The crazy world of capital

For reasons that elude me, I’ve been thinking and reading about capital in the nonprofit arts more than anyone probably should. Capital is both tedious and terrifying as an area of study, because the theory behind it is measurement and math (tedious, at least to me), while the organizational consequence of it is agony, ecstasy, or chronic malaise (terrifying).

Capital, for those who care to know, is a special class of wealth. It is wealth applied to generate more wealth (or other flows of value). In economics, capital is one of the three ‘factors of production’ required in any economy (the others being land and labor), with the unique quality of being necessary to production, but not being consumed or significantly transformed by that production (a power screwdriver is capital, the screws it attaches to a product are not). In accounting and business, capital is wealth invested in a business to generate income — usually in long-term forms like buildings, equipment, debt, or equity.

Exciting, yes?

In the nonprofit arts, capital is widely defined as any resource used in support of the achievement of an organization’s mission and goals over time. Buildings are capital. Sounds systems are capital. Elevators and air conditioning systems are capital. Stradivarius violins are capital. Circular saws are capital. Endowments and designated reserves are capital. Capital appears on the balance sheet, aka the statement of financial position, in various forms of long-term net assets.

So, who cares?

Organizations care, either implicitly or explicitly, because they need capital to successfully deliver their purpose — through buildings and equipment and other physical things, and through the designated resources that spin off investment income or level out the crazy roller coaster of cash flow.

Donors and foundations care because they provide capital in some cases — as gifts or grants or loans or loan guarantees. And they’d like to allocate it successfully over time to actually help the causes they care about.

Governments care (or at least behave like they care) because the policies they establish in tax law, investment, and corporate regulation shape productive or dysfunctional environments for capital issues, and support or distract an essential sector from useful operations. Also, government holds and controls a LOT of capital — buildings, machines, and on and on, using tax dollars and debt to pay for it.

The oddity of ‘capital’ in the nonprofit world is that its meaning and metaphor are so closely tied to private ownership and control. We live in a capitalist economy, which means we favor private ownership and private action to generate things our society needs. Businesses and individuals make big decisions based on ‘return on capital,’ which help them optimize (they hope) where they put their money.

But among nonprofit organizations, funders, and regulators, capital is a significantly different critter that we call by the same name. There is no ‘ownership,’ really, because nonprofits aren’t owned by anyone (their assets are managed in the public trust). The return on capital isn’t usually money but mission (although there’s some dispute about that distinction). And many of the capital ‘assets’ that nonprofits hold behave more like liabilities (collections of art, historic buildings, and such, that cost money over time rather than generate it).

Worse yet, funders, boards, and financial managers use versions of the word that mean different things without thinking too hard about them — capitalize, capitalization — and we all nod our heads knowingly.

In short, capital is essential to successful operations, durable in its use and its longterm benefits or damage to the mission, and devious in its ability to generate either net revenue or net expenses if we don’t select and apply it very carefully (and even if we do).

I feel like I need to read and think some more. Damn.