Six social enterprise essentials: Why financial viability aligns perfectly with the triple bottom line
Social enterprises can survive social or environmental ‘bankruptcy’ – but run out of cash, and they cease trading. Financial viability means more than a healthy profit, though: it’s also the key to a better way of doing business. The latest in our exclusive serialisation of a new book by social enterprise pioneer Freer Spreckley, on the six key principles that should define social enterprise.
I introduced the tripartite criteria of financial, social and environmental measurement in the late 1970s as an alternative to the single criteria of financial profit and loss, in order that operational performance in social enterprise could be adequately presented.
Social enterprises that measure their performance using the ‘triple bottom line’ – as it became known from the 1990s – establish new economic thinking about the purpose of trade and what counts as value. Yet the truth is that social enterprises can be socially or environmentally bankrupt and still survive. However, financial bankruptcy means we cease trading – we are still bound by the single bottom line.
And financial viability does more than just ensure an organisation survives. It also means the people running it can do so independently and that they remain in control of their financial decisions.
- Read more social enterprise essentials: Why only common ownership can create system change
The neoliberal economic assumption: flawed
For most of economic history, maximisation of turnover, sales and profit have been the dominant assumption. Within a balanced economic environment, this more or less works, but when we move to globalised capitalism, as we see today, profit maximisation becomes anti-social and causes untold poverty and environmental stress. No rule says you must maximise profit; it's just the default assumption expressed and justified via the single bottom line. In my book, Essential Social Enterprise, I suggest financial viability as the fundamental economic assumption for social enterprise; this is defined as 'generating sufficient income to meet operating payments and debt and to invest in commercial, social and environmental benefits'.
Financial viability broadens and liberates thinking, aligning perfectly with the triple bottom line's multiple objectives
Financial viability should be the underlying presumption on which to base plans, cashflows and operational decisions. Viability doesn't underplay the need for financial rigour, quite the opposite. While the assumption of profit maximisation – the dash for cash – skews and narrows thinking and planning towards achieving a single financial goal, viability, on the contrary, broadens and liberates thinking, aligning perfectly with the triple bottom line's multiple objectives. Financial viability has to replace profit maximisation as the economic assumption to overcome global poverty and environmental stress.
Maximising profit doesn't have to be the reason for enterprise
The capitalist system of profit maximisation is failing most people in the world. But imposing investment and profit limits, price caps, multiple sales taxes, and other draconian measures to stem excessive economic behaviour does tend to spill over into human rights restrictions. Instead of using fiscal measures to limit free trade between buyers and sellers, we need to change our perception of the role and purpose of money; from making as much as possible, irrespective of the social injustice and environmental degradation caused, to the perception of being viable and having enough alongside creating social wealth and environmental benefit.
Social enterprise operates in the macroeconomic system, as does any private business. Social enterprises can borrow money and sell non-equity shares (debenture stock). Although they pay the same costs and taxes and fulfil the same borrowing criteria as private companies, they also invest more in professional development and job rotation. Social enterprise pays more into the nation's state of wellbeing than private companies because some of the profits are invested in internal and external social and environmental initiatives that would otherwise not happen, or would be paid for by the state.
No financial viability without fair wages
Low income bedevils working people the world over. It is a characteristic of capitalism. The differential between the lowest-paid worker and the highest-paid worker is as great as the highest paid worker can impose. It is also the cause of most industrial strife. The amount of energy, time, resources and bad feeling that low income generates is disproportionate to any benefit experienced by a small minority of top-paid workers.
We all want to be financially viable (capable of producing a profit) either as an enterprise, individual or family unit. Financial viability is essential for survival in a free society; we need to earn money to pay bills, pay for housing, transport and, hopefully, save. Everyone should have the opportunity to achieve financial viability for themselves.
Every business should pay a living wage. How otherwise can they be called viable businesses?
