Hit the Ground Running by NESsT

NESsT Practitioner Series

Hit the Ground Running Getting a head start with local lessons for sustainable social enterprise

NESsT Practitioner Series

Hit the Ground Running Getting a head start with local lessons for sustainable social enterprise Authored by Loïc Comolli, Eva Varga, and Peter Varga Edited by Nicole Etchart

Abstract: Hit the Ground Running draws from NESsT’s experience working in Croatia during 2005 and 2006 with 17 organizations that explored social enterprise as a sustainability strategy. The manual presents the experiences of Croatian organizations that went through the process of planning for their social enterprise, and the purpose is to provide examples of the challenges these organizations faced and the strategies they developed to successfully prepare the launch of their enterprise. We hope Croatian organizations seeking to develop social enterprise strategies will learn from the lessons and practices of their peers who have attempted to follow a similar path.

USA: 965 Mission Street, Suite 700, San Francisco, CA 94114 - USA - Tel: + (1 415) 644-0509 Fax: +(1 209) 632-7763 Latin America: José Arrieta 89 Providencia, Santiago - CHILE - Tel: +(56 2) 222-5190 Fax: +(56 2) 634 2599 Europe: Kalvin ter 2 .1/2 H -1053 Budapest - HUNGARY - Tel: +(36 1) 267 0231 Fax: +(36 1) 266 0206 Email: nesst@nesst.org - http:// www.nesst.org

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NESsT JosĂŠ Arrieta 89 Providencia, Santiago, CHILE Tel: +(56 2) 222-5190 Fax: +(56 2) 634-2599 Email: nesst@nesst.org www.nesst.org

Publication of Hit the Ground Running: Getting a Head Start with Local Lessons for Sustainable Social Enterprise was made possible through the generous support of the Academy for Educational Development, CroNGO Program. NESsT promotes the social, political, economic and religious rights of all people and does not discriminate on the basis of age, gender, race, national origin, mental or physical disability, sexual orientation, and political or religious opinion or affiliation.

The entire contents of this publication are copyrighted by NESsT. All rights reserved. No part of this publication may be sold in any form or reproduced for sale without prior written permission of the copyright holders. Copyright ÂŠ 2011 NESsT ISBN: 978-1-930363-32-8 The examples contained in this manual do not disclose names of the organizations presented. The sensitivity of the information developed during the social enterprise planning process, including market positioning, competitive analysis, operational challenges, and financial information required that basic organizational information be left out. In some instances, specific information such as numbers and places were also changed to avoid revealing important social enterprise data. This publication is for information purposes, and NESsT is not engaged in providing legal, accounting, or other professional advice. As professional advice must be tailored to the specific circumstances of each situation, the information and opinions provided herein should not be used as a substitute for the advice of a competent professional.

introduction

Hit the Ground Running

Table of Contents Introduction............................................................................5 Section One..........................................................................11 Organizational Readiness Section Two..........................................................................35 Business Planning Conclusion............................................................................55 About NESsT.........................................................................57

Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright ÂŠ NESsT

Hit the Ground Running

introduction

Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright ÂŠ NESsT

Background Introduction

Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright ÂŠ NESsT

Background / Introduction

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introduction

NESsT – Academy for Educational Development Social Enterprise Manual: Practical Lessons from Social Enterprises in Croatia

A. Purpose of the Manual The manual draws from NESsT’s experience working in Croatia during 2005 and 2006 with 17 organizations that explored social enterprise as a sustainability strategy. By drawing on these experiences we hope Croatian organizations seeking to develop social enterprise strategies will learn from the lessons and practices of their peers who have attempted (successfully and unsuccessfully) to follow a similar path. Specifically, the manual shows how organizations plan for the enterprise through research and analysis during the initial stages of their enterprise development process. This planning phase is critical for several reasons: to assess readiness for implementing a business venture; to choose the appropriate venture idea; to analyze its potential; to get acquainted with the market and requirements of running the venture; and to build capacity for its implementation. This manual presents the experiences of Croatian organizations1 that went through this process using NESsT’s methodology and provides examples of the challenges they faced and strategies they developed to successfully prepare the launch of their enterprise. Because it presents an analysis of the process organizations follow to develop their social enterprises, this manual is meant to complement NESsT’s social enterprise and business planning toolkit Get Ready, Get Set: Starting Down the Road to Self-financing.

