Much to my delight and amazement, “capitalization” has been coming up more and more frequently in philanthropy conversations. Grant makers’ interest in learning more about capital and capital access seems to be at a high point, probably spurred by the fragile state of the economy, and the implications the slow pace of recovery has for grantees.
Yet given this progress, it’s rare to hear anyone in our sector make the important and fundamental distinction between “capital” and “money.” And to get to the heart of the matter, the real distinction is between “capital” and “income.” Understanding the difference between these terms and using them correctly would, in and of itself, be a giant step toward better capitalization practices and outcomes for the sector.
The distinction is fundamentally functional. It’s not about what the funds are used for (from an accounting point of view) but about what happens as a result of spending them.
Capital is both an organization’s built delivery platform and the resources consumed in building it.
A “delivery platform” can be thought of as an organization’s capacity to convert income into program delivery. Delivery platforms come in many shapes and sizes. For example, the platform of an advocacy group that promotes low-cost housing might sport many computers, a contact database, a development department and good talkers with great Rolodexes, while a provider of housing to homeless adults might have a platform that includes beds, a building, seasoned social workers, accounts payable/receivable management capacity, and a development department. These platforms are built with capital—in the form of cash, equipment, buildings, processes, skills, and more—and when they’re built, that platform is capital as well.
Income—or operating revenue—is attracted by the built platform and is used to pay for the expenses of delivering programs and services (as well as covering the ongoing costs of the built platform), whatever their nature (such as conducting a housing-policy-awareness event, or providing a homeless person with a bed for the night.) Much income is in the form of cash, and is specifically not capital.
The idea that capital isn’t income is confusing to some because both can be financed with cash, and cash grants from foundations, individuals, and government can fund either or both.
To recap: The most important distinction between income and capital is its function. Capital’s main purpose is to create and maintain the platform for vibrant, effective program delivery and to attract income to pay for delivery. And income’s purpose is to cover the cost of program delivery, month in and month out as long as there’s a demand.
Why does any of this matter? It’s because “access to capital” and “access to income” (positive net income in particular) are neither interchangeable nor mutually exclusive. In fact, both are critically important. One does not substitute for the other, and they are not synonymous.
Without income, capital access is irrelevant. And if an organization needs to change and adapt in any way, capital is required along with revenue—never instead of revenue.
Today, given the sector’s two economic imperatives: to cope with the financial crisis and to change, thus accommodating a new economic reality, we need to be savvier than ever to assure effective and vibrant operations. As everyone begins to look for ways to stretch dollars, become more efficient and, in some cases, grow, a crisp and disciplined understanding of enterprise finance—starting with “capital” and “income"—is mandatory.