When is a social enterprise financially sustainable?
3 keys to financial soundness
Social enterprises are hybrid organizations, living in the intersection between business and social impact. Often innovative, they are cause-driven firms that tackle complex social problems through entrepreneurial means. Among the different challenges a social entrepreneur usually faces, keeping the social enterprise financially sustainable all along its journey probably comes first. But exactly, what do we mean by “financial soundness“? And what are key aspects a social entrepreneur should bear in mind to achieve it?
Financially sustainable social enterprise
According to Bowman (2011), financial sustainability refers to the ability of an organization to maintain financial capacity over time. In other words, it’s all about acquiring, managing and optimizing economic resources to: (1) cover general/recurring costs of operations, (2) seize new opportunities and (3) be able to react to unexpected events (i.e. pandemic, economic crises, etc.).
For most social enterprises finding this balance is a key challenge. As a matter of fact, maintaining financial sustainability over time while pursuing the social impact mission can get quite complex. In the next sections, we briefly introduce the 3 main pillars able to make any social enterprise financially sustainable in the long run.
1. Access to capital
We all know that saying, “it takes money in order to make money”, right? Even though a social enterprise’s first goal is to ignite positive change, money is still the necessary pre-condition to begin running a business. So, social companies need to access capital too.
Regardless of the way it gets funded (i.e. self-funded by the entrepreneur, loan, equity infusion, etc.), a social enterprise should seek easy, inexpensive access to capital at every stage of its life. In fact, being able to minimize the costs of capital is crucial to enhance the chances of being financially sustainable.
We know it, we know it. Most of the times, you probably encountered social enterprises with not-for-profit structures. But don’t get confused here: these companies can still pursue profit-making. What they cannot do, instead, is distributing their profits. In fact, in most countries a social firm can retaining its profits and use them to sustain, develop and even grow its business.
Because of that, being able to make a profit out of the business activities becomes vital, as it’s a way not to end up eroding the capital base.
3. Positive Cash flow
“Do you have enough liquidity on your bank account to pay your bills?”. Cash flow specifically relates to this question, as it is an essential indicator to assess a firm’s flexibility and liquidity.
In fact, some companies might look solid and financially sustainable. Yet, they might be unable to spend a single penny they have on paper. For example, this is what happens when customers are late with paying bills or when a lot of money has gone in inventory. Technically, money are “there”, however they cannot freely be used nor spent. That’s why social enterprises too must seek positive cash flows, in order to be able to pay salaries and expenses, settle debts, return capital to shareholders and so forth.
In this article, we briefly introduced 3 key components to financial sustainability.
First, it is important for social enterprises to get access to inexpensive (or, at least, not-too-expensive) capital, trying to minimize its costs as much as possible. Secondly, they should seek profitability, since profits can be reinvested by the enterprise to further enhance and scale its activities or used as buffer against future financial challenges. Lastly, having a positive cash flow can allow these firms to keep the business up and running.
In conclusion, we believe any aspiring changemaker should bear in mind these concepts when launching a new social enterprise. Do you agree with that? Do you think there are other fundamental components to prioritize? If so, please let us know in the comment section below!
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