Walden Conservatory of Music:
A Case of Nonprofit Financial Analysis and Strategic Planning
Walden Conservatory of Music was founded in the late 1800s in the City of Walden, the
largest city and the main cultural and economic center in a north-central state in the United
States. It is the largest nonprofit community music school in this state and provides quality music
programs for all ages and levels. The conservatory’s mission is to provide the finest musical
education and performance opportunities to all individuals who desire a means of cultural
enrichment and self-fulfillment. The conservatory is located on the main street in the center of
the city, the Walden Square. Within the same block on the different sides of the main street, the
conservatory owns two century-old crimson-colored brick mansions, i.e. Pike Hall and Walden
Hall, where it holds private music lessons, master classes, and practices for ensembles. Within
the Walden Hall building, Walden Hall is the main music hall where most of the concerts have
been held. Walden Conservatory of Music has made great efforts in preserving the historical
architecture of the two buildings and in updating building features to support its regular
operations, which leads to about $100,000 of annual maintenance costs. Right across Walden
Conservatory of Music, there is a beautiful tall cathedral church building, full of artistic heritage
and architectures. Next to the church, the city offices reside in Walden City Hall, a large gray
concrete building. Walden Museum of Fine Arts and a state university are two blocks away from
the conservatory. Along the two sides of the main street in between big buildings, small business
stores like CVS, Starbucks, 7-11, and restaurants such as Panera Bread, Burger King, Subway,
and a local pizza shop, etc. are sharing the space, one next to each other.
The conservatory features three main music programs: Private Lessons, Concerts, and
Camps. The conservatory has approximately 100 faculty to teach classical, jazz, rock, folk,
blues, and vocal arts, etc. private lessons. The lessons are offered in three different lengths: 30,
45, and 60 minutes long, depending on students’ age and level. The costs of these private
lessons range from $45, $60, $90 per lesson by length respectively, in addition to the charges for
music materials. The prices for private lessons are competitive on the market. Students need to
go through an interview and a screening process in order to sign-up for private lessons, which
helps the music program directors to decide the right levels of lessons to place students. Once the
directors assign students to the appropriate levels of lessons and corresponding teachers, the
students and parents will register for their lessons for a fixed schedule during each term (fall,
spring, or summer). Typically, each term has about 14 to 15 weeks of lessons.
The Concerts Program hosts musical concerts throughout the year. The concerts are open
to the public, and tickets are sold both online and in the ticket office at the entrance of the
Walden Hall. The conservatory is the home to several audition-based ensembles like Walden
Youth Orchestra (WYO), Walden Youth Chorale (WYC), and Walden Jazz Group (WJG). Most
concerts are performed by the faculty and students of the ensembles, and those who take lessons
from the conservatory. The ticket prices range from $10 to $60 according to seat locations. The
majority of the audience in these concerts are grandparents, parents, relatives, and friends of the
students who are performing at the event. In the basement of the Walden Hall, there is a large
ball room, where most after-concert receptions are held. Parents often volunteer to bring bakeries
as desserts for receptions and group gatherings. Occasionally, orchestras and bands from outside
the area (other cities, states, and countries) may also come to play in the Walden Hall. Typically,
the tickets for these concerts are $40 to $75 depending on the seating, slightly higher than those
of the concerts performed by students and faculty.
The Camps Program mainly focuses on providing school-age students with music-related
activities during school breaks. For winter and spring breaks, the conservatory offers week-long
camps, where students have music lessons, local field trips (e.g. visiting Museum of Fine Arts),
and social activities. During the summer, besides regular week-long camps held at the
conservatory, students can also sign up for Music Abroad Camps, where groups of students will
travel to foreign cities like Vienna, London, Berlin, etc. to perform at local churches or small
music halls and enjoy some sight-seeing activities during the trip. The conservatory typically
charges about $350 weekly for full-day camps and $200 weekly for half-day camps, plus
additional field trip costs.
Besides the above three music programs, the conservatory also has a fundraising program
which aims at promoting the conservatory and raising funds to support program-related
activities. The conservatory hosts fundraising events like Play at Your Conservatory Gala and
holiday fundraising concerts either in the Walden Hall or in the mall which is about a couple of
miles away. The conservatory also solicits monetary donations as well as donations of
instruments and other musical supplies through Friends of Walden Support program. People
including alumni who give different levels of donations annually can enjoy free or discounted
admissions to concerts and other popular local events. Periodically, the conservatory also calls
for financial support from the community through Walden Radio Station (WRS), a local radio
station. During the past year, the conservatory launched a new campaign program with intensive
marketing efforts, including hiring an IT consulting firm to redesign its website, running
advertisements on TV and radio, and hosting numerous fundraising events, etc. The campaign
aims to raise funds for its financial requirements for the next five years and calls for donations to
make a difference in the life of a conservatory student today and support future performing
artists and educators of the country.
