Relying on donations to survive

My recent survey on organisations addressing social issues in South Africa, shows that the vast majority of the sample surveyed, are reliant on donations to survive.

The survey was completed by 153 organisations, and the full results can be found on this blog.

All the organisations surveyed have been set-up to directly address social or environmental issues in South Africa.

Two-thirds of the organisations are reliant on donations and grants to survive, meaning they do not have an independent way of generating an income to help the organisation to survive.

Some organisations that completed the survey are, arguably, in the fortunate position where they are completely sponsored by a parent organisation or trust.

But what happens if the parent organisation gets into financial difficulties or their objectives change, meaning they can no longer support the subsidiary organisation that is striving to address social causes?

Without an independent income source, the organisation will continue to be reliant on hand-outs and have little control over their future existence.

The good news is that a fifth of the organisations that were interviewed do sell products or services that cover their costs.

It's important that more organisations that are set-up to address social and environmental issues start to use the principles of social business so that they can become financially independent and no longer be at the whim of philanthropists.


Mike.

Measure your performance

You've defined your vision and set your objectives, but how do you know if you are meeting your objectives?

You measure and track your performance.

Commercial businesses measure their performance in terms of revenue and profitability. Social businesses can also do this, but more importantly they need to track their performance against their social objectives.

The social objectives may be the number of homes provided for the homeless, or the number of HIV/AIDs orphans who are being cared for.

Each of your objectives should have a set of tactics that determine how you are going to meet your objectives.

Looking at the example on homes for the homeless, and assuming you are currently an Estate Agency, the tactics could include:

1. Use existing contacts in the construction trade to build or provide the low cost housing
2. Finance the homes through the sale of commercial or residential buildings
3. Engage with organisations that can identify those most in need of homes
4. Etc, etc.

You then need to measure your performance (progress) against these tactics.

This can be done in a variety of ways, but the simplest way is to track your progress is to keep a log (written or electronic) based on set periods (weekly, monthly, annually) with the number of times your are and are not delivering on these tactics, and hence meeting your objectives.

Your tactics should be reviewed regularly, to ensure they are still appropriate.

For example, you may find that your contacts in the construction trade cannot provide the houses you are looking for, and you need to focus on low cost governmental housing, perhaps looking at a Private-Public Partnership.

I've used the example of an Estate Agency here to highlight that you don't have to be a typical non-profit, NGO or charity to be a social business. Although you do need to be careful that your financial objectives do not clash with your social objectives, and may consider having your social business as a separate legal entity.


Mike.

A clear vision and objectives are a must for social businesses

Arguably all organisations need a clear vision of what they are trying to achieve and objectives to determine how to get there.

This is especially important to social business, and is the ninth key principle.

A vision provides the over riding direction for the business and should drive everything you do.

It could be something like providing all HIV/AIDs sufferers in the Kwa-Zulu Natal with the healthcare they need; or to supply employment for unemployed women in the Khayelitsha township.

Your vision is the reason why your organisation exists and provides the guiding light for everything you do. It provides the focus and direction required to ensure that you do not deviate from the path you have set.

Once you have a clear vision, you should set objectives. Objectives provide the stepping stones to realising your vision. Examples of this could be that you will get 100 of the HIV/AIDs sufferers in Kwa-Zulu Natal on the right medication in 2009; or that you will gain employment for 2 unemplyed and unskilled women in Khatelitsha in January 2009.

Objectives should be captured in a way that is easy to understand, communicate, and most importantly, measure. If you can't measure your progress against your objectives then it is very difficult to know when you have achieved them. Having numbers, like the financial value or number of items, as well as dates in your objectives help provide the measurement.

No matter what the size of your organisation, all staff need to know what your vision and objectives are. Create posters and display them round the office, post them on your website and keep repeating them at every opportunity.

In this way your vision and objectives can become second nature to all, and ensure that your whole organisation adheres to this key principle of social business.


Mike.

