The social enterprise speed-bump

Those with a keen interest in social enterprise in the UK will have been waiting in eager anticipation for the recent publication of the SEC’s State of Social Enterprise Survey 2009. It’s difficult to sum up a chunky piece of research in a short blog post and I’m not going to try but, over the next couple of weeks, I am going to pull out a few points of interest.

The first one relates directly to my own company’s experiences.

In ‘3.2 Are social enterprises profitable?’ the report tell us:

“Whilst the smallest social enterprises are the most likely to make a loss, the situation improves with turnover – except for organisations at £100,000 – £250,000. These organisations were almost twice as likely to report a loss as organisations that turnover between £50,000 and £100,000.

There are a number of hypotheses that can potentially explain this, from taking on debt finance to managing cash flow and becoming an employer. All of these present challenges to many businesses in the early stages of growth.

Further research could confirm whether there is a specific social enterprise related cause of this ‘speed-bump’ and could highlight a key area for intervention and support.”

As someone who runs an organisation in that turnover band, this doesn’t surprise me at all. This level of turnover is the point where many businesses find themselves moving from being ‘a few mates with some ideas’ to ‘a real business’.

The passive ‘find themselves moving’ is a deliberate choice of words. That’s often what happens. There’s a point where some people who are quite good at doing something suddenly get an opportunity to take it to the next level. The good thing about that next level is you’re (hopefully) doing something bigger and more socially useful, the challenging thing is that you’ve got lots of new bills to pay and people who depend on you to pay their wages.

The report is right to question the lack of support for businesses at this stage of development. There’s a phenomenal amount of support for people to start businesses but people who need professional support to work out the very basics of business – such as the need to provide goods or services that some people will pay for at a cost that enables you to survive and hopefully make a profit* – should generally be discouraged from starting businesses because they will just waste their own time and other people’s money. The problem is that it doesn’t suit anyone – government, the armies of generic business plan advisers and coaches, generic business plan participants – to admit this so the basic business planning circus is still in every town, every day.

But once you’ve dragged your business to a point where it’s turning over £100,000 a year or more, there’s quite a good chance that you’ve got at least a vague idea of how to do or sell something that some people want. The problem is that the leap into the £100,000 – £250,000 band is likely to involve taking one or several risks – including, as the report says, taking on debt or staff, or more likely debt & staff – and there’s a big question of how social enterprises can do that.

It’s a particular challenge for not-for-profit social enterprises because they can’t sell equity (not that this is necessarily easy or even possible for those who are allowed to do it constitutionally). If the risk involves developing a product or service that doesn’t aim to generate a large government/council/NHS service delivery contract if it succeeds, even specialist social enterprise lenders tend to be wary of stumping up the cash (and I don’t particularly blame them).

The question is whether social enterprises that might ultimately be able to operate deliver significant social social benefits at or beyond upper end of the £100,000 – £250,000 are currently losing out (or maybe not even trying to take the next step) because they’re unable to access the resources that would enable them to get there.

*Many good business people can’t do this immediately (or for several years) but they need to be clear that it’s the aim.

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2 Comments

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2 responses to “The social enterprise speed-bump

  1. Tiny (<£100k turnover) SEs are quite likely to be grass roots, startup, no working capital, sweat equity operations where nobody's really getting paid and overheads are minimal (like my co-op, Calverts, back in its first 6 months of trading). In other words, they're not trading enough to actually lose money. When you start growing, and still don't have any working capital – that's when it gets really difficult. Just a hunch.

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  2. beanbagsandbullsh1t

    I think you’re right.

    And if you want to make what you’re doing sustainable, as a job, you have to try to make the move up from ‘not trading enough to lose money’ to ‘trading enough to be able to pay yourselves’.

    But I reckon this is the point where support services could be useful.

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