Increasing Your Endowment: A Roadmap to a Thriving Arts Organization 

If there’s one lesson the pandemic taught cultural organizations, it’s the critical importance of planning for sustainability.

 

When COVID-19 shuttered theaters and cultural venues across the nation in March 2020, all forms of earned revenue—primarily ticket sales—ceased overnight. In response, organizations scrambled to reduce operating budgets and increase contributed revenue to stay afloat.

 

According to Americans for the Arts, COVID-19 resulted in an estimated $15.2 billion financial loss for arts and cultural organizations nationally. As recovery from such significant and abrupt loss continues, these organizations are now strategizing to create safeguards against future unexpected challenges. One of their best defenses: endowments.

 

Increasingly essential as a revenue stream, endowments serve as a safety net in maintaining sustainability for the arts while providing a path toward vibrancy. Contributed/unearned and earned revenue are not sufficient to ensure that a fiscally well-managed organization is advancing its mission. For example, the League of Symphony Orchestras cites that on average, symphony orchestras rely on endowment fund distributions and other investment income for roughly 17 percent of their operating budgets.

 

The massive dislocation caused by COVID-19, and the Great Recession before the pandemic, underscored the essential need to grow all forms of endowments for most cultural institutions. So how do you begin analyzing how much endowment makes sense for your institution and preparing for a campaign?

 

• There is no simple formula for calculating the correct size of an endowment. The old thinking was to have an endowment equal to 200 times your operating budget, but this may not be sufficient for organizations with extensive arts education and community engagement programs or those that do not generate the overwhelming majority of their operating budget through earned revenue.

 

• Instead, we have collaborated with clients to create 10-year financial projections based on the organizations’ current strategic plan or business plan to help them understand long-term endowment requirements. We suggest testing two or three scenarios in a 10-year projection to examine assumptions and establish a target endowment range. Eliminating a structural deficit is an immediate priority in growing or establishing an endowment.

 

• If you do not have an endowment or it is modest, then consider establishing a Board-designated reserve fund before adding to or starting a permanently restricted fund. You can draw down the principle in a Board-designated fund, allowing you to better withstand emergencies. Of course, you must exercise discipline both in using and replenishing such a fund. Consider creating special purpose funds like an innovation fund to help address specific requirements, such as investing in new works or deploying technology. Such funds resonate with donors who have similar interests.

 

• Once you determine your approximate endowment fundraising requirement, you should consider conducting a campaign readiness assessment and a feasibility study. Unless you have conducted multiple successful campaigns and are very disciplined in capturing prospect data in your CRM, you will want to undertake a feasibility study to understand if and how your proposed campaign objectives and goals align with your donor philanthropic interests and priorities. In addition, you will also want to know if you are ready to undertake a campaign and where your development program may require strengthening.

 

While we hope that cultural organizations will never again undergo severe financial strains like those presented during the pandemic, we’ve learned that ensuring a vibrant and fiscally sound organization requires an investment in the future.

 

Arts, Culture, and Media Philanthropic Advisors specializes in helping organizations increase their endowments. Reach out today to discuss your needs.