Many social enterprises operate as programs of a 501(c)(3) nonprofit organization with missions that have led them to start and operate social enterprises. As such, these enterprises are held to a “double bottom-line;” to be successful they must generate revenue (at least enough to cover their costs) and fulfill their social mission. However, the structure of the relationship between the social enterprise and the parent nonprofit can fall into three different types: Integrated, Connected and Divisional.
Identifying all of the additional social costs for a social enterprise is no small task, and depends on how the nonprofit interacts with the enterprise, and how the relationship between the two is structured. To illustrate, we will diagram the structures of our three sample organizations.
Defining our terms in the following diagrams:
- ‘PN’ will denote the parent nonprofit in each case. The parent nonprofit provides oversight of all programs, enterprises and activities run by or under the auspices of the nonprofit, and is headed by an executive team and a board of directors.
- ‘E’ represents a social enterprise run by the nonprofit.
- ‘P’ represents other, more traditional programs run by the nonprofit.
- ‘T’ represents the vocational training element of the nonprofit’s mission. ‘T’ can be either integrated with the operation of the business enterprise, or a wholly separate program.
- “AMM” represents the functions of accounting, MIS and management that are often spread between the organizational entities.
Using these symbols, we can diagram our three sample organizations as follows.
“Integrated” Organizational Structure
In some cases the parent nonprofit’s sole mission is to run small businesses as vehicles to train and employ members of some defined population. This type of enterprise is “Integrated.”
In the above example, a parent nonprofit is operating three businesses, each with integrated training functions. Accounting, MIS, and management for the three businesses are done at the level of the parent organization. In an integrated organization, separate financial statements may be prepared for each business, but are most often all prepared by the same central accounting person or department based on information gathered from the business managers.
In this type of organization, social costs for each business can be found in the consolidated financial statements of the parent nonprofit. All costs of the parent nonprofit are, in effect, social costs to the business, since the parent exists only to perpetuate the social mission of the businesses. While COGS, labor costs, training costs, etc. can be identified for each individual business based on its independent financial statements, the true social costs of the businesses will be found both at the business level and at the level of the parent nonprofit.
“Connected” Organizational Structure
Other parent nonprofits have more broad-based missions, and have multiple programs serving one or more constituencies. One or more of these programs may involve the operation of small businesses, while others may be social service programs independent of the business and serving a client population that may include, but is not limited to, employees of the business(es). This type of enterprise is “Connected.”
In the above example, a parent nonprofit is running one business and several other more traditional social service programs. All vocational training takes place on the job, within the business. Much of the accounting, MIS and management for the business is done within the business itself (though under the guidance of the parent nonprofit), with financial information then being fed to the parent nonprofit’s central system, and integrated with the parent’s reports.
In this type of organization, social costs for each business can be found in the financial statements of the business, as well as in the consolidated financial statements of the parent nonprofit. Unlike the integrated organization, however, not all costs of the parent nonprofit can be considered social costs of the business. Care must be taken to identify the resources of the parent that go to the business, and then to differentiate which of those resources should be considered business costs and which social costs.
A traditional small business, for example, would probably hire an accountant to prepare some amount of financial information. If the business manager handles his or her daily inflows and outflows, but then passes the files to the nonprofit’s accountant for final reporting, the cost of the parent’s accountant should properly be considered a (business) cost of the business. On the other hand, if the development director of the parent nonprofit spends time soliciting donations of subsidy funds for the business, the cost of that person’s time should properly be considered a social cost of the business.
“Divisional” Organizational Structure
A third type of parent nonprofit runs one or more small businesses for employment purposes, but also has a separate program for providing job-readiness and job-skills training to a broader range of individuals. Such an organization may also provide other services to the community and may be labeled as “Divisional.”
In the above example, the parent nonprofit is organized into “divisions,” or quasi-independent programs that operate apart from each other. A primary differentiator for our purposes is that the parent nonprofit operates a workforce training program that is separate from its business, and training is provided to non-employees of the business, as well as to employees and future employees of the business.
As with the connected organizational structure, much of the accounting, MIS and management for the business is done within the business itself (though under the guidance of the parent nonprofit), with financial information then being fed to the parent nonprofit’s central system, and integrated with the parent’s reports. This is also the case for the training program, and may be the case for one or more of the other programs run under the auspices of the parent nonprofit.
In this type of organization, social costs for each business can be found in the financial statements of the business, the financial statements of the training program (assuming that at least some trainees from the program make their way into the business when they finish the training program), and in the consolidated financial statements of the parent nonprofit. Once again it is important to look carefully at the various costs (both social and business) incurred by each division, and by the “umbrella” of the parent. Costs attributable to the business or the enrichment of its employees should be allocated first to the business, and then to either the “business cost” or “social cost” category.