1 Three of the examples presented in this manual are drawn from social enterprises that are part of NESsT’s portfolio in Central and Eastern Europe. While these examples are not directly related to Croatia, they illustrate social enterprise planning issues that Croatian organizations have encountered or may encounter during the process.

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B. Social Enterprise Planning: introduction and definitions NESsT defines social enterprise as mission-driven businesses owned and operated by civil society organizations (CSOs).2 Social enterprises aim to increase the financial sustainability of CSOs by generating untied sources of revenues and at the same time strengthening the mission impact of the organization. The following example provides a good illustration of the mission and financial impact a social enterprise can have on a CSO. A Croatian organization whose mission is to provide assisted living and health care services to the elderly runs a program geared toward meeting the needs of senior citizens through counseling, educational programs, and volunteer work. In 2005, the organization started to provide daily home delivery of cooked meals, a service that had previously been provided by the municipal government. The municipal government asked the organization to take over the service to provide more comprehensive assisted living services to the elderly, and it was agreed that the costs of the service would be shared by the municipal government and the beneficiaries. More than 60 elderly customers are serviced each day and over 20 are currently on the waiting list. The organization expects this activity to contribute a significant portion of its budget and to continue strengthening its mission impact by delivering services to one of their target groups. Social enterprise can be implemented in a variety of ways: - Fees for services: Fees charged by the nonprofit in exchange for a service, oftentimes capitalizing on some existing skill or expertise of the staff. - Product sales: Selling products made by or for the nonprofit’s beneficiaries; reselling donated products; or producing and selling new products. - Use of “soft” assets: Generating income from nonprofit-held patents, licensing agreements, royalties for intellectual property, or endorsements. - Use of “hard” assets: Renting out real estate, space/facilities, equipment, etc. when not in use for mission-related activities. 2 NESsT defines CSOs as non-governmental organizations (NGOs), nonprofit organizations (NPOs), community groups, volunteer associations, and other legal entities distinct from both the governmental and business sectors that advance a collective or public good. Included in the category of CSOs are any of the formally registered nonprofit, non-state organizations or community-based associations and groups that fall outside the sphere of the government and business sectors.

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- Investment dividends: Dividends from active or passive investments of financial resources (e.g., savings, endowments, reserve funds, etc.). - Membership dues: A fee collected from nonprofit members or beneficiaries in exchange for some kind of product or service or other benefit. While the potential benefits of social enterprise are high, for many nonprofits entering the marketplace it means entering unknown territory involving skills outside of their professional experience. This reality presents a new set of challenges to nonprofit leaders who must prepare for the unique risks and demands of entrepreneurship ensure that enterprise activities are used responsibly and without harm to the core mission and spirit of their organization, and guard the reputation and values of their organization and the nonprofit sector more generally.3 To assist CSOs to go through the process of planning for the development of social enterprises, NESsT developed a methodology and series of tools designed to lower the risk inherent in entrepreneurial activities and at the same time build the capacity of nonprofit leaders to successfully manage a business venture. This methodology relies on a four-step process: 1. Organizational readiness: the organization examines many facets of the institution to determine whether it is prepared to undertake a social venture. The organization then evaluates social enterprise ideas against enterprise criteria and core competencies. 2. Pre-feasibility study: the pre-feasibility study examines one or various potential business ideas, identifies the problem areas and rules out options that are clearly not viable before investing too much time into research and development. It is after working on this study that the organization will be able to make an educated decision on whether it makes sense to develop a full business plan for a social enterprise or whether they should explore other ideas. 3. Feasibility study: the feasibility study assists social entrepreneurs to realistically assess the proposed venture and its ability to meet their goals. At this stage the organization performs in-depth market research, including market surveys, and develops revenue projections. 4. Business plan: the business plan is a professional document that assists organizations with the implementation of their social enterprise, including financing and marketing strategies.

