Can a Social Business make profit?
Profit and dividend policies for social businesses
The notion of “social business” was first introduced in the late 1980s by Nobel Peace Prize laureate Professor Muhammad Yunus. Ever since then, numbers of organizations across the world began tackling complex social problems through business means. Yet, there is one question frequently asked in this regard: “eventually, can a social business make profit?“. In this article, we provide a concise answer and discuss whether social businesses can be profit-making or not.
“Social Businesses” defined
As discussed in one of our previous articles, we define “social businesses” as those companies trying to tackle and solve societal issues through business-oriented methods. By selling products and/or services, such entities manage to achieve economic and financial sustainability while leading positive change.
We shouldn’t confuse the terms “social business” and “social enterprise” though, as the latter relates to a much broader variety of socially-oriented organizations. As a matter of fact, according to M. Yunus there can be only two types of social businesses:
– Type I : non-loss, non-dividend, socially-oriented companies, in which investors get back only the amounts they first poured into the firm;
– Type II : non-loss, socially-oriented companies owned by the poor, either directly or through a trust fund.
Can a social business make profit?
Having cleared that, it’s now time for the ultimate question: can social businesses actually earn any profit? Well, just in case you missed it, the answer is … YES!
Sure, social businesses strive to overcome poverty or solve complex social problems – not to maximize profit. Yet, such organizations implement business tools and approaches in order be financially sustainable. And eventually, from time to time, they might happen to generate a “surplus“, namely a positive difference between amount earned and amount spent. Definitely not a bad thing in itself, as long as impact creation remains first.
Therefore, it’s important to notice that a social business must not pursue profit-making or dividend distribution as its first goal. Professor M. Yunus provided different reasons why so, the main one being: “when profit and human needs conflict, profit generally wins out“.
However, this doesn’t prevent social businesses from occasionally making profit along their entrepreneurial journeys. When that occurs to happen, the surplus should stay within the company and get reinvested to expand the social benefits provided.
Finally, let’s not forget to mention two cases in which dividend distribution is permitted:
1) Type I social businesses can pay dividends until investors get back their investment amount (with no dividend beyond that thresold);
2)Type II social businesses can always pay dividends, since the money directly flow to the owners (in this case, the poor themselves) and thus directly contribute alleviating poverty.
In this article we discussed what social businesses are and whether they can make profit or not.
At the heart of the social business idea stays social impact, rather than profit-maximization. Thus, for management there is no balancing act involved, since each decision should be oriented towards social value creation rather than profit. Always. Nevertheless, when a social business generates a positive surplus, it should primarily use it to further its social mission, with few exceptions allowed.
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