Stage 1: Understanding Social Enterprise
Outcome at the end of this stage: A thorough understanding of what social enterprises are and the implications of starting one.
Audience: Those wanting to know more about social enterprise
Expected time commitment: 1–2 days (read about social enterprise and conduct your own root cause mapping activity)
What is social enterprise?
In the Australian context, because there is no legal structure called social enterprise, we define social enterprise as organisations that:
- are led by an economic, social, cultural, or environmental mission consistent with a public or community benefit;
- trade to fulfil that mission;
- derive a substantial portion of their income from trade; and
- reinvest the majority of their profit/surplus in the fulfilment of their mission.
Social enterprises face all the challenges of small and medium sized businesses with the added challenge of delivering on their social objectives.
The value generated by social enterprises will typically be measured in terms of the achievement of their social, cultural or environmental mission, as well as their financial sustainability. Social enterprises are oriented towards public, or community benefit rather than private financial gain. Such enterprises can take the form of a commercial trading arm of a charity, a community-owned or member-owned business, or a privately owned business set up to achieve a social, cultural or environmental goal.
A successful social enterprise is a good business.
Social enterprises are businesses, as such the terms ‘enterprise’ and ‘business’ are used interchangeably in this guide.
The motivations for social enterprise typically fall into one or more of three broad categories:
Social enterprises can be further classified into different types (although most are hybrids borrowing from two or more types):
- Intermediate Labour Market Companies – businesses that undertake commercial work in order to train, support and employ disadvantaged job seekers and then help them into mainstream jobs.
- Social Firms – businesses that undertake commercial work to create employment for people with a disability.
- Australian Disability Enterprises (Australian Government term) – businesses developed to employ people with a disability who are unable to work in mainstream businesses.
- Cooperatives, Associations and Mutuals – member-benefit businesses, formed to meet defined social needs of members, e.g. childcare, housing.
- Community Enterprises – businesses set up to provide benefits to their local communities, e.g. community buy-outs of local services and facilities.
- Community Development Finance Institutions – financial institutions that provide products and services to individuals, organisations and communities who have difficulty getting mainstream finance.
- Fair Trade Organisations – businesses that exist to benefit producers and workers, usually in developing countries by paying fair prices for products and commodities, which they on-sell in developed countries.
- Charitable Business Ventures – commercial businesses established by charities to generate revenue that is reinvested in their charitable purpose.
Different social enterprise types are suited to particular industries and markets. While employment-motivated social enterprises are often best suit labour-intensive industries, charitable business ventures seek to achieve greatest return on investment so that they can maximise the profit that will be utilised for community benefit.
Social enterprise is not a new phenomenon. The FASES research in 2015 identified 20,000 social enterprises in Australia, and found the sector to be mature, diverse, innovative and sustainable. This number has grown by 37% in five years. Preliminary findings of the FASES research project can be found here.
The Australian social enterprises introduced in the stage two of this guide show the diverse nature of this sector, with its varied motivations, types, industries and locations. In this context, any fixed definition of social enterprise is less important than the ability of individual entrepreneurs and organisations to create the business models that best help them to achieve their goals.
Where non-profits and for-profits meet
Social enterprises share characteristics of business and not-for-profit (NFP) organisations.
- Charitable Organisation
- Mainstream Commercial Business
- Social Enterprise
- Charitable Organisation
- Mainstream Commercial Business
- Social Enterprise
Many social enterprises take critical elements from both organisation types, adopting some unchanged, compromising on some and discarding others. It is tempting to assume that, borrowing so closely from business and the community sector, these enterprises take the best from each, performing better at all levels. However, social enterprises tend to generate a business model that is more difficult to run than community sector organisations or for-profit businesses.
A successful social enterprise is firstly a good business
It is important to remember that profits or surplus from your business are needed to fulfil your social mission. Without profits, a social enterprise is unsustainable. It can no longer generate income to fund its social purpose, employ the people it wants to help, or deliver the services the community needs.
No profit = no mission.
Like mainstream, commercial businesses, social enterprises need to take a long-term view. A social enterprise is not set up to make a finite amount of profit in a set amount of time, it needs to be sustainable over time in order to deliver lasting social outcomes. In this way, social enterprises can become foundations and building blocks for communities.