3 Get Ready, Get Set: Starting Down the Road to Self-financing, NESsT, 2004.

Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright ÂŠ NESsT

introduction

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C. Social Enterprise in Croatia: summary findings of NESsT’s country assessment. In 2005, NESsT performed research on the state of social enterprise in Croatia. This research was compiled into a ‘country assessment’ analyzing the types of social enterprise implemented and challenges faced by Croatian organizations in planning and implementing enterprises. The assessment formed the basis for NESsT’s entrance strategy and expansion of its NESsT Venture Fund into the country.4 A summary of this assessment is presented here. Croatian CSOs face every day uncertainties in terms of their sustainability. Virtually none of them have their core funding secured, which makes them rely exclusively on the unpredictable inflow of project funds. Foreign donors have largely withdrawn from Croatia due to the country’s scheduled accession into the European Union, a funding trend that is similar to the rest of the region. Very few alternative sources of funding have stepped in to fill the gap, aside from a few donors such as the National Foundation for Civil Society Development, which provides institutional grants of various sizes to help CSOs with their sustainability. Often out of necessity, a growing number of Croatian CSOs have turned to the marketplace in an effort to generate income to support their work. The majority of social enterprises consist in the sale of products, often times CSO memorabilia; and fees for services, usually expert consultancies, trainings, and other similar services. Nevertheless, a number of them have adopted innovative approaches with a mass public appeal, such as eco-tourism or the sale of services to state institutions and local authorities on a wider scale. To date, virtually all of these social enterprises have been started by the CSOs themselves with little outside support. They chose the activity that best matched their organizational resources, both in terms of the available expertise and minimal financial start-up requirements. While these social enterprises bear witness to the resourcefulness of Croatia nonprofits, most enterprises are currently managed in ad hoc and inefficient ways, with little or no planning or preparation, and little access to the financial capital and capacity building/management support needed to expand and thrive. There are a variety of reasons for this; one key reason is the lack of capacity, human resources and expertise needed to undertake social enterprise (many CSO leaders are highly-skilled in their area of expertise – the environment, disabilities, social welfare – but don’t have practical business training).

4 The NESsT Venture Fund is a philanthropic investment fund providing capacity building and financial support to a portfolio of high impact social enterprises.

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Despite these obstacles, CSOs in Croatia maintain a very positive view of social enterprise opportunities. CSOs are generally aware that international donors are withdrawing from Croatia and that they must find alternative revenue streams to ensure their sustainability. Most also see social enterprise as a way of directly fulfilling the mission of their organization (beyond simply generating financial resources to support it). An organization was established in 1992 with the aim of supporting the education, employment and inclusion of disabled persons in Croatia. Aware of the necessity to diversify its funding base in order to decrease its reliance on governmental funds, and at the same time looking for ways to more effectively achieve its mission, the organization started its first profit-making activity in 2003. The organization established cooperation with a small enterprise and started the production of home accessories (candle holders, ceramics, baskets, etc.) which are marketed to the general public. This has enabled the organization to hire four of its beneficiaries who were previously unemployed and belong to a socially disadvantaged group. The products have been very well-received by the market and have contributed to the CSOâ&#x20AC;&#x2122;s greater visibility and recognition of its work among the public. In 2004, selffinancing contributed almost 10% to the organizationâ&#x20AC;&#x2122;s total budget. Given the growing demand, the organization is exploring various options for further development of the venture in line with its mission and aims. An organization founded in 2003 supports non-governmental organizations (NGOs) and civil society organizations (CSOs) in Croatia by helping to explore policy issues, and by strengthening management and organizational effectiveness. Aside from various mission activities, the organization manages a fee-based training and consultancy service to NGOs and local authorities in the fields of organizational development, project development, human resources, and other management-related topics. Through this consulting service the organization derives approximately 25% of its budget from earned revenues.

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Section One: Organizational Readiness

Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright ÂŠ NESsT

Section One: Organizational Readiness

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section 1: organizational readiness

A. Introduction to Organizational Readiness Social enterprise requires entering a territory that many nonprofits know little about and often regard with mistrust and fear. Building a strong case for social enterprise within the organization takes time and considerable self-reflection. Before developing an enterprise activity, an organization needs to assess its readiness for such activity by evaluating its institution in four key areas: 1. Mission and values: Anticipating and preparing for the potential implications of social enterprise on the organization’s mission and core values. 2. Organizational support: Assessing support for social enterprise among the organization’s key organizational stakeholders (i.e., staff, board members, donors, etc.). 3. Organizational capacity: Assessing whether the organization has the sufficient skills, experience, and capacity to undertake a social enterprise. 4. Financial readiness: Assessing whether the organization has sufficient financial health, stability financial, untied funding and financial systems needed to undertake a social enterprise.

