NGO Management: Should your charity be a social enterprise?

The most common problem for charities and NGOs in every country in the world is suitable access to funding to support their work. Most organisations draw financial support from wherever they can reach. This is likely to include donations from individuals, community groups, businesses and grants. Often there simply isn’t enough donations to go around with the huge majority of NGOs failing before they have fulfilled their vision because of financial collapse.

Wherever you go there are social causes  who are unable to support their mission through traditional charitable sources of income alone. The best NGOs are able to adapt to their financial environment to maximize income from a variety of sources. Even some of best managed organisations will struggle to overcome the stark reality that there are not enough donations to go around.

This past decade has mostly made this challenge even more difficult for most due to funding cuts in many countries across the world. The pressure on charitable organisations to become self-sustainable has intensified with communities who rely on their support facing the prospect of losing life changing services.

This has led charitable organisations to seriously reconsider how they are best equipped to generate income to support their work. Thousands of NGOs around the world have reached the same conclusion, that the sale of products and services can help them to be sustainable and achieve their goals. These organisations have become known as social enterprises.

What is a social enterprise?

A social enterprise is simply an organisation that trades for a social purpose. This means that any surpluses from the business is invested back into the organisation or towards its social purpose.  Another way of thinking of it is using business to solve social issues.

There is normally no legal distinction between a charity that relies on donations compared to one that trades to fund its social mission. Both charities and social enterprises  exist to fulfil a social mission and both reinvest any financial surpluses from their activities towards social good. The key difference between a charity and a social enterprise is first that charities fund their social mission  through grants and donations whilst social enterprises fund their social mission by selling products and services to customers.

You may be familiar with a few of the biggest social enterprises such as charity:water, Acumen, and Terracycle who provide water and sanitation services, social investments and recycled products respectively.

Rather than relying on public donations for the majority of their income, they instead generate profits through their business activities which they use to fund social good. Products and services sold by a social enterprise often serve to further their mission as well as generate an income. For example, an educational social enterprise may sell learning aids and equipment. This provides a dual return of both income and social investment in just one business activity. Income generated through business can be more reliable than relying on public support.

Many social enterprises changed their funding strategy to overcome their financial problems that had restricted their ability to support their mission. The increasingly competitive nature of grant funding, due in large part to a huge increase in the volume of the number of NGOs, had meant that many viable projects were left failing to fulfill their potential.

Others choose the social enterprise route because they favour the idea of empowerment through enterprise, some even with a strict policy of rejecting donations in support of their cause.

Changes in laws and legislation have also created new opportunities for charities to deliver professional services as governments open areas such as healthcare and social services are opened up to competition. Tax incentives have also fueled this increased financial mix with some businesses creating charitable arms and some charities created trading arms.

The majority of NGOs maintain a mix of charitable sources and trading, often in the form of contracts to deliver specialist services that the charities staff can provide and manage. The amount of income generated from trading can vary  dramatically from organisation to organisation. The first may generate the majority of its income from the sale of products and services with a far smaller amount charitable contributions. The second could rely on donations from the public and businesses whilst also generating a small amount of income from trade.

In most countries, social enterprises can use any product or service to generate income to support their mission. From simple ideas like cafes and furniture shops to more complex solutions such as healthcare interventions in the event of disease.

However, in some countries being a registered charity comes with certain restrictions, one of which may be that you are only allowed to trade in areas related to your social purpose. One common route around this restriction is to establish a broad vision for your organisation which will enable you to diversify and adapt to your future needs.

For example, if your social mission is to support visually impaired  or blind people you would be only able to sell products and services that relate to the support of your client group. In this case the organisation may sell aids and equipment that enable visually impaired people or deliver social services on behalf of the local authority. although you should seek professional advice in your country before embracing the social enterprise structure.

Becoming a social enterprise requires more than a simple change in income streams. It requires a change in the mindset of the organisation as you move from a fundraising culture to a sales led culture. That change in mentality can be a difficult experience for some people and new skills will need to be brought in or developed internally to implement and execute your NGOs new financial strategy.

In a world where money dictates so much of what we are able to do, it should be no surprise that finances are shaping the way NGOs solve social problems. Charitable organisations of all types should seriously consider whether trading may provide a reliable form of income that they can use to change lives for the better.

For more information on social enterprises read Pilotlight’s guide here.