The shareholder reward system that drives down salaries or reduces jobs as the quickest and easiest way to maximise profits still continues to be the acceptable face of capitalism. The idea that working people will earn less than they can live on and that the state then uses taxpayers' money to indirectly subsidise the businesses that pay such low wages is ludicrous, especially when companies make excessive profits. Capitalism prides itself on being a robust economic system. In reality, the below-survival wages many companies pay workers, irrespective of the minimum wage, who then have to be subsidised by the taxpayer/state, belies that claim. Undoubtedly, every business should pay a living wage. How otherwise can they be called viable businesses? They get away with it because the subsidy is to low-paid workers, not the actual companies. If the grant were paid directly to businesses, there would be an outcry, and the demand that companies pay decent wages before profit-taking would soon attract attention. In the UK, the fifth-largest economy globally, where the majority of people have so little, something is fundamentally wrong.
The significant difference with social enterprise is that the workers, ie co-owners, decide on the pay structure and how profits are used. Some social enterprises pay higher salaries than those in the private sector, and it is not unknown for them to pay the same hourly rate to all workers, regardless of roles or tasks. Most, however, do pay different salaries but keep the differential low and transparent.
Ensuring that co-owners are financially viable as individuals, and that they can self-manage their work, are the solutions to low wages and poverty. To share ownership and the financial rewards equitably among those who create the wealth reverses the principle of 'capital hiring labour' to 'labour hiring capital'. If working people are always busy being hired to create wealth for rich people, they will always be poor.
Investing surpluses: a source of confusion
Social enterprises can be mixed-receipt organisations, receiving earned income from sales and grant funding for specific social and environmental projects. However, some social enterprises are trapped, thinking they have to pay 50% or more of their net profit to charity.
This seems to have come about through the confusion caused by not understanding social enterprise. Some thought it was about non-profit or a vehicle for funded projects: not at all. Social enterprise has always been based on commerce and financial integrity. To impose rigid structures on profit use would be anti-trade and contradict the principle of independence. The idea that a social enterprise should give 50% of profit to charity may undermine their ability to pay decent wages and to choose how to invest their surpluses according to their plans.
The idea that a social enterprise should give 50% of profit to charity may undermine their ability to pay decent wages
Social enterprise enables working people to decide where to invest their resources. This is crucial and builds self-esteem over time as returns on investment bear fruit. Investment decisions also allow social enterprises to meet their broader goals. Surpluses are usually distributed in four ways: reinvestment in the commercial side of the enterprise; dividends for co-owners; to their own reserve fund; and donations made to social and environmental benefits/projects. The apportionment of profit is for each social enterprise to decide.
Social enterprises can often use surpluses as partnership investments, working together with other organisations in raising funds for social or environmental initiatives. Investing in commercial, social and environmental initiatives around them contributes to the local economy, meaning more income generated for local people, and more jobs, higher pay and more tax revenue (the so-called Local Multiplier 3 effect).
Financial independence: essential for system change
Being independent – having no outside share ownership and control – is essential to achieving system change. The principle of financial viability is based on the value of independence; for social enterprises to exercise their democratic ownership and control, they must be financially independent and not beholden to external influences or criteria. So financial viability – making a profit over and above the running and investment costs – is just as crucial to a social enterprise as a private sector business.
The critical difference is the breadth of investment opportunities and who decides how the surplus is apportioned from year to year. The enterprise purpose and environmental responsibility statement will curtail certain profit-making activities, enforce care for the supply chain producers, restrict dishonest claims to customers, and enhance fair share distribution to co-owners.
While we are still trapped by the assumption that the purpose of business is to maximise profit and that the single bottom line is the sole measurement indicator, the global economy will continue to monopolise everything it can to achieve this purpose. Nothing will change unless a more holistic view is adopted or there is a movement towards a presumption of financial viability and broader accountability in commerce as the guiding economic assumption. To change the premise from maximising profits to financial viability requires system change of accounting procedures from the single bottom line to the triple bottom line. This, therefore, should be another core value of every social enterprise: the social accounting and audit system.
- Freer Spreckley is the author of 'Essential Social Enterprise: A just transition to a regenerative fair future', published 2021, and available worldwide (print on demand) from online booksellers including Booksplease. Check back soon for the next installment in our exclusive serialisation.
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