Common pitfalls for social enterprises

Finance

Associate Professor Jo Barraket and Heather Anderson, from the Australian Centre for Philanthropy and Nonprofit Studies (QUT), asked a number of social enterprises what their greatest challenges were. The number one issue was finance – particularly at start-up, but also as an ongoing problem when operating and expanding. These findings are similar to those of researchers at Foresters Community Finance (Burkett 2010). This study also noted that, the mixed resources on which social enterprises rely can make their financial reports fairly complicated, which can limit these organisations’ access to loans or equity through mainstream financial institutions.

Sources of income include: grants, personal finance, debt, member contributions, cash flow management, and resource sharing with other businesses. All of these carry their own positives and problems. For example, grants add administrative burdens and another group of stakeholders, whose priorities may or may not align well with those of the enterprise. 

Networking can be a powerful tool in building your knowledge, and ultimately your access to, funding sources, support services, and new clients or markets.

Staff

Finding the right staff was the second biggest problem. Just like for-profit companies, choosing the right team to manage and run the business is vital to its success. Enthusiasm or availability alone will not produce income. ‘Waiting’ can be the biggest challenge for small, overstretched organisations – although this applies to larger organisations as well.

Connected to this problem is burnout. When volunteers and staff are overworked and undercompensated, especially where their own money is invested in a venture, stress levels can result in collapse.

Identity crisis

The dual nature of social enterprise can create problems if not managed properly. For example, in the traditional business model, governance (long term strategic management) is done by the board on behalf of the shareholders. In nonprofits, the relationship between members, clients, stakeholders and management is not this simple. Your social enterprise may want the board to ‘represent’ stakeholder interests – which are much broader than simply making money. 

Social enterprises usually have a wide range of stakeholders, so making business decisions on a representative basis can prove problematic when interests conflict. Alternatively, requiring a ‘representative’ board may prevent recruitment of people with the skills your organisation needs.

Remember: your customers (the people who buy your goods or services) may not be the same as your beneficiaries (the people whom you are aiming to benefit through running your service). For example, you might sell coffee and bakery goods to the local community, but use the profits to run an animal shelter. Your business needs to target your customers or it will not work!

A warning

Sometimes, you may need to make a value judgement that sacrifices profitability in the interests of mission objectives. This is the nature of the business, but if this is needed or done too frequently, the social enterprise will not work. If too much conflict arises between the social and business goals of the enterprise, you may need to switch to a different organisational model.