B. Mission and Values Perhaps the greatest single difference between social enterprise and fundraising is the impact these strategies can have on an organization’s mission and core values. Unlike grants and donations, social enterprise may or may not be related to an organization’s mission. In some cases, it may even potentially run against it, or against the core values of the organization. Therefore it is important to anticipate and prepare for the potential implications of social enterprise on the mission and core values.5 The effects of social enterprise on core values are very specific to each organization and its mission. It is not uncommon for organizations to have similar core values (e.g., transparency or volunteerism) but organizations will assess the effects of social enterprise differently based on their environment, past experiences, staff motivations and interests, and other differentiating factors. In general, Croatian organizations feel that social enterprise has the potential to enhance their mission and core values. In those circumstances where a social enterprise could potentially threaten an organization’s mission or values, Croatian organizations still feel comfortable pursing their venture by developing good mitigation strategies. Some of the mitigation strategies 5 Get Ready, Get Set: Starting down the Road to Self-financing, NESsT, 2004.

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Croatian organizations have developed for avoiding mission risk include: 1. Careful planning: by assessing the impact of the social enterprise on mission and core values an organization can decide, after objective analysis, whether or not to pursue the venture. 2. Criteria: sometimes a social enterprise can threaten values if the forprofit venture opens up the possibility of working with clients that do not support the organization’s values (e.g., human rights, environment protection). In such cases, developing criteria for the types of clients the social enterprise will serve is useful and will prevent compromising core values. 3. Inclusiveness: some organizations promote specific work environments that are collegial and participatory. Social enterprise may threaten this culture if the for-profit activity creates competition among staff. In such cases organizations have identified three mitigation strategies: participation from all staff in the planning of the social enterprise; regular communication among staff through meetings, email, and other vehicles related to the progress and implementation of the enterprise; and defining clear staff roles and responsibilities for the development of the enterprise. 4. Transparency: in some cases, organizations feel that social enterprise may be perceived negatively if the nonprofit is seen as making a profit. Organizations have put in place mitigation strategies whereby communication and transparency with their beneficiaries and the public play an important part in explaining why the enterprise does not go against mission or values. An important issue faced by Croatian organizations during the planning phase of their social enterprise is the “relatedness” of the enterprise to nonprofit mission. A social enterprise can be a direct extension of an existing program or activity (i.e., an organization begins to offer a new product or service to its existing beneficiaries) and hence be mission related; or it can be one step removed (i.e., an organization begins to offer its existing product or service to a new beneficiary or client). An organization can also decide to offer a totally new product or service to a totally new beneficiary or client and move away from its mission. As the next table illustrates, the further the organization moves away from its original mission and constituency, the riskier the social enterprise activity typically becomes. In these instances, the nonprofit runs an increased risk of moving away from not only its core mission and values, but also from its organizational capacity, expertise and experience.

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Spectrum of CSO Self-financing activities, from high mission-related (left of chart) to less mission-related (right of chart)

Program Activities

Existing Product/ Service Existing Customers

New Product/ Service Existing Customers

Existing Product/ Service New Customers

New Product/Service New Customers

Services specified in the NGO charter, bylaws, mission

Earned income directly from the NGO’s program activities

New products/ services offered to the existing NGO constituents

Extension of the mission-related activities of the NGO to new paying clients

New product/service to new paying customers (unrelated/ ancillary business activities)

Example:

Environmental Education nonprofit offering public education seminars and publications.

Environmental Education nonprofit charges fees for its educational seminars and charges for its publications.

Environmental Education nonprofit opens vegetarian restaurant and environmental products shop.

Environmental Education nonprofit offers cleaner technology seminars/ consulting to businesses.

Environmental Education nonprofit opens website design studio.

100% grant subsidized

Cost recovery

Cost recovery/ break-even

Small/average profit

Larger profit

High mission impact

Average mission impact

Low mission impact

Croatian organizations feel very strongly about their missions and they tend to focus on enterprises to the left of the chart, where the social enterprise does not branch out of its current products or services and constituencies. This has two consequences: 1. Organizations attempt to “commercialize” their core services. This is often not possible because many of these services do not have potential in the market place; 2. Organizations will decide not to pursue a social enterprise strategy because the only enterprise ideas with potential to meet their financial goals are non-mission related. While social enterprises to the right of the chart are inherently more risky, this risk can be significantly reduced through careful planning and analysis. In those cases where the enterprise has the potential to generate significant profit, the impact on mission can be quite high allowing the organization to continue providing services to its beneficiaries, to expand coverage, or to strengthen the organization’s operations and long-term viability. These strategies should still be explored, and their risks appropriately analyzed. In the process, the organization might realize that it simply lacks the risk tolerance needed to implement a non-mission related enterprise despite its potential market viability.

