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TYPES OF SOCIAL ENTERPRISE
Social enterprises exist within the spirit of social and community impact, creative thinking, decisiveness, innovation, resilience and fortitude, and persistence. Therefore, there can be various types of social enterprises. Some of the most common types are:
Small-business entities: An independently owned entity with limited investment that engages in trade activities primarily with local clients or customers. Examples would include a grocery store, a coffee or sandwich shop, a retail store that sells used items, or a repair shop.
Co-operative: Organization created through voluntary and open membership and managed by members to achieve a social or community purpose (e.g., fair trade).
Social firm: Business created to help disadvantaged people in the labor market find employment.
Credit union: Helps members save and borrow money.
Trading arm to charity: Engages in trading activities to raise money for a charity (e.g., charity shop, thrift stores, catalogues, training & consultancy).
Public sector spin-outs: Delivers services that were once provided by public sector organizations.
SOCIAL ENTERPRISE DEVELOPMENT FRAMEWORK
The development of a social enterprise should include the following generic steps outlined in Figure 13.2: need statement, purpose statement, organizational readiness, identity and legality, business plan, start-up and implementation, management, and evaluation and growth.
FIGURE 13.2 Social enterprise development framework.
The need statement describes the vision, mission, and the target population of a nonprofit organization, as well as the needs that the organization is meeting through its current activities. Further, the needs statement describes the limitations of the current stream of funding to continue to support current activities in a sustainable manner. The need statement also outlines several funding approaches and their limitations or reliability, and justifies why the starting of a social enterprise is an effective option to generate income to support organizational programs and services.
The purpose statement describes the earned income business activity or strategy that the organization will implement in order to have specific social impact. For example, it can be something like, "Start a local green restaurant in order to generate income that can help homeless youth in Boston achieve economic self-sufficiency."
A social enterprise is not a nonprofit activity. It is not a traditional business activity either. It is a combination of the two. Therefore, it requires different attitudes and dispositions from a nonprofit organization. There should be an assessment of the organizational understanding of the nature of a social enterprise, its ability (i.e., governance, management, financial), readiness, willingness, and commitment to invest in such new endeavors. The readiness assessment should also include elements of a SWOT (strengths, weaknesses, opportunities, threats) analysis in relation to the creation of a social enterprise.
Identity and Legal Issues
Identity refers to the type of social enterprise that will be created, and the necessary legal requirements it must satisfy. For example, as a business, a social enterprise will apply for local and state business licenses, and will be required to pay sales taxes.
As indicated earlier, a social enterprise is a business. Like any new business, it requires the development of a business plan. A business plan is a written document that describes the nature, goals and objectives, and operations of a new business. Generically, a business plan includes:
- Cover sheet
- Table of contents
- Business identification
- Executive summary
- Description or profile of the business
- Description of product(s)/ service(s)
- Market analysis
- Competitive situation
- Marketing and sales strategies
- Operations management
- Action plan
- Financial framework
Cover sheet: The cover sheet includes the following information:
- The name of the business
- The label "BUSINESS PLAN"
- The date
- The contact person (name, title, address, telephone, fax, e-mail)
Table of contents: The table of contents presents the chapters, sections, or subsections of the business plan, and the page numbers used to find them.
Business identification: The business identification section presents:
- The name of the business
- The business EIN (Employer Identification Number)
- The business address, telephone and fax numbers
- Owners of the business and contact addresses
- Possibly other people involved in the business (accountant, attorney, insurance ...) and their addresses
Executive summary: The executive summary is an overview of the business plan and synthesizes the vision and the mission of the business, the goal(s) and objectives, the strategies and capitalization needed to achieve the goals and objectives, and the potential capability of the business to make a profit. The executive summary should be no more than one page.
Vision-Mission-Goals-Objectives: The vision statement describes what the business aspires to become. The mission statement describes the purpose, client, and the products or services that the business will offer. The goals describe the main targets or benchmarks related to products and services that the business will offer. The objectives describe short-term targets that will accumulate to achieve the goals, which are long-term targets.
Description or profile of the business: The description or profile of the business describes:
- The precise nature of the business
- Whether this is a new business or the purchase of an existing business, or a franchise, or other
- Whether it is a seasonal or year-round business
- Whether there is any contract or agreement or not
- The vendors, suppliers, outside contractors (if any)
- The operational procedures
- The local and national economic trends that influence the business, and how the organization owning the business will deal with them
- Any other relevant information that can help better understand the profile of the business
Description of product(s)/ service(s): This section explains all relevant information about products or services, describes what makes the product or service unique, the tests or approvals that they passed, and the guarantee that will be promised to customers.
Market analysis: The market analysis section describes the demographic, economic, and social profiles of the clients that are most in need of the products or services. Further, it includes the identification of all competitors, their strengths and weaknesses, and strategies to compete with them.
Competitive situation: This section identifies the local and national trends that may affect the business, and strategies to address these trends.
Marketing and sales strategies: This section is about the marketing and sales strategies that will be used to reach clients or customers.
