By Eric D. Turner, CPA, Business Assurance & Advisory Services Senior Manager | Not-for-Profit Team
Fundraising is the lifeline of many nonprofit organizations and a constant discussion point at all levels of the entity. Board members, Directors of Finance, and the development department are all equally interested in knowing just how much revenue has been generated and how much is available to be spent towards the mission. While solicitation of contributions from philanthropic donors often makes up a large segment of total revenue generated by a nonprofit, many organizations are turning to other earned income ventures commonly referred to as social enterprise.
What is Social Enterprise?
Social enterprise is revenue generated from the sale of goods, services rendered, or work performed. A few examples include the Girl Scout’s sale of cookies, renting out event space owned by a nonprofit, hosting workshops, or creating a marketplace employed by a targeted segment of the populations such as those with special needs. While some of the benefits of social enterprise are obvious, others are more subtle. However, that is not to say that established nonprofits should jump head first into this form of generating revenue as there are several factors to consider before setting off on this objective.
Social Enterprise Benefits
The most obvious benefit is that social enterprise can lead to a new and previously untapped source of unrestricted revenue for a nonprofit entity that can be used however deemed fit by the organization without donor restrictions being in place. A more subtle benefit, is that the social enterprise can increase the visibility of the nonprofit and introduce them to new segments of the community that they may not have previously had access. Social enterprise also diversifies not only the revenue stream, but the organization’s public offerings as well. Also, many nonprofits have access to great business leaders and entrepreneurs in the community through their Board of Directors that can serve as a great resource for assistance during the initial stages when tasks like building a business plan are vital.
Planning for Social Enterprise
While the benefits might seem alluring, it is important that any organization considering undertaking a social enterprise only do so after the proper amount of planning has taken place. Starting a social enterprise can be very time consuming due to researching the market, preparing the business plan, and coming up with solid financial projections. Also, the organization may need cash upfront to get the plan up and running depending on the size of the venture as well as a cash cushion on hand to help with unexpected market downturns. More often than not, initial budgeted revenue is overestimated and expenses tend to be underestimated or items like indirect costs may not have been considered at all during the initial budgeting.
It’s important that organizations focus on profit as a key metric instead of revenue generated. With donor solicited funds, an organization might be able to put 85 cents of every dollar straight to mission based objectives. This is because typically the cost for fundraising is relatively small in comparison to the size of donations received. However, the gross margin on social enterprises are going to be much lower. The organization might find this acceptable if the social enterprise is also mission focused and serves the population focus of the organization. If the purpose though is to generate funds that can then in turn be used to support the mission, then it is imperative that there is great enough profit and great enough activity to provide a meaningful amount of funds that the entity can then use towards the mission. Another consideration is that if the social enterprise is not mission focused, then the nonprofit might have to pay taxes for what is known as unrelated business income tax.
With the proper amount of planning, resources devoted, and mentorship, social enterprise can be a valuable resource for nonprofits. However, this must be taken seriously with full commitment from all parties involved and not just seen as a means of easy money. As any entrepreneur can attest, starting a new business is serious work, but the benefits can be abundant.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.