A social enterprise is different from a charitable organisation in that:
- It is connected to the open market, selling products and/or services to generate profit, and is heavily influenced by changes and opportunities arising in the market.
- The goods and services it produces may be aimed at different people to those it is trying to assist.
- It may mirror a commercial business, except that its profits go toward achieving its social mission.
- To succeed, social enterprises must apply the tools and know-how of their commercial counterparts to their own businesses.
Pathway to financial sustainability for not-for-profit organisations
Social enterprise can be a way for traditional not-for-profit organisations to become financially sustainable. Non-profit organisations typically rely on funding, donations and grants as their main sources of income. Social enterprises can provide more sources of income and greater community benefit, thus helping an organisation achieve its social purpose.
Most of a social enterprise’s income should come from trading. The further a social enterprise is able to move from grant or program support, the more independent and stable it will be. In the long run, the market is more predictable than philanthropy or government grants.
As with any good business, those running a social enterprise need to know the market value of the goods and services they provide, and where they can best “sell” their social benefit. Given the value to government of the goods and services generated by social enterprises, it is important that social enterprises are able to turn this value into income.
Social enterprise and responsible corporations
Commercial businesses exist to make profits for owners and/or shareholders. Social enterprises exist to meet a social purpose. Commercial businesses are increasingly recognising the strategic value of operating in an environmentally and socially responsible manner, as evidenced by the focus on Triple Bottom Line performance and corporate social responsibility. However, environmental and social responsibility by commercial business is not social enterprise. Social enterprises reinvest their profits into their social purpose, sometimes even compromising profits to directly meet a social need.
Profits in a social enterprise
The important question here is not how much profit you make, but what you do with it. Simply taking all your profit and redistributing it can leave you unable to plan for the future. Far from thriving, your business may actually decline over time. Businesses feed on capital and investment – the first call on any profit must be the nourishment of the business.
If the business is ticking over nicely, the question then is how can the profit best meet the social objectives you are trying to address?
The balancing act
The real challenge for social enterprises that deliver social outcomes directly is finding the balance between the social and financial objectives of the business. There is a tension in this social enterprise type between its social and financial aims, and keeping the two in balance is a constant challenge. Sometimes, delivering social outcomes compromises the profitability of a business. Make no mistake, your competitors in the market place are generally not concerned with social needs; they want to win your market share and maximise their financial returns. While you are committed and passionate about your social objectives, it is critical to establish a solid market and business platform at the outset to ensure the enterprise is viable and capable of delivering your social mission. This ensures that your enterprise is sustainable in the long term in order to deliver social outcomes.
The costs and benefits of social outcomes in social enterprise
The heart and soul of all social enterprises is the social mission that they trade to achieve. The challenge they face is to find opportunities in the market place that will allow them to achieve this goal. This is no small feat given that many mainstream businesses are unable to achieve financial sustainability.
While many social enterprises find that their social purpose reduces their profitability, some can succeed where conventional business models have failed. Understanding the impact of the social mission is central to running a successful social enterprise. This section looks at the costs and benefits to social enterprises of having a mission focus.
Sometimes a social enterprise can find an opening in the market place that commercial businesses might hesitate to enter. Such opportunities often occur where there has been market failure or in markets where private businesses choose not to operate because there is not enough profit.
Sometimes, the social element enhances the experience
The Big Issue is a social enterprise that promotes social inclusion and works to alleviate poverty in Australia. The Big Issue raises awareness about homelessness by having magazine sellers (participants in its programs) who come from backgrounds that may include mental illness, homelessness, long-term unemployment, intellectual and physical disability, drug and alcohol dependency, family breakdown and social isolation. Every customer comes face-to-face with homelessness each time they buy a copy. Without this direct engagement, The Big Issue would just be another well-written publication with a small circulation.
Aggregated demand driven by needs
Consumer cooperatives work on the principle of aggregating or pooling demand or supply to achieve better individual and community outcomes, whether for a childcare centre, housing association or organic food scheme.
