidence that you have a broad social support base. Stable operations funded from several sources give banks confidence to finance your investments over many years because there is less likelihood that you will run into trouble when the next spending cuts occur.
The broad basis for financing the things you want to do – your operational budget as well as your investments and your buffer capital – does much more than just bring money in. It brings more commitment; it ensures a much broader support base in society, more involvement and more engagement. It makes you much more broadly embedded than when you are dependent on a single source, such as the government.
Above all, these sources of funding offer different perspectives. In terms of content, the subsidy fund challenges you to provide a good, artistically-defined product and the association of friends keeps you alert about being customer-friendly. Your mission has to be the touchstone when you integrate these different perspectives: what is your purpose as an institution, what are you on this earth to do, now that art is at a turning point?