Social Enterprise: To profit or not to profit?
Richard Cobbett, Assessment and Compliance Manager at Social Enterprise Mark, discusses the value of social enterprises getting comfortable with expressing their approach to profit generation and investment.
Arguably, what principally distinguishes a social enterprise from other forms of commercial enterprise – including other types of 'social business' – is the commitment to distributing the majority of profits generated towards social purposes. So why is it that some social enterprises take pride in the label of being “not for profit” organisations?
The label can be as misleading as it is helpful, sometimes seeing social enterprises written off as unviable businesses, not worthy of support and investment because they are deemed to be 'uncommercial'.
One possible reason for this is that the social enterprise model of profit distribution is mistakenly believed to prevent a business from investing in its commercial success, therefore making it less viable. But this is false: a social enterprise can retain and use profits to sustain, develop or grow the business. If there are additional profits beyond this available for distribution, dedicating them to social purposes, rather than individual investors, does not make social enterprises any less commercial.
The reality is that a social enterprise should operate along the lines of any other form of business. A social enterprise is committed to pursuing commercial success through trading, but it does so in support of its social objectives and to maximise its potential to generate social benefit.
The sustainability of a social enterprise and its ability to maximise social outcomes is therefore dependent on it being commercially successful – in it being profitable. The more profitable a social enterprise is, the more it can invest in activities and resources that create social benefit. But on a more vital level, being a profitable business means a social enterprise can continue to exist and fulfil its social purposes in the long term.
Some social enterprises may justifiably argue that their in-year expenditure represents an investment in social purposes that has resulted in a deliberate suppression of profits. Furthermore, in doing so they have avoided corporation tax and have therefore been able to invest more in their social purposes. Just because they resourcefully managed their income in a cost-effective fashion within the business year does not necessarily mean the business is unprofitable.
This leaves the question, does being a profitable business mean a social enterprise has to show consistent profits each year? Although this is a more immediately transparent indicator of commercial success and viability, it is by no means the only one.
The social enterprise commitment to profit distribution should take into consideration its ongoing expenditure and investment, both in terms of how these show fulfilment of social purposes as well as actions to remain commercially viable.
But how a social enterprise actually demonstrates its primary commitment to investing in the achievement of social purposes is much more of an organic process; there is rarely a neat equation of “x profits from last year = y social output this year”.
The model in which a social enterprise spends all it earns does not necessarily mean they are either unprofitable or failing to maximise their social output. They may instead be maximising it through the application of income that could have turned into potential profit.
How a social enterprise reviews and reports on such matters to stakeholders and communities of interest becomes significant in being able to show transparency of action in line with stated purpose and principles of operation. At the very least, it represents good practice for social enterprises to aspire to this.
It is fair to say that approaches to social impact reporting amongst Social Enterprise Mark holders are mixed (which is likely a fair reflection of the sector in general). Most social enterprises just take for granted that income and profits simply carry on sustaining their general social mission. But highlighting key areas of expenditure and investment does not have to be a costly or time-consuming exercise. It shows a willingness to explain such matters – which a social enterprise can then be held accountable to.
Our observations of how Social Enterprise Mark Holders report their social impact suggest three broad approaches to how they are investing profits into maximising this:
1. Service enhancements
These are investments which go above and beyond service delivery requirements and expectations – ones that add value or reinforce the capability to deliver social outputs (either delivering more, or delivering them “better”).
This can include:
- Additional infrastructure serving stakeholder needs
- Tools/equipment and similar resources employed in support of stakeholder needs
- Recruitment or training of people that is not recognisably a service requirement or expectation, but which adds to and/or improves the quality of social output
2. Delivering free or subsidised outputs
These are investments which show how social enterprises deliver more social outputs. This may take the form of:
- Pro-bono work
- Outputs or outcomes in excess of contracted amounts (that are therefore unpaid)
- Providing subsidised or free products, resources or materials, that may typically form part of a costed and paid-for service (or go beyond what this usually involves)
3. Altruistic contributions
This is most commonly financial and therefore more easily quantifiable – donations to charities, community groups and projects that support wider social or community needs. But it also encompasses other types of resource contribution. For example:
- The free use of company resources, loans or donations of other properties, in support of social or community needs (premises space; equipment; other materials or usable assets)
- Allowing employees to volunteer in the community, or do fund-raising on paid time
- Sponsorship (this may not be entirely altruistic as it involves a promotional benefit but the financial contribution could be well in excess of the value this has)
There is much to be gained by raising public understanding of social enterprise as a viable commercial business model that generates income and profits, primarily in service of public benefit – not simply as not-for-profit institutions. Dare I say it… social enterprise is a model through which capitalism can be “re-booted”: inherently hardwired to benefit society, not just as side-benefit to the “for individual and commercial profit” motivations of shareholders and owners, but as a primary socio-economic purpose.
Given the right focus and support, social enterprise can be the harbinger of lasting social change and an alternative way of doing business. If social enterprises were to get better at shaping the conversation in these terms, it means they are more actively playing to strengths they can use when convincing others to support and do business with them.
Maybe this is an idealistic pipedream. But if social enterprises were to get better at shaping the conversation in these terms, it means they are more actively playing to strengths they can use when convincing others to support and do business with them. These arguments are bolstered by a willingness to stand up to external scrutiny of such claims, and achieving recognition for how they live up to them. This is why the Social Enterprise Mark exists. Through accreditations that define standards of good and best practice, Social Enterprise Mark CIC provides social enterprises of all shapes and sizes with a platform from which to build and better communicate what they are.