Mary Smith, the CEO of the Walden Conservatory of Music, retired two year ago after
having served this role for twenty years. The conservatory had gone through variable leadership
with a couple of interim CEOs until earlier this year when Justin Lappin, a veteran CEO from an
independent music school in a neighbor city, took the CEO role of the conservatory. As an effort
for improvement, Justin initiated the new campaign discussed earlier last year and hopes to
recover about $20,000 of campaign-related costs in a year or so. In addition, he hired a
consulting group from Illuminations Inc. (a strategic advising firm) to review current operations
and seek more appropriate business strategies.
You are a senior business student who is hired by the CEO office as an intern to work
with the consultants from Illuminations. Your tasks involve analyzing the financial performance
of the conservatory and working with the consultants to provide strategic recommendations for
the leaders of the conservatory. It is an exciting opportunity for you because you can directly
apply what you have learned in your business classes to the consulting project. You are eager to
impress the staff in the CEO office and the consultants with high-quality work, hoping to either
get a return offer from the conservatory or a new offer from the consulting firm next year.
In preparing to analyze the financial condition of the Walden Conservatory of Music, you
recall from your course work four areas to consider for financial review: Liquidity, Solvency,
Profitability, and Efficiency. It is essential that nonprofits maintain an adequate level of
liquidity to meet current obligations. Financial accounting standards require nonprofits to
disclose both quantitative as well as qualitative information about the availability of financial
resources to meet cash needs that come due within one year of the balance sheet date. In addition
to maintaining an adequate level of liquidity in the short-term, nonprofits must be sure they can
cover their total obligations of the long-term. Solvency ratios measure an organization’s ability
to operate over the long-term. Too much leverage can make a nonprofit organization vulnerable
to future financial distributions.
Profitability ratios indicate the extent to which the nonprofit is earning a surplus or
deficit. Nonprofits earning consistent deficits run the risk of becoming fiscally distressed.
Conversely, nonprofits that earn large surpluses run the risk of stakeholder backlash and public
ire that they are hoarding resources and not investing enough in their mission. Finally, nonprofit
organizations aim to be efficient with the resources entrusted to them. Efficiency ratios measure
what proportion of total expenses are spent on programs compared to administrative and
fundraising activities respectively. While charity evaluators, such as the Better Business Bureau
Wise Giving Alliance, expect charities to spend at least a minimum threshold amount on
program services, nonprofits not investing enough in their administrative capacity may fall
victim to what has been commonly referred to as the “starvation cycle” where underinvestment
in a nonprofit’s capacity ultimately leads to diminished outcomes.1
You and the consultants are given the Statement of Financial Position and Statement of
Activities based on Form 990s (the IRS tax form for tax-exempt organizations) of the
For a more expansive discussion of the starvation cycle see Lecy and Searing (2015).
conservatory from 2006 to 2018 for your analyses (see Tables 1 and 2 in the Appendix). There
are two parts of requirements: (1) First, you will conduct a preliminary financial analysis of the
conservatory. Upon finishing your analyses, you will need to write a business report detailing the
financial condition of the conservatory and submit it to the consulting group as well as the CEO
office; and (2) Second, utilizing your analysis results from Part 1 as a base, you will work with
the consultants to identify appropriate business strategies for the conservatory to ensure the
sustainability of the organization. Toward the end of the project, you and the consultants, as a
group, are expected to write a business memo to Justin and the Board of Directors of the
conservatory with strategic recommendations including supporting evidence.
Part 1. Utilize Table 1 and Table 2 to answer the Part 1 questions.
1. Illuminations consultants have prepared a list of financial ratios (numbers) for your analyses.
For each of the ratios (numbers), first identify which of the following category each ratio
(number) falls under: A) Liquidity, B) Solvency, C) Profitability, or D) Efficiency. Then use
the formula given below and calculate these ratios from 2006 to 2018 in Microsoft Excel.
Make sure to use the cell referencing feature in Excel.
Administration Expense Ratio
=Administration Expenses/Total Expenses
Number indicates the percentage of total expenses that cover administrative
Payables+Grants Payables+Deferred Revenues)
Number indicates whether the organization has sufficient current assets to
meet its short-term obligations.
Debt to Asset Ratio
=Total Liabilities/Total Assets
Number indicates the extent to which the organization's assets are financed
Debt to Net Asset Ratio
=Total Liabilities/Total Unrestricted Net Assets
Total debt in relation to unrestricted net assets. Number indicates percentage
of unrestricted net assets that are being financed with debt.
Number indicates the number of months the organization could operate using
cash, marketable securities, and receivables on hand at year end.
Liquid Funds Amount
=Unrestricted Net Assets-Net Fixed Asset+Long-Term Debt
Amount of unrestricted liquidity remaining after fixed assets and related debt
Liquid Funds Indicator
=[(Total Net Assets-Permanently Restricted Net Assets-Fixed Assets)*12]/Total
Number of months that an organization can operate based on net assets
(reserves) that do not include fixed assets or endowments.
