The risk of not focusing on profit in your social enterprise
By Kat Luckock, Founder of Share Impact
This is the second in a series of posts Kat has written specially for our guest blog.
It’s true that balancing social and environmental priorities with commercial and financial requirements of a social enterprise is a challenge we all face as social entrepreneurs. However, what I’ve noticed, and increasingly been surprised by, in many quarters of the social enterprise sector is a resistance to talking about and focussing on finance, income strategies and profit to the detriment of many organisations’ success.
This seems especially the case for early-stage social enterprises or those who haven’t received external support or backing from investors. In my experience a commitment to ‘doing good’ often gets in the way of prioritising a strategy to generating reliable income. And for many early stage solopreneurs with social or environmental aims, confusion about whether profit is allowed or the conflation of making profit with being wealthy sits very uncomfortably.
“Profit in and of itself cannot be seen as a dirty concept. Rather it should be understood that it’s the choice of how to spend or invest that profit that differentiates a social enterprise with other types of business.”
I suppose it does take a particular type of person to set up a business which doesn’t allow for personal profit or shareholder returns (at least not without limits). More often than not it’s about being able to do a job that’s aligned to one’s values and commitment to make a difference on an issue they care deeply about.
The risk however is that those of us working in the sector conflate the issue of limiting personal/shareholder profit with the need to create organisational profit. The difference being that organisational profit can be used to deepen or scale the powerful social or environmental impact the organisation was set up to achieve, rather than line the private pockets of individual shareholders.
Profit in and of itself cannot be seen as a dirty concept. Rather it should be understood that it’s the choice of how to spend or invest that profit that differentiates a social enterprise with other types of business. As such, it seems essential to me, as a social entrepreneur, to focus on both: delivering the social / environmental impact and creating a robust income strategy to enable it.
Where income and finance are not taken seriously the impact is limited and the social enterprises themselves struggle to continue at all or become dependent on increasingly constrained grant funding (with all its restrictions and limited timescales). This in turn hinders the sector as a whole and limits our collective opportunity to demonstrate the difference social enterprise can make to challenging the status quo (and those we compete with on a global scale), not doing business as usual, and most importantly tackling global inequality and environmental degradation.
A secondary symptom of not focussing on wealth generation (within a social enterprise) is individuals working more hours for less income; reduced competitiveness to attract the best people for roles; lack of investment in training and development; and limited research and development for innovation or expansion in to new markets.
Without profit we limit the possibility of the social sector to expand and challenge “business as usual” to the detriment of people and planet.
To conclude I want to share three reasons why getting more comfortable with generating profit is beneficial to your social enterprise:
1) It enables sustainability
With an operating profit you know you have reserves to take you into the next financial year. Consistent profits and sustainable income also allow you to plan more than 6-12 months down the line. Being able to create a strategy of what you want to achieve that extends 2-5 years in to the future helps you make big decisions and move your business forward.
2) It enables space for research, innovation and development (note how I didn’t say growth)
With profit you can choose to invest in the areas of the business that are struggling or new areas you want to develop and expand in to. Without an operating profit it’s very difficult to find money to invest in the development of your business and harness potential opportunities in the market place. Notably this isn’t always about growth or scaling the impact but could be about improving your service, developing products or simply deepening the impact you have by being able to invest more in your social or environmental cause.
3) It increases opportunity for investment
As someone who is no expert in investment this is just an assumption, but it is my understanding that an investor or funder is always going to look more favourably on a social enterprise that is able to demonstrate how it will maintain a sustainable income and generate a profit beyond the term of their investment.
On the whole, as I understand it, investors and funders want to help organisations start, get to the next stage or innovate something new (for profit or impact) but they don’t want to fund you indefinitely. They want to know their investment or grant will pump-prime your initiative and allow you to maintain operations afterwards – so they can see a return on investment and celebrate your success with you. So planning for profit and setting this out in your proposal will give them more confidence that it’s possible to happen.
Kat Luckock is an Impact Strategist & Business Coach for social entrepreneurs and ethical retailers. She specialises in helping businesses measure and communicate their social and environmental impact to stakeholders and customers so they can build communities of support and increase sales and income.
Kat works with social entrepreneurs all over the world and is excited to write a series of posts for the Social Enterprise Mark blog throughout September. To find out more about Kat visit the Share Impact website.