Sell products and services to cover your costs

Don't be dependent on donations and grants to survive, but instead sell products and services to cover your costs.

Making your income from selling products and services is the eighth of the ten principles of social business.

Selling products or services that are aligned to your social objectives gives more focus to these objectives, for example the organisation called Open Africa, where tourists pay for guided tours by locals who might otherwise have no source of income.

Other similar examples include Streetwire and Khayelitsha Cookies.

A recent comment on this blog questioned whether the sales of products and services may be just as time consuming as focusing on donations and grants. That may be correct, but by making sales rather than focusing on charity, you minimise the dependency on those donating and give your organisation more control over your income stream.

There's no doubt that these are challenging economic times, but it is going to be a lot more challenging for those reliant on charity to survive, because charity is normally based on otherwise excess funds (of the organisation donating) and will be the first thing to be cut. Whereas, people still need products and services.

If you are stuck for ideas on what to sell, start with the reason why your organisation exists, for example to support those living in remote but tourist friendly locations in South Africa, and then work out what you can sell that supports this objective, e.g. tourist routes like Open Africa does.


Mike.

Salaries must be paid at market rates

The best businesses have the best staff. The best staff need to be paid salaries at market rates.

This is the seventh of the ten key principles of social business.

In order to compete effectively and be the best at what you do, you need to make your organisation a great place to work, which includes remunerating staff at the levels their skill and responsibility deserves.

This does not mean that staff need to be paid corporate-style seven figure annual bonuses; but rather salaries that reflect their market value.

There are a variety of ways to determine what market rates are for the positions within your organisation. Recruitment agencies can give you an idea of what these are, but if you are looking for a more accurate figure then salary benchmarking firms, like Celre in the United Kingdom, can provide this information for you, normally at a fee.


Mike.

Social business investors are paid back

Social business investors can be in the form of social entrepreneurs, corporate organisations (through CSR initiatives), philanthropists, financial institutions including banks and even the Government.

They invest in social businesses to get both a social and a financial return on their investment.

The social return is gained through investing in a social business that is striving to address social or environmental issues that the investor has a interest or concern about.

The financial return is realised through being repaid their investment at market rates.

It is important that the investment is repaid for three primary reasons:

1. The investment can be reused to address other social issues

2. The investors don't get equity in return for their investment, because they don't own the social business

3. The social business operates with commercial business principles and doesn't focus on a donation mentality.

Paying back the investment at market rates means the social business can widen the net of investors to commercial banks and other institutions that are focused primarily on the financial return. This can provide quicker access to funds, and in some cases at better interest rates.


Mike.

Profits are reinvested in the social business

Social businesses reinvest their profits, which is the fifth of the ten key principles of social business.

Considering that social businesses do not allow dividends to be drawn, they instead use their profits to reinvest in their organisation.

This means the profits can be used to focus on addressing the social issues the organisation has been set-up to solve, rather than used for shareholder wealth maximisation.

There are a number of ways these profits can be used, for example to extend product lines or to enter new markets.

Profits provide a way of gaining additional investment for starting new projects or ventures to address your social objectives. This reduces the time needed on looking for investment, either via financial institutions or of course through the conventional approach for charities of donations and grants!

Like with all of the 10 principles of social business, this should not be a difficult concept to grasp, however the challenge is changing the habits and behaviours of charities and commercial businesses in order to embrace the approach of social business.


Mike.

Social business is not reliant on donations and grants to survive

Charities are reliant on donations and grants to survive, meaning they need to spend a significant amount of time building relationships to obtain their funding.

Unfortunately there is no such thing as a free lunch.

Charities generally have little control over what funding they get and when they get it. Sure if they are running an effective organisation that is meeting its social objectives, they are more likely to attract developmental funders and philanthropists; but the donations are not guaranteed and when the economy is in a downturn or a commercial organisation is not meeting its financial objectives then CSR budgets and donations will be cut, impacting charities revenue streams.

