Social enterprise finance is about sustainability. It is about creating the right mission-money balance for your organization and managing this to both meet and exceed financial expectations and impact people’s lives. This article will help you understand what is unique about social enterprise finance and set financial goals and sustainability standards with the goal of setting up your financial structure to support your financial sustainability goals.
Social enterprise finance is unique
As in many areas, social enterprise finance is unique. The concepts of social costs and the relationship with a parent agency make social enterprise finance different than that of a traditional for-profit business.
Social costs are costs that are incurred by a social enterprise above and beyond ordinary business costs in order to fulfill its mission. A cost is a “social cost” if it is incurred to accomplish a social mission. A cost is a “business cost” if it is incurred by a similar for-profit business in the same industry. If all social costs are taken out, the remaining cost structure should be comparable to a for-profit business in the same industry.
If you have a parent organization to which you are affiliated, the social enterprise finance should be separate from agency finance to better monitor the business. However, the parent organization must be closely integrated into the finance and operations of the social enterprise, with the social enterprise finance rolling up into the financials of the Agency. If you have a relationship with a parent agency, then some of your financials may be reflected in the parent agency’s statements.
Setting financial goals
Many think goals should be centered around profitability. While this is the ultimate goal of all enterprises, for social enterprises, financial sustainability is a more realistic goal. Your financial goals should be tied to what it means to be financially sustainable to your organization. What is the difference between profitability and financial sustainability?
Profitability is consistently producing a monetary surplus from sales of goods and services after removing business and operating expenses. On the other hand, sustainability is maintaining a reliable recurring revenue stream to cover expenses and achieving financial results that are consistent with the expectations of the organization.
Your financial goal should be to achieve financial sustainability, which is a standard unique to your organization’s expectations and structure.
Your path to financial sustainability begins at social enterprise inception and must be consistent across all aspects of your business plan. Find sustainability standards that fit your organization’s structure and expectations.
Make sure your goals are specific and attainable. You may adjust your goals throughout the process, however, be aware of changing your goals to be easier for you to attain.
Once you have your financial sustainability standards in place, make sure you have the right structure in place to help you achieve financial sustainability. You should set up your financial structure to support your financial sustainability goals
What do you need to have in place to help your social enterprise be financially sound?
- Roles & Responsibilities: Defines who is involved in the tracking and monitoring of financial progress
- Income Statement: Tracks your profit or loss and is used for social cost analysis and double bottom line accounting
- Balance Sheet: Indicates what the social enterprise owns and owes; social enterprises that are agency subsidiaries do not usually have their own balance sheet, rather it is a line item on the agency’s balance sheet
- Cash Flow Projections: Helps a social enterprise determine the cash they need on hand in order to either maintain or grow the business and social aspects of their enterprise
Now that you understand what is unique about social enterprise finance you can set financial goals and sustainability standards with the goal of setting up your financial structure to support your financial sustainability goals. Once you have these structures in place, you can begin calculating your social costs – a critical activity for social enterprises.