“Top 100 charities see longest fall in voluntary income for 20 years” was the headline in Charity Times in January. Charity Finance Magazine’s 100 Index identifies that for three successive quarters, the overall voluntary income of the largest organisations in the sector has decreased.
This confirms what many CEO’s, finance directors and fundraisers know – that donations are getting harder to raise. A long period of austerity, new opt-in requirements and decreasing public trust in charities contribute to a need for many charities having to look elsewhere to raise funds to keep programmes and services going.
Research suggests that earned income has held up better and it is earned income that many charities have turned to. But even can be challenging as local authority budgets are squeezed and delivering central government contracts can be difficult and high risk.
At the same time, we have seen the rise of social enterprise. The 2017 State of Social Enterprise Report shows a commercially resilient sector outperforming mainstream SMEs when it comes to turnover growth, innovation, business optimism, start-up rates, and diversity in leadership.
I started my first social enterprise, a workers co-operative, 38 years ago. Social enterprise was not a term used then and there were few of them. Now social enterprise is a major part of the UK economy. As consumer awareness of the value of social enterprise grows, it’s not just public services that are now being delivered by social enterprises. In many parts of the UK you can buy most of your food (especially if you are vegetarian), go to a café or restaurant, get your bike fixed, buy your energy and much more from social enterprises.
So, it must seem to many CEO’s and Trustees that with donations falling, it’s time to get into social enterprise as a means of filling their income gap. But is setting up and growing a social enterprise the same as running a successful charity?
In my experience the short answer is no. However, that doesn’t mean that charities can’t set up successful social enterprises. So as someone who has set up five social enterprises (three of them spun out from charities), here are my tips for charities wanting to create successful social enterprises.
1. Do what you already know how to do
Many of the most successful enterprises (social and otherwise) are started by people who are already providing a particular service and can see another market or income stream for it.
This lowers the risk as you understand the business model, probably means that you have an existing network of potential customers and very possibly some organisations that will provide a reference or case study, a vital ingredient of start-up success
If you are a charity seeking to set up a social enterprise, I would recommend starting by looking at your existing portfolio of services and operations and asking whether there is a business opportunity there.
2. You are only an enterprise when you have your first customer
I have typically started social enterprises and other organisations at the point when there was someone clearly identified to pay for our services. The customer could be local authority commissioner or a prime contractor or social investor needing your specialist skills to deliver a major contract.
This approach has been at the heart of the success of local authority spinouts, where a contract is agreed in advance of the creation of the social enterprises, allowing for a managed transition of people from council employers to social entrepreneurs.
Have a look at your existing funders, service users, commissioners and partners and ask whether one of these would be your first customer.
3. Don’t assume charity leaders make great entrepreneurs
There are some excellent examples of charity leaders who have become great entrepreneurs, such as Lord Victor Adebowale.
But the skills of managing or leading a charity are not necessarily those of starting up, growing and making a profit at a social enterprise.
It can be a mistake to assume that someone who has been in a senior role at your charity to run the social enterprise, especially if it is a start-up. Leading a new social enterprise will require passion, hard work, agility, ability to know (and often deliver) every aspect of the business. That isn’t for everyone.
However, it may be that there is someone you are working with in the charity that would be perfect for the role. This happened for me once and the person concerned went on to make the social enterprise a huge success.
4. You need to make profit
Many charities operate at financial break even or aim to create a modest surplus to build reserves. When a charity sets up a social enterprise it typically wants it to make a profit so that this can be given back as tax-free dividends creating vital unrestricted income.
So, your social enterprise will need to create profit. This means that profit targets will be a vital part of business planning and, more importantly, mind-set of the team running this. It takes a certain discipline to prioritise profit making over hiring new staff, buying new equipment and other costs.
At the same time, if your charity wants the social enterprise to grow, you’ll need to let it retain profit to invest in that growth. You should be prepared to do this, especially at the beginning. Having a clear dividend policy that makes it clear what percentage of profit needs to go back to the charity and what percentage is retained for investment in growth can be highly motivating to the
social enterprise and its team.
5. Take a long-term view of success
New enterprises (social or otherwise) typically take time to get off the ground. At least two years is a good benchmark. Everyone involved should recognise that even the most successful social enterprise will need to focus on its own sustainability before it can generate a sustainable profit stream for the charity.
A degree of impatience if often part of the culture of a successful start-up. Impatience to grow the business, to help more people, to create more jobs, to change the world. At the same time, if your charity wants social enterprise to close your fundraising gap, be patient. This can happen if you take a long-term view and recognise that in time a successful social enterprise can provide sustainable unrestricted income for years to come.