Financial sustainability in social entrepreneurial organizations

Marketing for social entrepreneurship
18.02.2020
Leadership in social entrepreneurship
18.02.2020

Content

  1. Financial sustainability of the social enterprises
  2. Sources of funding
  3. Types of funding
  4. Business risk
  5. Activities for readers
  6. References

Financial sustainability of the social enterprises

The financial viability is of an important consideration, since without funding, the social enterprise won’t be able to produce the desired outcome. As we have already discussed, profitability is not the goal of the social enterprise, but is a necessary condition for its sustainability on the market, so the company should be aiming at both: better financial outcome, and more social impact. Since the social enterprise is not a charitable organization, it should do its best to provide for its needs and to cover its costs of operations though production and sale of goods and services. Very often however, in order to reach the target audience and have more social impact, the SE needs to price its products/services very cheaply and even distribute them for free to those who won’t be able to acquire them otherwise. This obviously will jeopardize the company’s financial stability in a long run. That is why the success of the social enterprise depends to a great extent on the resourcefulness of the management to find funding and to ensure that the company will be able to continue its operation and to create the impact it is destined to.

Sources of funding

When searching for additional funding, the social company may consider one (or several) of the following sources:

1. Governments

Government structures (Ministries, Agencies, Committees etc.) provide funds for research and development in specific subject areas and funding for new ventures. Research funds ususally benefits universities and research institutions but the social enterprises could also profit from them in collaboration with a bigger educataional organziation for joint projects.

Government agencies may also provide start-up funds and other resources to encourage new ventures, whether commercial or social or both. The focus here is usually on the innovations or regional development.

It is possible to receive funding even from foreign governments through their international aid agen¬cies. Some countries have special agencies specialized at international develop¬ment. A few examples include JICA, DANIDA, SIDA, and Norad (agencies in Japan, Denmark, Sweden, and Norway, respectively).

2. International organizations

Beyond the resources provided by individual governments in their home countries or abroad, there are international organizations that bring together funds from multiple governments around the world to specific causes. For this reason, they are also often referred to as intergovernmental agencies. The World Bank, UN and EU agencies are among the largest and most well-known exam¬ples. While these funding institutions often finance large-scale private-sector enterprises, they increasingly are supporting initiatives to foster social entrepre¬neurship in emerging markets all over the world. International cooperation often involves partnering with local actors such as social entrepreneurs (Chahine, 2016).

3. NGOs (Non-governmental organizations)

NGOs include any private association organized by individuals who have a common purpose. NGOs can either implement their own programs, products, and services or they can provide funding to other organizations (including SEs) to help fulfill their mission.

4. Foundations

Foundation a nonprofit organization (type of NGO) which is formed for the purpose of funding and sup¬porting other organizations/ individuals. Foundations usually focuses on philanthropy, the practice of promoting and supporting social welfare. Some foundations are formed by rich and generous people such as Rockefeller, Gates, Clinton etc., others have branched from big corporations as part of their CSR policy such as Pepsi, Starbucks, Nike, Shell, and Unilever Foundations.

5. Investment Funds

Investment funds can be private or public, profit driven, or nonprofit. Investment funds are made of individuals, organizations or banking institutions. Venture capital firms are also a sort of investment funds that provide funding for potentially successful start-ups.

6. Individuals

Individuals could be a source of funding that is especially important for the early stage of development or the startup of the social enterprise. These includes:

  • Friends and families: Usually the most accessible and easy to find source of funding, but seldom large enough to ensure the financial viability of the enterprise.
  • Philanthropists: also known as an “Angel investor” –people who are willing to support the social venture if they believe in its vision and mission. Some of these private investors won’t require any accountability from you and will give those money as a donation, while others will ask for a financial return on investment
  • Self: Some entrepreneurs prefer to self-fund. In this case, they carry the burdens and the risks by themselves, but also simplifies to a great extent the planning and operational process. If one could afford it, self-financing has the benefits of keeping the work less stressful (there is no one to be accountable to) and the entrepreneur could focus more on the job, instead of applying for loans or grants.

7. Partnership with larger companies

This is a valuable source for both financial and non-financial support. Many successful for-profit companies are willing to partner with social enterprises in order to increase their social impact and to gain better image or other promotional and marketing benefits or as part of their Corporate Social Responsibility.

Types for funding

1. Donations

This is a sum of money, given by an individual or organization to support a cause. They could be small or large, one-time or on repeated bases. Usually they are given to non-profit organisations, initiatives, programmes, services etc. In return of the donations the benefactors don’t expect financial return, but for a social impact.

2. Grants

Grants are given to the social enterprise for the purpose of achieving a specific aim. They are usually distributed by foundations, other NGOs, governmental bodies, international organizations and agencies. In most cases grants are associated with application procedures where several candidates are competing. Pro and cons of the grants are numerous. Very often they require a burdensome reporting process. Filling in papers might take more time than doing the work itself. Apart from financial support, the grants might come in form of technical assistance, expertise, training etc. which could give additional advantages for the social entrepreneurs.

3. Awards

Usually awards carry fewer restrictions than grants but they are received after competing with others or because of some exceptional performance or results. Example of awards in the social business is King Abdallah award for youth innovation and achievement. The award also is a form of achievement and recognition and distinguish the work of the entrepreneur thus adding to the image of the company and presenting opportunities for more positive outcomes.

