Business Operations

The Imperative to Grow

Introduction

It often seems that, within the social enterprise movement, “growth” is almost a mantra, a consistent goal. So few ventures feel they have achieved “scale” and “significant social impact” that the objective of growth appears obvious and paramount among other potential objectives. When asked, “When is [profitable] growth the goal of a social enterprise?” practitioners responded with either surprise at someone even asking the question or gave very strong responses such as, “Growth is always good.” The only caveat they offered was the benefit of controlled, rather than unchecked, growth. Today’s social entrepreneurs grow their ventures in the name of both financial viability and social impact.

 

Financial viability

Economies of scale play the same role in driving the growth of social enterprises as they do in the for-profit sector. Simply put, economies of scale mean that as the number of units produced increases, the average unit cost decreases. For example, the same number of employees may be needed to screen print 50 t-shirts as to print 100 t-shirts on the same presses. If so, the average cost per shirt printed is lower on a day when the shop prints 100 shirts. Similarly, if only one truck and driver is needed to pick-up and drop-off anywhere from one to four landscaping teams in a single day, the average transportation cost for each team goes down as the number of teams increases (up to four.) Because of high fixed overhead costs associated with supporting their employees, social enterprises may be even more eager than many private sector companies to spread their costs over a large volume of sales.

Depending on their business, practitioners also cite other typical for-profit factors such as the need to achieve high volume because of low industry profit margins or the need for critical mass to achieve visibility in the market as rationales for growth. Social enterprises also frequently make reference to their nonprofit origins in their desire to achieve financial viability.

 

Social Impact

Social enterprises are equally motivated to grow by a desire to realize their social goals. As long as their businesses are meeting pressing needs in their target population, the leaders of these ventures will fight to grow in order to create more jobs.

The concept of the Social Return On Investment (SROI) also pervades many of the social enterprises. Scale arguments can be as effective when describing positive social outcomes as when describing ‘profit after taxes.’ Organizations recognize the value of creating fifty rather than ten jobs from the same initial capital investment and appreciate the value of leveraging ongoing investments of management time and dedication.

 

Limits of growth

Social enterprise leaders remain remarkably consistent to their origins. Growth is only questioned when it jeopardizes or no longer furthers the organization’s social mission. For example, social enterprise leaders may ask themselves whether they are really meeting their stated goals of “moving youth to their highest potential” or whether their venture simply creates entry-level jobs.

However, growth does present very real dangers to all business enterprises and particular hazards for social enterprises. The lack of key success factors described in the Birth, Survival, and Growth stages can mean suicide when a company continues to grow. As counter-intuitive as it may sound, increasing sales can actually drive down profits. Finally, expanding into new markets and businesses can be very risky

For-profit and nonprofit businesses alike are often able to “sneak by” and continue to grow for a time without adequate infrastructure. Unfortunately, as a venture grows, each of these problems gets magnified and any one of them can drive a company quickly to bankruptcy. Accounting and financial systems are the most common Achilles’ heel of social enterprises, often made even more challenging by accounting processes connected to a parent nonprofit organization. Operational processes that “evolved” to meet the needs of a small start-up business are often cumbersome, expensive and ineffective in a larger organization. And inferior technology that was annoying yet viable on a smaller scale can create real problems as a company grows. Similarly, a manager who “did okay” managing $1 million of sales per year may not have the skills needed to handle a company three times as big and five times as complex.

The single largest concern of ventures planning aggressive growth should be having the cash flow to see them through this stage. As mentioned earlier, insufficient cash flow during a phase of growth is the most common cause of bankruptcy in new businesses. Nonprofits often have experience managing cash flow crunches, but usually rely on the relatively predictable timing of grants and reimbursements and know that a brief reduction in delivery of services, although never desirable, will typically not mean the end to the organization. Business ventures, on the other hand, must typically pay for their raw materials/goods and of ten other expenses long before they receive the revenues for selling their product or services so must have the cash on hand to bridge this less predictable gap. Refusing to spend the requisite amount in inventory can cost the company loyal customers as well as individual sales. Yet because of their nonprofit origins and status, social enterprises rarely have access to all of the financing mechanisms used by their for-profit counterparts. Growth without careful cash flow planning can have severe ramifications.

Growing revenues is relatively easy. Additional profits are much harder to come by. Social enterprises eager to expand must take care that their additional sales add to the bottom line rather than subtract from it. Each business must understand what it costs to serve its current markets and customer segments, then analyze the cost of selling to any proposed new markets and customers. Factors such as a high cost to acquire each new customer, high variable costs of transportation or high customer service usage can actually mean even selling a product or service at the standard price will lead to lower profits. Similarly, a strategy to go after a new customer segment by offering a lower priced product will mean overall reduced margins if the costs to sell this product are not lower as well.

At the same time, growing sales often means expanding the business’ production or sales capacity. However, these kind of fixed costs, such as a new production facility, machine or storefront, can rarely be added in the exact increments as needed. Rather, the business pays the cost for total new capacity even when it may be ready to sell only a few additional units – a risky proposition unless it is sure it can fill the capacity to at least the point where total costs drop down to their pre-expansion levels. Depending on the venture’s ability to fill its capacity, such growth can reduce profits and quickly lead to dramatic losses.

 

Conclusion

Growth often means exploring uncharted territory – new markets, new channels, new customer segments, new products or new businesses. Even with the best of planning and analysis, anytime any organization takes on something new, there is a larger element of risk and less predictability in its success. Social enterprises are no exception. Despite perceived pressure from certain kinds of funders to “do something new,” when they attempt to grow by trying new strategies, ventures run the risk of jeopardizing the health of what they have already established.

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