funders

Today, with the help of a particular kind of money--Change Capital--Alvin Ailey American Dance Foundation is attracting new revenue by building a technology platform and internal capabilities that maximize opportunities for patron and audience engagement.  Merce Cunningham Dance Foundation is raising money upfront to wind down its operations in a graceful way and leave a meaningful legacy. 

These are success stories.  But, when grantmakers and grantseekers fail to make the distinction between different kinds of revenue and capital, the consequences can be dire: desired outcomes aren’t met, organizational infrastructure is hollowed out, and communities go underserved.  Given these risks, the nonprofit field and funder community need greater clarity about the role of each type of money and what they can separately and collectively achieve. 

First, some definitions:

General Operating Support

GOS is unrestricted revenue, meaning it can be spent at the organization’s discretion – on anything. It might be used to fund programming, to offset administrative salaries or to pay the rent.  In a universe where many grants are tied exclusively to specific programs or projects—often without paying for an appropriate share of the infrastructure required to deliver them—GOS is a rare form of flexible revenue that can pay for mission-critical expenses that few (sadly) are yet willing to support. As such, annual GOS is an essential element of a healthy revenue mix for any organization. It is typically raised from select foundations as well as individuals and corporations, often through special events.

Capacity Building Revenue

Grants for capacity building, whether formally restricted or not, are revenue typically earmarked for building new organizational knowledge, staff and infrastructure. Board development, expansion of the marketing department and the purchase of new technology would all qualify as capacity building expenses.  GOS is often but not always used to pay for capacity-building activities. In that sense, the two can overlap. The difference is that capacity building dollars usually have a specific non-programmatic intention.  They are typically raised from foundations.

Change Capital

Change capital is a concept we developed at NFF to describe a flexible form of capital, distinct from revenue.

This post originally appeared on the Money and Mission Blog at the Chronicle of Philanthropy. 

Over the past few months, the Nonprofit Finance Fund has had the opportunity to work with several foundations and regional associations of grant makers across the nation on efforts to rethink how they can better use their grant dollars to achieve more and better results in their communities.

Time after time, I have been struck with the deep desire by foundation program officers and staff members to change what many understand is a flawed system. Too often, foundations bear the brunt of the blame for creating many of the problems facing nonprofits.

As Ann Goggins Gregory and Don Howard suggest in the Stanford Social Innovation Review, the problem boils down to “funders’ unrealistic expectations about how much running a nonprofit costs.”

Laying the blame and responsibility on the doorstep of grant makers and their “unrealistic expectations” might play well with many people who work at nonprofits, but it won’t achieve the results we want to see.

In reality, grant makers and nonprofits are actually in the same boat, ensnared by a set of dysfunctional rules and conflicted beliefs about money.

While there are certainly bad grant-making practices that undermine nonprofit financial health, I have found many program officers, trustees, and foundation managers who have a deep understanding of nonprofit economics and the realities under which nonprofits are struggling.

To really understand why nonprofits struggle to cover their full cost of doing business, why a foundation grant can actually drain an organization’s liquidity when it does not cover the full cost of a service, or why the nonprofit world lacks an equity ethic, we need to understand the broader historical and social context of money in American society.