When the only petrol station in Yackandandah closed in 2001, residents faced a 40-minute round trip to the nearest supplier. It looked like the beginning of the end for this small town on the border of NSW and Victoria, but community activists came together to buy the petrol station and maintain it using volunteer labour. Watch this video to hear their story.
Social purchasing and procurement can open new markets
There are many institutional and individual buyers who would like to support businesses with a social purpose. Government departments, for example, deliver some goods and services directly and procure many more. Governments exist for public benefit and to improve the quality of life of every member of the community. Engaged government departments are now looking at ways of buying from social enterprises to better achieve these goals.
Social Traders’ Connect program does just that – we connect buyers from corporate and government to social enterprises. Read more about Connect here.
The impact of social mission on costs
Most conventional commercial businesses focus on maximising revenue and minimising costs in order to increase their profits. Social enterprises adopt the same approach, but some, in order to achieve their social mission, will take on costs that conventional businesses do not.
For example, the ‘employment and engagement’ motivated social enterprises have significant additional operating costs beyond their competitors’. Their challenge is to operate an enterprise that is both financially and socially sustainable.
Employment and engagement challenges
Fair trade products, whether handicrafts or commodities such as bananas, coffee and sugar, typically have a higher cost due to fair, non-exploitative wages being paid to the producers and/or manufacturers. Businesses that offer fair trade products often incur a higher unit cost than do competitors offering non-fair trade products.
There are customers who seek out and are prepared to pay more for fair trade products, but often sellers of fair trade products have to price at the same levels as non-fair trade competitors, therefore reducing their profit margins.
Employment of those disengaged from the labour market
With its focus on employing people otherwise unable to obtain work, this type of social enterprise faces a complex array of factors leading to increased costs. For every new member of staff coming from the target group there are:
- recruitment costs – the time required to find and employ staff;
- training costs – paid staff time required for training, and the cost of delivering training.
Both these costs can become particularly high in businesses that move staff through social enterprises into mainstream jobs. Other costs are:
- productivity deficit costs – staff are unskilled and may be facing other impediments to full productivity when they arrive in the business; there will be a cost to the business until these staff are fully productive;
- personal support costs – some trainees will have personal issues that may affect their work ability. Some social enterprises invest in additional support to help trainees address these issues; others invest in management structures that can provide the required support.
These costs are significant and – if you are moving staff out into the mainstream, or dealing with a particularly disadvantaged cohort, such as those with a disability – can be ongoing.
The bottom line
Contrasting a conventional business with a social enterprise helps show the impact of the social mission on the business model. Take, for example, a social enterprise operating in the cleaning industry that draws 80% of its workforce from the long term unemployed. This is a common industry for social enterprises delivering training and employment because the skill requirements are relatively low.
Cleaning Business – conventional
Cleaning Business – employment-motivated social enterprise
Cost of wages
(The cost of wages incorporates recruitment, training, and productivity differences)
(@ $60,000 each)
(@ $60,000 each)
9 unskilled workers
(@ $40,000 each)
Cost of materials
Cost of overheads and equipment
In raw figures, the costs are $200,000 (25%) greater in the social enterprise than in the conventional cleaning business undertaking the same work. The revenues in the social enterprise are $30,000 (3%) greater than for a conventional business that chooses to employ skilled workers. The conventional business generates a profit of $170,000 more than the social enterprise. The social enterprise profits are 2% of income, while the conventional business profits are 20% of income.
The numbers don’t always come out as favourably as this neat example suggests; some social enterprises run losses because:
- the costs of their social mission exceed their revenue;
- they are badly run businesses; or,
- they are based on poor business ideas.
Wage subsidies are available to any employer (profit and not-for profit) who recruits highly disadvantaged job seekers through various sources, some of these subsidies include:
- Australian Apprenticeships Centre – compensation while trainees undertake traineeships
- Disability Employment Services – encouraging employers to provide sustainable employment to workers with disabilities.
- Jobactive – Australian Government’s national employment services.
Additionally, employers can access another layer of subsidies available for indigenous people from the sources above. The implication for enterprises is that subsidies should be included in the business plan and financial statements as an income stream, particularly for employment based social enterprises.
