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Grants in Sheep’s Clothing

I’ve been thinking a lot lately about how nonprofit arts groups account for grant funds and other capital investments.  Everyone in the business sector understands the need for raising capital funds – through issuing stock or assuming debt – to finance new products and other business improvements.  In fact, many businesses fail because they were not adequately capitalized.  How do nonprofits capitalize their business models?  The short answer is, they don’t.  Endowments – for the lucky few who have them – are mostly restricted and cannot be expended for product development purposes.  Otherwise, investments in new programs have to be paid out of operating funds.  Typically, this only happens when special grant funds come available.  Because there is no generally accepted way of accounting for capital investments differently than operating revenue, however, grant funds disappear into overhead as fast as you can say “unsustainable practice.”  I like to use the analogy of a snake that swallowed a pig.  When the pig is gone, what’s left is a fatter snake that is very, very hungry for another pig.  Clara Miller, CEO of Nonprofit Finance Fund (NFF), is a champion for better capitalization methods for nonprofits.  I heartily recommend her incisive essay, The Equity Capital Gap.  Over the next four years, I’ll be co-leading, with Arthur Nacht, an evaluation of NFF’s Leading for the Future: Innovative Support for Artistic Excellence initiative, funded by the Doris Duke Charitable Foundation.  This experimental pilot program seeks to develop more sustainable approaches to financing artistic success, and should generate many valuable lessons for the field.


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