Program Service Ratio
=Program Service Expenses/Total Expenses
Number indicates the percentage of total expenses that go directly into
=(Cash+Marketable Securities+Receivables)/(Accounts Payables+Grants
Number indicates whether the organization has sufficient liquid current
assets to meet its short-term obligations. It is a more stringent measure than
Return on Investment
=Investment Income/Average Investments
Number indicates the gain or loss generated on an investment relative to the
amount of money invested.
Number is the income (loss) as a percentage of total revenue. Positive number
indicates income and negative number indicates loss.
Times Interest Earned Ratio
=(Increases or Decreases in Net Assets + Interest Expenses)/Interest Expenses
Number indicates whether the organization has sufficient increases in net
assets to pay the current year's interest expenses.
2. Explain the financial position and performance of the conservatory using the ratios that you
have calculated in Part 1.1.
3. A graph is worth thousands of words. Use graphs to show the trends of financial performance
of the conservatory. Do you derive the same conclusions as those from Part 1.2.?
4. Table 3 details ratios for peer art organizations. How does the Walden Conservatory of
Music compare with its peers?
5. Find a comparable conservatory in your home town or city as a benchmark. Compare the
financial performance of the two organizations and provide suggestions (based on the
comparison) for the Walden Conservatory of Music, both from a financial and operational
As a part of their strategic review, Illuminations Inc. conducted an in-depth review of
Walden’s three programs as well as the development efforts. Their review utilized a mapping
tool that considered both the mission impact of each program as well as their financial
performance. The mapping tool is derived from the book, The Sustainability Mindset by Steven
Zimmerman and Jeanne Bell. The tool first measures the financial performance of each program
as well as the development area. The financial performance was based on the latest twelve
months of data.
The tool then compares the financial performance of each program or area with its
relative mission impact. Mission impact is based on a survey of key stakeholders including large
donors, board members, program staff, and executive officers. Each stakeholder was asked to
respond to a mission impact survey as follows:
“On a scale of 1 to 4 with 4 being the highest, please rate each program below on the following
criteria. As you complete the survey, remember that there is no "right" answer in the survey and
take into account all the information you have from your experience with the organization.”
The four criteria are: 1) Contribution to Intended Impact: Relative to other programs, how well
does this program contribute to what the overall organization aims to accomplish? 2) Excellence
in Execution: Is this program something that the organization delivers in an exceptional manner?
3) Significant Unmet Need: Is there significant competition or are there similar offerings of this
program? Is there an adequate supply of services to meet the demand for them in our
community? 4) Scale: How many people are touched or influenced by this program?
Based on the responses from the survey and the financial review, the overall summary was as
Note the Mission Impact Score represents the average score across the four criterions.
Walden Conservatory of Music
Note the Expenses column includes an allocation of all administrative expenses to the four
The profitability of each program area represents the difference between the last twelve
months revenues and expenses associated with each program area. Total expenses are given to
provide a measure of the relative size of each program area. Twenty-percent of the total expenses
represent fixed costs (ex: occupancy costs) that would exist even if one of the program areas was
eliminated. Appendix A includes a mapping of this data. Note the map includes a bubble for each
program area. The size of the bubble indicates the relative size of the program area based on total
expenses. The x-axis represents the profitability of the program area while the y-axis represents
the relative mission impact of the program area.
As noted in the The Sustainability Mindset, programs in the upper right quadrant are in
the star quadrant. Organizations should consider investing and growing these programs. The
bottom right quadrant is referred to as the money tree quadrant. Organizations should consider
whether these programs can be watered and harvested to increase impact. Programs in the upper
left-hand quadrant are in the heart quadrant. Organizations will typically want to keep these
programs but must consider ways to contain costs. Finally, the bottom left quadrant is referred to
as the stop sign quadrant. Organizations must consider whether these programs should be closed
or transferred to another organization.
Before speaking with the consultants, the CEO would like to get your insights into the
analysis. Based on your review of the profitability and mission impact of the individual program
areas, what initial recommendations do you have for the CEO to ensure Walden Conservatory of
Music is on a sustainable path for the future?
Lecy, J. D., & Searing, E. A. (2015). Anatomy of the nonprofit starvation cycle: An analysis of
falling overhead ratios in the nonprofit sector. Nonprofit and Voluntary Sector Quarterly, 44(3),
Zimmerman, S., & Bell, J. (2014). The sustainability mindset: Using the matrix map to make
strategic decisions. John Wiley & Sons.
Walden Conservatory of Music
Liquid Unrestricted Net Assets: ______________
Net Surplus: ($210,655)
Table 1 Statement of Financial Position Data for Walden Conservatory of Music, Inc. (Based on Form 990s)
Cash & Equivalent
Pledges & Grants
Inventories for Sale or
Investment / Securities
Fixed Assets (LBE Depreciation)
Long Term Liabilities
Loans and Notes
With Donor Restrictions
- Temporary in Nature
With Donor Restrictions
- Permanent in Nature
Total Net Assets
Total Liabilities and
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