SOURCE: Flickr user marc falardeau
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.
This is an excellent essay. It’s frustrating to seek “bolstering” funds when it seems that all funders want to do is build, and occasionally buy but with strings attached.
Useful, and right on target. Neither buying nor building can be effective if arts groups are not healthy. Most are not, and cannot even imagine that state of being. I think the performing arts are especially vulnerable.
Thanks for this contribution to the capitalization conversation. The term “bolster” capital is catchy and therefore useful, although at Nonprofit Finance Fund (NFF) we would argue that money to bolster an organization’s health is derived from buying and building done right. Buy money, whether from earned or contributed sources, should be collectively sufficient to cover full costs and contribute to surpluses, which can then bolster an organization’s working capital and longer term reserves. And when a funder does provide build capital for growth or change, the expectation should always be that the investment will be spent in ways that contribute to a business model that covers its costs and contributes to such surpluses. Also, while build money is often for growth or change, it encompasses other forms of flexible capital provided for the purpose of strengthening organizational health through the balance sheet.
Thanks Rebecca. And I completely agree that ‘bolster’ isn’t necessary if funders and organizations navigate the ‘building’ and ‘buying’ with care and consideration. However, since not every funder or organization is always doing things exactly right every time, I could still see a role for the ‘bolster’ funding to correct current or past errors in the build or buy. Not needed in an optimal world, but probably needed until we get there!