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The following example provides an illustration of the planning and criteria that can be implemented to satisfy the organization that the risks involved in the social enterprise are acceptable. A Central and Eastern European organization founded in 2001 provides comprehensive policy information covering the following issue areas: policy process, rule of law/corruption, European and foreign affairs, and media independence. Within these areas, the organization publishes policy studies (produced by third parties such as the government, NGOs, international organizations, and academic institutions) and original content pieces (articles, reviews, and interviews). Facing a difficult funding environment in which few donors consider policy work a priority in the country, the organization decided to develop a social enterprise to complement its grant funding. The organization developed an initial list of social enterprise ideas and narrowed it down to two potential ones: the first idea was close to the organization’s mission and involved charging for publications and subscription newsletter. The second idea was not related to the mission and involved using the organization’s research and writing skills to write reports for businesses. The organization assessed the first idea, charging for publications and subscription newsletter, as having limited financial potential: with its reports and newsletter the organization targeted a niche market composed of public officials, academics, and some CSOs. While some expressed interest in purchasing publications, the number was too small to make the enterprise a financially viable one. The second idea, writing reports for businesses, had more potential. During the research the organization found out that corporations often hired outside consultants to provide objective assessments of their image in the public domain. Companies were also interested in soliciting advice on how to effectively lobby government at the national and regional levels. In its business plan the organization further analyzed the types of services companies would require and it decided that it would not provide consulting services to companies that wanted lobbying advice: the organization felt this would jeopardize its reputation of an impartial thinktank. However, it decided to sell services for the development of reports on companies’ image. After careful analysis of the enterprise, the organization felt confident it had put in place the necessary strategies to minimize risks to its reputation: 1. the social enterprise would primarily target medium-sized companies, who did not participate actively in lobby and advocacy; 2. the social enterprise would be managed by an individual that would be hired specifically for this purpose and who had not previously authored independent policy reports for the organization. Furthermore, the manager of the enterprise would be 100% dedicated to managing the enterprise and would not work on policy assignments; 3. the social enterprise designed and developed a due diligence process for each potential client that included an investigation of the company’s past two years’ lobby and advocacy efforts. If the social enterprise uncovered campaigns that had the potential to run counter to the organization’s policy positions, the social enterprise would have to turn down the clients (for each new client that hired the social enterprise the enterprise manager would present results of this due diligence to the organization’s Executive Director, who had ultimate authority for accepting or turning down clients); 4. finally, the social enterprise would rely almost exclusively on outside consultants to carry our research and part of the writing. Relying on outside consultants would ensure that researchers and authors of the policy documents would maintain their reputation as independent policy analysts. With these measures in place, the organization felt it could pursue the non-mission related social enterprise and increase its long-term financial sustainability.

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C. Organizational Support Nonprofit organizations sometimes face resistance to engaging in a for-profit activity because of preconceptions or stereotypes held by stakeholders about such activities. Therefore a key to social enterprise success is to identify these preconceptions and ensure organizational buy-in from the very beginning. The planning process should be participatory and involve a high number of stakeholders. The typical stakeholders to a nonprofit organization are: - Senior management - Staff - Board of Directors - Beneficiaries/members - Donors Not all these stakeholders will become involved in the social enterprise plans, and their involvement will depend on their closeness to the day-to-day operations of the organization. Three groups are usually actively involved: 1. Staff: always closely involved in the decision to plan and launch a social enterprise. The staff usually takes part in doing research, analysis, and often in implementing the social enterprise, so their involvement is necessary from the very beginning. 2. Board of directors: usually takes part in the decision to launch the social enterprise, since it has the potential to bring significant revenues to the organization and funding is an area in which boards of directors are usually closely involved. Based on their background, interests, experiences, and contacts, some board members sometime participate in social enterprise planning. For example, a board member can attend trainings or meetings in which key decisions are made about defining a product or identifying a target market. Board members may also have in-depth knowledge of a particular industry and be a good resource for staff members when researching the social enterprise. 3. Beneficiaries: may be involved in the planning process in the case where the social enterprise will impact them either through employment opportunities or as potential clients. Croatian organizations usually find stakeholders supportive of the development of their social enterprise. But the level of this support depends on the type of stakeholder.

Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright ÂŠ NESsT

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1. Senior management and Board of Directors: tend to overwhelmingly support social enterprise. Croatian organizations cite the following reasons for this support: • Increased sustainability: social enterprise provides flexible income to implement hard-to-fund projects or to sustain the overall organization (i.e., administrative and operational support). • Long-term planning: social enterprise revenues tend to be more permanent than project funds, thereby allowing the organization to plan for the long term. • Staff motivation and commitment: social enterprise can create an entrepreneurial culture and motivate staff through increased responsiveness to market demands and new challenges. 2. Staff: in general, Croatian organizations feel their staff is supportive of the social enterprise. Staff is usually aware that social enterprise has the potential to make the organization sustainable over the long term. In some cases social enterprise is also a motivating factor because it is a new challenge in which new skills can be acquired; furthermore, staff may feel pride in demonstrating it can succeed in implementing a for-profit activity.

Nevertheless, some organizations have encountered staff resistance to social enterprise. Staff may fear the organization will drift away from its mission if they perceive the social enterprise as diverting resources – including human and financial – away from core programs. Also, staff may question the risks associated with starting a social enterprise and the expertise of the organization in successfully running such enterprise. These perceived risks can be compounded by a fear of division (of tasks, remuneration, culture, etc.) a for-profit venture can bring. For organizations already overworked, a social enterprise may also mean a further increase in workload that staff may not be ready to take on.

Organizations have identified a number of strategies to overcome staff doubts or resistance about social enterprise. These strategies involve: • Having a clear decision-making process that lays out the reasons for pursuing social enterprise. In this respect communication with staff is important, whether it is through meetings, e-mail, or other means; • Seeking staff input in the social enterprise development process. Staff will often show great enthusiasm at being able to shape the type of social enterprise an organization will pursue, including brainstorming for potential venture ideas, taking part in research, etc.; • Developing enterprise plans to demonstrate the future benefits of social enterprise. Through objective market research and analysis, an organization can show staff – and other stakeholders – that social enterprise can be implemented without putting the organization at risk.

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3. Donors: a large majority of the Croatian organizations that have collaborated with NESsT feel ambivalent about donor support to social enterprise. One common source of uncertainty relates to the success of the social enterprise: while donors may support social enterprise because it increases sustainability, organizations fear that, should the social enterprise become “too” profitable, donors will withdraw their funding because they will not view their financial support as necessary anymore. Organizations also feel that, while donors may support social enterprise in theory, they are unwilling to provide start-up funds to start the activity. In some instances, organizations differentiate between national and international donors, with the latter identified as being more supportive of social enterprise.6

Croatian organizations have identified some potential strategies to create buy-in from donors who may be reluctant to support social enterprise. Donor education about increasing organizational sustainability through social enterprise is one mechanism to change donor perceptions. Other organizations try to demonstrate that social enterprise does not aim to replace donations but rather to complement them. For example, an organization will show a donor how social enterprise will help to diversify sources of funding and hence increase long-term sustainability. Indeed, Croatian organizations recognize donor attitudes toward social enterprise are changing and that they are more willing to support this activity today than a few years ago.

4. Beneficiaries: while support for social enterprise among many organizational beneficiaries is strong, support among others is mixed. Beneficiaries understand the importance of social enterprise to the organization’s sustainability but they also see is as a potential threat. The primary reason beneficiaries don’t support social enterprise is due to their fear of the organization losing its focus by engaging in a for-profit activity. In their view, this may lead to a decrease in service availability or quality. A second reason for beneficiaries not to support social enterprise is cost: if the organization targets beneficiaries as a potential customer for the new social enterprise, these beneficiaries may react negatively to paying for a service that was previously free. Or, if the organization is providing paid employment to its beneficiaries, they might fear the loss of welfare benefits or wages. Some Croatian organizations have solved this issue by involving beneficiaries in the design of the products or services and the social enterprise.

6 One national donor supporting social enterprise among nonprofits is the National Foundation for Civil Society Development. A goal of the Foundation is the development of social enterprise and employment in the not-for-profit sector. See http://zaklada.civilnodrustvo.hr/index.php.