How could this model be made more profitable?
Reducing costs relative to revenue is the most effective way of increasing profits. The best way of reducing costs is to reduce the actions that are generating costs. In the case of the social enterprise example above, this would involve taking on less unskilled labour with complex needs, and employing relatively more skilled staff on an ongoing basis. This might mean less social benefit in the short term but it might also add to long-term sustainability.
Take a long-term view
Central to the social enterprise paradigm is the move from high-impact, short-term programs, thirsty for funding, common in the NFP sector, to long-term, sustainable businesses that deliver social outcomes year on year. To be around in 25 years a business needs solid financial footings. This means running healthy surpluses to provide security and fund growth that will, in turn, lead to more employment opportunities.
Many social enterprises use volunteers as part of their business model (most opportunity shops, for example, rely on volunteers for their profits). In this model, volunteers can provide mentoring or social support; or help with marketing, sales and even tender writing.
That said, managing volunteers sometimes requires as much labour as the volunteers provide. Taking on volunteers requires all the due diligence involved in taking on other staff.
Other potential risks of relying on volunteers include:
- Inconsistent workforce – Volunteers are not bound by work contracts, and can be more likely to walk away from a position or task than a paid employee. The productivity and quality of volunteer work may also be inconsistent, causing possible bottlenecks within your business.
- Mismatch of skills – Volunteers may not possess the specific skills you are looking for to complete the tasks required by your organisation.
- Management of volunteer time – Many social enterprise managers need a dedicated volunteer coordinator as volunteer management can be time-consuming and takes them away from running the enterprise.
It is possible that the business could be more successful if larger. Businesses can benefit from economies of scale, in which a large output increases profit because fixed costs are being spread across a greater number of units of output, resulting in a higher profit margin. An enterprise can also benefit from a higher volume of trade when profit margins can be maintained while delivering more social outcomes.
Understanding industries that suit social enterprise types
These social enterprises typically emerge when the private sector ceases to provide a desired service or fails to respond to emerging needs in a community. They are typically quite commercial in orientation, identifying new issues or fresh approaches to ailing business models. Most commonly, they aggregate demand to build businesses that will provide needed goods or services, such as childcare centres, fruit and vegetable co-ops, community banking, community telecommunications, community power, pubs, petrol stations, post offices, laundromats, aged care services, housing cooperatives and opportunity shops.
These enterprises can also play a key role in re-imagining existing services. This might include taking a security service on a public housing estate, previously delivered by a commercial provider, and running it as a social enterprise that responds to the needs of the community. Another example would be the role of government reform in opening new opportunities for social enterprises to deliver services in health, housing or education and training.
These types of social enterprises are usually, but not exclusively, service sector social enterprises. St. Luke’s Innovative Resources in Bendigo built a social enterprise around the need for tailored social work tools and now exports its products to 25 countries.
Due to their dual focus on pathways to work and commercial returns, employment-motivated social enterprises are best suited to industries with the following characteristics:
- Labour intensive – the business needs a large labour force to effectively meet its social objectives of employment creation.
- Quick skills acquisition – the longer it takes to train staff, the greater the costs incurred by the business, and the greater the likelihood of running deficits.
- Skill shortages and clear pathways to employment – the skills developed need to be appropriate to industries where there are skill shortages so that employees / trainees can be provided with an employment pathway.
Employment-motivated enterprises are not suited to industries or sectors where earning capacity is directly linked to productivity, or where work flows vary.
Charitable trading arms
These businesses are located squarely in the commercial market place and use standard financial indicators such as return on investment, profit margin, etc. to measure success. These businesses are resources that support an organisation’s mission, and operate in fields where profits can be generated without undermining the charity’s social purpose.
Activity: Root Cause Mapping
The first activity in this guide is to get you to think about the root cause of issues that you are passionate about. A root cause is the issue that other issues stem from.
There are many factors that contribute to the complexity of social issues within a community. Often, the issues are related and the causal relationship between issues is unclear. For example, homelessness may be a pressing issue within a community, but homelessness might be caused by some other problem such as addictions or even the lack of housing supply.