There are a slew of confusions for nonprofits, and their supporters, that blur the difference between operating money and capital. Even though we may know instinctively that long-term investments and daily operational expenses are different things, we flow them together in our accounting statements, in our planning, in our strategy, and in our brains. Unfortunately, the outcome isn’t just about semantics. It’s about solvency.
One of the more elegant, therefore most useful, discussions of the issue comes from the Nonprofit Finance Fund, and their on-going distinction between ‘building’ and ‘buying’ in the nonprofit world (described in detail by George M. Overholser in this PDF report).
In short, “buying” money from a foundation or donor is about purchasing goods or services as they’re already being produced by the enterprise — often on behalf of someone else (tickets to an educational performance for school children, for example). “Building” money is intended to change the enterprise — to finance its startup and early operations, to restructure the business, to launch a new initiative, to scale into a new region or line of work.
“Buying” money is familiar to almost any funder: “We like what you’re doing, and we’d like to make it available to more people.” Or, “we like what you’re doing and know you can’t cover your full costs from those you serve, so we’ll pay the difference.” “Building” money can often LOOK like buying money, but carries with it significant effort to change: “We’d like you to serve a different audience in a different place in a different way.” Or, “we’d like you to do your work in a bigger, better facility.” Building money also requires a longer-term commitment from the funder, or a group of funders, because it essentially destabilizes an organization on purpose, to coax it toward a different stable relationship with the world.
The National Capitalization Project from Grantmakers in the Arts is, in part, training funders to know the difference between building and buying, while also being smart about funding healthy organizations as well as interesting projects.
But in all my reading and conversation about capitalization in the nonprofit arts, it feels as if there’s a category missing from build or buy, and that’s “bolster”. Bolster money is essentially buy money with the added intent of organizational health. It’s not seeking change, but rather supporting a healthier version of the current enterprise at its current scale. It’s packing a little extra liquidity on the balance sheet, covering FULL cost of the good or service, rather than incremental costs. It’s making the delivery of the existing goods or services a bit more sane, humane, and reliable.
So often, a funder will buy a service from a nonprofit on behalf of another party, but not cover the full costs. They’ll pay the face value of the ticket, for example, when that value is already discounted by subsidy or market concerns. It’s like the early days of Amazon, when every sale meant a loss, so more sales made the loss larger. Or, it’s like that classic Saturday Night Live commercial parody of the bank that only made change (“All the time our customers ask us, how do you make money doing this? The answer is simple: volume.”).
And it’s not just important for the funder to know the difference between build, buy, and bolster money, it’s important for the organization too. If we pour all these different types of money into the same bucket, we’ll continually be confused about the true dynamics of how we do our work.