Recently I had the great pleasure of presenting at the TCG 2014 Fall Forum. I love speaking at this gathering. It brings together interesting, funny and smart staff and board leaders from theaters of all sizes from around the country. My topic was “Diagnosing Your Capitalization Challenge” – it is the fourth time I have spoken about the seemingly dry topic of capitalization to the TCG membership. This is another reason why I love going to this gathering: theater leaders have been thinking carefully and working hard over a number of years to determine how to capitalize their efforts. Their stories and questions are challenging, honest and touching. (If you would like to hear some of these questions directly, click here and fast forward to the Q & A section at the end.)
As the title of the presentation would suggest, I presented a framework of how to think about capitalizing your organization based on the long term vision, the strategic direction, the state of the competitive market, and the current financial condition. It’s a pretty straightforward “how to” that you can see for yourself, so I won’t belabor those ideas here.
Truthfully, sharing these points was really just a way to set up the conversation that I – and it turns out, most of the audience – really wanted to talk about: What if you don’t have a capitalization issue? What if the real problem is that at the core, your business model is broken? What then?
Over the last four years, as I have traveled the country working on capitalization issues, the underlying assumption that everyone starts with is that a bad balance sheet and deficit spending suggest that an organization is undercapitalized, and that if the organization could just get more unencumbered cash into the system, life would get better.
That made be true for some, but the harder – and more commonly true – fact is that you can’t capitalize a bad business model. You have to fix the model and then capitalize appropriately. Otherwise you just keeping throwing money down a hole, frustrating donors, supporters and board members who keep stepping up to help with no end in sight. It is no way to live.
So how would you know if you have a broken business model? If you have a combination of several of the following characteristics you should consider carefully if your model needs to be reinvented:
- Consistent losses over a multi-year period (which may sometimes be covered by one-time events)
- Fully borrowed lines of credit
- Loans to the company by staff or board (which imply you are no longer credit-worthy)
- Inability to pay debt out of annual operations
- Consistently not meeting budgeted income targets and/or diminishing programs/exhibits or productions during a budget year
- Inability to invest in staff; frozen/diminishing pay levels
If you determine that you indeed have a broken business model, how would you go about fixing it? You have to go back to basics — start with the mission/vision. What are you really trying to do and for whom? Can your local market really support that vision? How would you align the organization’s goals to the level of support it can attract?
Doing this work is hard. But it has the potential to take you out of the destructive cycle of organizational starvation and frustration. To get you inspired I urge you to read three stories of organizations who successfully confronted issues with their business models. Understanding the real problem you are solving takes you halfway down the road to success.