All flexible funding is not created equal: GOS, capacity building grants and change capital

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. It allows for periodic investments in an organization’s strategy that have the greatest likelihood of impact and viability over time. Ailey and Merce are just two of NFF’s clients that are using change capital to adapt their programming and operations.

Change capital is flexible in that it can be spent on any number of program related activities or infrastructure building priorities. But don’t be fooled: it is not revenue to pay for business as usual like GOS. Change capital is an investment in adaptation at the organizational level. While it may build organizational capacity, change capital—unlike a typical capacity grant–—is invested with the explicit intent of securing reliable revenue to pay for the future ongoing expenses associated with an organizational change strategy. Change capital should result in a healthy business model that contributes to a healthy balance sheet, characterized by sufficient liquidity and adaptive capacity. More importantly, its effective use means that communities are better served by healthier, more vibrant nonprofits.

Change capital—and the appropriate financial reporting for its use—is described more fully and illustrated with examples in the Case for Change Capital in the Arts series.

The conflation of these three very different types of money often causes a mismatch of expectations between funders and nonprofits about the purpose of funding and the impact grant dollars can have. In distributing or raising each type of funds, grantmakers and nonprofits may want to consider the following guidelines:

	*For Funders*	*For Nonprofits*
General Operating Support	Do not expect grantees to do anything differently from what they are currently doing, although certainly continue to hold grantees accountable for producing the quality of results that they delivered before.	Since GOS is still not the funding norm, avoid the temptation to use it as project or program funding. While serving one more child or producing one more great work of art are worthy pursuits, having the infrastructure to fully support programs is necessary to achieve mission success.
Capacity Building Grants	Count on your funds achieving their designated purpose – whether that be building stronger management or improving internal systems. The dollar amount provided, when combined with other funds available for the same purpose, needs to cover the full cost of the organization’s investment and no less.	Be careful not to promise capacity building on the cheap in an effort to secure new grant support. In assessing the full costs of an infrastructure investment, consider those less intuitive but very real costs, such as the time an executive or other staff will need to spend on the project. If the cost is likely to continue but the capacity grant is one-time (for example, one year of a development director’s salary), have a viable plan to raise future years’ funding before saying ‘yes’ to the grant.
Change Capital	As a capital investor, you are committing to be a builder of healthier, higher impact organizations. You will be taking significant risks with your dollars and deserve to have high expectations of results. Resist the temptation to interfere with grantees’ spending decisions as long as their financial and programmatic roadmap is clear and progress is made along the way. Avoid penalizing the inevitable mistakes and roadblocks that will occur; rather, use these times as opportunities to engage about smart mid-course corrections.	Don’t squander the opportunity to use precious, all-too-rare change capital to rethink strategy, invest in revenue-generating activities and measure progress and results. Expect to share your progress candidly with investors and to be transparent about challenges and mid-course corrections to plans. Be clear in your financial planning and reporting that change capital is not ordinary revenue, but that investing it appropriately should lead to improved revenue and greater effectiveness.

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