Operations management: The operations management section describes the administration and the conduct of regular activities related to running the business. It also includes the people involved in decision making and the implementation process of production or service delivery.
Action plan: The action plan details the steps or benchmarks that will help implement the business plan.
Financial framework: The financial framework includes:
- Capital requirements
- Depreciable assets
- Sales forecast
- Pro-forma balance sheet
- Projected income statements
- Cash-flow projections and analysis
- Break-even analysis
Capital requirements: The capital requirements concern the money needed to start the business. This is basically a budget of investment. The capital requirements include all the start-up expenses and working capital.
Depreciable assets: Depreciable assets are all assets of the business that depreciate over a period of time. For example, when you purchase a copier, you have a depreciable asset that helps you run your business. There is an initial cost for the copy machine, which is the price of purchase. But, once you start using this asset, it loses some value until it becomes useless. This deterioration in value of an asset (real estate may go up in value) is called depreciation. In accounting, depreciation is considered as an expense. The most common depreciation method is called straight-line depreciation. It consists of:
- Identifying the initial cost of the asset
- Estimating how many years you think the asset will have some value for your business
- Dividing the initial cost by the number of years
In other words,
Depreciation = Initial cost + Estimated asset lifetime Figure 13.4 offers an example of depreciation for a $40,000.00 copier machine.
FIGURE 13.4 Sample straight-line depreciation.
Sales forecast: Sales forecasting is the process of estimating sales volume, expenses, and projected profits for the first 5 years of a business.
Projected income statements or profit-and-loss statement: The projected income statement or profit-and-loss statement is an estimation of income and expenses of the business within a period of time, which can be 3 to 5 years. The projected income statement includes:
- Sales: Net sales in dollars (or currency).
Direct cost of sales or cost of goods sold: Cost of products or services that you have sold.
- Gross margin or gross profit: Sales less cost of goods sold.
Selling expenses: Sales salaries, advertising, delivery expenses, bad debt expenses, credit card fees, and other similar selling expenses.
- Administrative expenses: Salaries, utilities, depreciation, rent, building services, insurance, phone, and other similar administrative expenses.
- Operating expenses: Costs of goods sold plus selling and administrative expenses.
- Profit before tax: Sales less operating costs.
- EBITDA: Earnings before interest, tax, depreciation and amortization.
- Net profit: Profit before taxes less taxes.
Cash-flow projections: The cash-flow projection displays inflows and outflows of cash in the business within a period of time, which can be 12 to 36 months or even more. The cash-flow projection concerns the net income of the business. In other words, it deals only with actual cash transactions. It shows the amount of cash needed to operate the business over time and when there will be positive cash flow. The cash-flow projection includes:
- Starting cash: The amount of cash you start with.
- Cash disbursement: Receivables from sales of products or services and possibly from other sources.
- Cash uses: Includes costs of goods sold, operating expenses, income tax, and so forth.
- Ending cash: This refers to the cash in hand at the end of the period. Except for the first month, the ending cash of a period is the starting cash for the following period. See Chapter 9 for an example of a statement of cash flow.
Pro-forma balance sheet: The pro-forma balance sheet is a projected balance sheet that shows the distribution of the assets, liabilities, and equity of the business at a given point in time.
- Assets: This includes current assets (cash, accounts receivable, notes receivable, prepaid expenses, inventories, and any other item convertible in cash within 1 year in the normal course of business), fixed assets or long-term assets (land, buildings, equipments, vehicles, leasehold improvement, machinery, and any other item with estimated useful life measured in years), and other assets (deposit on a franchise, preopening expenses, etc.). Liabilities and owner's equity: This includes current liabilities (debts and obligations that will be paid within 1 year, such as accounts payable, notes payable, taxes payable, salaries), long-term liabilities (debts and obligations due in more than 1 year, such as mortgages, equipment loans, bank loans, etc.), and owner's equity (initial investment, retained earnings, common stock, etc.).
Appendices: The appendices include all documents that can illustrate or help support assertions made in the body of the business plan. For example, appendices can include legal (e.g., legal registration), financial (e.g., audit, copy of 990 form, bank statements), and administrative documentation (e.g., organizational structures, letter of support, resumes of key personal).
Start-up and Implementation
Start-up and implementation are the translation into actions of all the ideas described in the business plan. The start-up includes decisions and activities to satisfy all the legal requirements for the social enterprise, secure the location of the business, purchase equipment, hire staff to run the social enterprise, design the service delivery system, and implement marketing strategies to attract customers.
Management of a social enterprise includes all aspects of ongoing planning, operating, monitoring, and making managerial decisions so that the business can generate profit that can be used for the purpose for which the social enterprise was created.
Evaluation and Growth
Performance measurement is a key to the success of a social enterprise. Performance measurement should be at the center of financial and human resource management, as well as the relationship with customers. Effective performance assessment though evaluation frameworks and tools will provide data that can be used for the growth and sustainability of a social enterprise.