4. Loans

A loan is a sum of money that is given to an individual or organization and must be return in the future. It is also referred to as a debt or a credit. Loans carry interest in the form of percentage over the capital. The loan has the advantage of being a commonly affordable source of funding, especially in emergency situations. It also gives freedom of disposing with the money at your discretion, without the need to report to an institution (as with the case of the grants or donations)

5. Equity

Some social ventures are owned by a number of shareholders, who also provide the capital (or the initial funding) of the enterprise. In this case, the financing is ensured through equities (or shares) that could be sold, transferred or exchange on the stock-market. The shareholder has a portion of the enterprise. He/she bears the risks and profits from the growth of the company.

6. Crowdfunding

This is a modern form of investment which became popular with the growth of the web-based social companies such as kiva.org. Due to crowdfunding even small-scale individuals could become social investors and lend a sum of money for a socially important cause or venture. Other crowd investing platforms include vested.org, startsomegood.com, fundly.com, Indiego.com, Rockethub.com, Pozible.com, Razaoo.com etc.

7. Impact investors and social responsible investors

These are type of investors who demand both social and financial return on their investment. Acument Fund and Echoing Green for example are non-profit organizations that reinvest the financial returns into other organizations and expand their impact while keeping financial viability and achieving profit for their donors. Social responsible investors focus on financial gain, but are concerned with the social policy of the company they support. They want to make sure that their investments go into socially and environmentally responsible enterprises, that this companies have policies and practices consistent with their values and have a positive impact on the environment and the society.

Business risk

Business is associated with a variety of risks. Business risk is defined as the likelihood of adverse changes in the market and economic conditions in which the entity operates.

These changes directly or indirectly affect the main economic indicators of the enterprise such as sales, revenue, business efficiency, financial result, cash flow, return on equity, economic added value, etc.

Activities for readers

1. Look at this cite and watch the video

2. Answer the question:

  • Which factors help the sustainability of the social enterprise “Baby Elephant Hotel” in Cambodia?
  • How did the location and its presence in the social media help “Baby Elephant Hotel” to become sustainable?

3. Start a research

  • Find other more social enterprises working for sustainable development.
  • What is the sphere of the activity of the social enterprises you found?
  • Why the social entrepreneur started this business?

Group work activity: How to write project proposal

Duration: 2-3 hours

Description of the activity: The trainees are grouped at random. The optimal group size is between 3 and 5 people. Each group receives a blank paper (size A3) and colored markets.

Every group should pick a general theme (e.g. children, democracy, education, environment, migration, poverty, etc.) and focus on a specific problem. The project proposal should include identified needs, analysis of the environment, specific issues to be solved, long-term and short- term goals, target groups, activities, team, monitoring and evaluation plan.

The trainees should write or draw on the blank paper their proposal to present them at the end of the group work activity. They can use a set of questions to structure their ideas:

  • Write down the main addressed issue (problem)
  • Why does this problem exist? Any particular reasons causing it?
  • Target group: Direct and Indirect
  • Why? – What are the needs and wishes of the target groups, but also the project group?
  • What are the participants’ motives to contribute?
  • Who? With whom? – Who implements the project? Who is on your team?
  • What? – The main activities of the project (how do they help to achieve the aims)? How will the results of the activities be sustainable?
  • Where? – Context of the project and the situation of the participants and what are the needed conditions to facilitate the project
  • When? – When are you going to implement the project activities?
  • How? – Methods and resources that you are going to use (experience, experts).
  • What is Next?

After work is complete, every group should present their project proposal in front of the whole class. They should be brief but consistent. The time for presenting the proposal should not exceed 5-7 minutes. Comments and questions from other trainees and the lecturer are welcome to facilitate discussion and feedback on the work being done.

Credit: Nevena Dobreva, PhD.

References and Links to self-study resources

Bacq, S., & Eddleston, K. A., 2018. A resource-based view of social entrepreneurship: how stewardship culture benefits scale of social impact. Journal of Business Ethics, 152(3), 589-611.

Durkin, C., & Gunn, R. (Eds.), 2016. Social entrepreneurship: A skills approach. Policy Press.

El Ebrashi, R., 2018. Typology of growth strategies and the role of social venture’s intangible resources. Journal of Small Business and Enterprise Development, 25(5), 818-848.

Haigh, N., Walker, J., Bacq, S., & Kickul, J., 2015. Hybrid organizations: origins, strategies, impacts, and implications. California Management Review, 57(3), 5-12.

Hoogendoorn, B., van der Zwan, P., & Thurik, R., 2019. Sustainable entrepreneurship: the role of perceived barriers and risk. Journal of Business Ethics, 157(4), 1133-1154.

Huybrechts, B., 2012. Fair Trade Organizations and Social Enterprise. Social Innovation through Hybrid Organization Models, Routledge, London and New York, 2012

Kickul, J., & Lyons, T. S., 2016. Understanding social entrepreneurship: The relentless pursuit of mission in an ever changing world. Routledge.

Madsen, K. M., 2013, Social Enterprise In Latin America: Dimensions of collaboration among social entrepreneurs. School of Public Policy Capstones.Retrieved from https://scholarworks.umass.edu/cppa_capstones/23

Racelis, A.d. 2014. Sustainable entrepreneurship in asia a proposed theoretical framework based on literature review. Journal of Management for Global Sustainability Volume 2, Issue 1, 2014: 49–72

Schaper, M. (Ed.), 2016. Making ecopreneurs: Developing sustainable entrepreneurship. CRC Press.

Staicu, D., 2018. Financial sustainability of social enterprise in Central and Eastern Europe, Proceedings of the International Conference on Business Excellence, vol. 12, p.907-917