The fourth key principle is that social business is not reliant on donations and grants to survive, paying back any investment made to the business.

Social businesses have full control of their own revenue stream by selling products and services that cover their costs.

There will be times when external investment is required for social business (e.g. a new business or project start-up), which is the same for any commercial business. It is important that these investments are taken as a loan, and not as a donation or in return for equity which will impact the ownership of the business.

The loan should be repaid at market rates, which will provide focus to operate as a commercial business. The loan interest will be covered by the products and services the social business sells.

Typically the turn-around time for gaining funds via a loan will be much quicker to obtain than a donation or grant, allowing the business to address social issues in a much quicker time-frame.

A challenge now is for organisations addressing social issues in South Africa is to remove their reliance on donations and grants to survive (as identified in my recent survey) and start operating as social businesses.


Mike.

A social business is a non-loss, non-dividend business

Owners of most commercial businesses draw dividends as a form of salary. A social business should not allow its owners to draw dividends, and instead reinvest their profits back into their organisation.

The third principle of social business is that they are non-loss, non-dividend businesses. This is a description that Muhammad Yunus uses in his recent book.

Social businesses are not charities, and instead aim to make a profit, but a key difference is that they do not draw these profits as dividends, and reinvest them back into the organisation.

Reinvesting the profits allows this money to be used to extend product lines and focus on new markets and opportunities, which would have not been possible if the profits had been drawn as dividends.


Mike.

Identifying the owner of a social business

Social business are owned by those communities that benefit from the social causes these businesses have been set-up to address.

This is the second of the 10 key principles of social business.

There will be a core group, which I'll refer to as the leadership group, that run the social business, and may have even invested start-up capital.

The leadership group is responsible for giving the social business its direction, in terms of strategy and tactics to delivery, but they should not have ultimate ownership of the business.

If they did won the business there could then be a conflict between their, typically financial, needs and those of the communities that benefit from the social causes.

Social, or environmental, objectives need to be set-up, which will guide the leadership group and ensure that resources (finances, systems, people, etc) are aligned to the social causes .

Adhering to the social objectives ensures that shareholder (i.e. the leadership group) wealth maximisation does not overrule the social causes that the business was set-up to address.

So although the leadership group (ofter social entrepreneurs) give direction and run the social business, it's the beneficiaries of the social causes that are the owners of the business.


Mike.

A social business is set-up to address social issues

The first of the key principles of social business, is that the organisation's primary purpose is to address social or environmental issues, typically serving those amongst us who at the most disadvantage.

An example of this could be to provide employment opportunities for those living in underprivileged communities. Like Khayelitsha Cookies, which provides jobs for ladies living in the township of Khayelitsha in the Western Cape.

Another example is Spazatainer, which offers a unique form of office space at affordable prices to underprivileged communities.

Objectives need to be set to ensure that there is clarity on what the social or environmental issues are that the social business has been set-up to resolve.

It is important not to allow non-social objectives to override the social ones, which is what happens with many commercial businesses, where shareholder wealth maximisation ultimates comes before any CSR initiatives.

Social businesses are not profit driven, but instead use their income as an enabler to meet their social objectives.

For the purposes of this blog, the social businesses need to be addressing social issues within South Africa, but this does not mean that the principles are specific to this region.


Mike.

10 key principles of social business

With the concepts of social business being new to so many people I've listed what I view as the key principles.

These principles have come from a number of sources, with Muhammad Yunus' recent book providing the bulk of the 10 key principles of social business:

1. Primary purpose is to address social issues

2. Owned by the beneficiaries of the social cause

3. A non-loss, non-dividend business

4. No reliance on donations or grants

5. Profits are reinvested in the social business

6. Investors are paid back

7. Salaries are paid at market rates

8. Products and services are sold to cover costs

9. A clear vision and objectives are at the heart of the organisation

10. Performance is measured against the organisation's objectives


Mike.