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A Croatian organization committed to strengthening civil society set out to launch a social enterprise providing consulting services to their CSO beneficiaries. The organization had well-established connections with several CSOs from their target market, thanks to years of previous assistance to them through various mission activities. The organization decided to build on its established network and involve several of its previous beneficiaries in the planning of a new social enterprise. Apart from including them in its market survey sample, the organization also conducted two workshops for approximately 30 CSOs to collect information about the needs, preferences and characteristics of its future potential customers. Since the enterprise would change the relationship between the organization and its beneficiaries â&#x20AC;&#x201C; the target CSOs received similar support from the organization free of charge, thanks to a donor grant â&#x20AC;&#x201C; these workshops also served as a way to directly communicate the new situation and the goals of the new enterprise with them. It was easier for the beneficiaries-turned-clients to accept that the organization would start charging for its professional services when they were involved in developing the offered services, and could provide input into fine-tuning them according to their own needs. Involving future clients/beneficiaries in the planning and development of a venture will not only provide invaluable market information about their needs and preferences, but will increase their trust and loyalty, deepen relations and facilitate future communications and promotion efforts; ultimately greatly increasing the chances of success for the social enterprise.

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section 1: organizational readiness

D. Organizational Capacity In addition to having support from stakeholders, organizations need to have the necessary capacity to plan and implement a social enterprise. A forprofit activity may require different skills, experiences, and capabilities from those traditionally found in nonprofit organizations, and identifying internal strengths and weaknesses early on will help to reach the organizational and financial goals the organization has set for the enterprise. Organizational capacity can be analyzed in four areas: organizational culture, staff capacity, infrastructure capacity, and strategic capacity. - Organizational culture: most Croatian organizations believe their culture is “somewhat” entrepreneurial, and many encourage and reward innovation and initiative. These two traits are important in fostering a climate where opportunities can be identified, seized, and a certain level of risk tolerated, especially considering the market environment in which social enterprises participate. Additionally, a majority of organizations believe there is a tolerance to risk in relation to social enterprise among their staff members. - Staff capacity: overall Croatian organizations believe they have adequate or good staff capacity for social enterprise, including managerial and technical skills necessary to plan and launch the venture. Nevertheless, successful design and implementation of mission programs may not translate into thriving social enterprises. Social enterprise planning requires skills and analytical tools that are often not used in nonprofit organizations. These skills and tools include market analysis, in particular customer and competitor research, and financial analysis. For most organizations, these skills and tools need to be acquired during the planning process and developed during the implementation phase. In developing plans for their social enterprises, organizations have a number of options to organize the work internally and take advantage of their capacity. The first option, which is often the most widely used, is to form a team to work on the social enterprise idea. This team conceptualizes the idea, attends trainings on the process, performs research, analyzes the results and develops the pre-feasibility and feasibility studies as well as the business plan. Teams are usually composed of two staff members who report to the Executive Director about the progress of the social enterprise development. Other organizations decide to entrust the social enterprise development process to an individual (as opposed to a team) who leads the process by involving staff members through questions, input, and feedback. The staff member leading the process may have been selected because of their special knowledge of the social enterprise, background in business or market research, or because this person will most likely manage the social enterprise once it is implemented. Though this approach has benefits – most notably, it ties up fewer people in the process – it also has some drawbacks. Social enterprise planning is a lengthy process that can best be performed by a

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team who divides tasks according to individual strengths and work schedules. Furthermore, if the individual leaves the organization or doesn’t have the proper institutional support, the process can die out entirely. Many Croatian organizations have faced such problems, whereby the “champion” of the social enterprise is not supported and eventually cannot complete the tasks in time, or at all. Therefore organizations should aim for buy-in and ownership of the process by involving several members and using a team approach to social enterprise development. The best option is probably a combination of both of these strategies. While a team approach has many benefits when planning for an enterprise, it is nevertheless necessary to count on the presence of an individual who can serve as the “champion” of the enterprise and lead the team through the process. Not having a social enterprise “champion” in the organization can be an important obstacle to the development and successful implementation of a social enterprise. The champion provides leadership and vision, takes responsibility for coordinating team work, and ensures tasks are completed on time. The champion does not need to be the Executive Director or be part of the senior management: a staff member can show leadership and be the ‘project champion’ and report to senior management. The experience of the following organization presents a good illustration of the perils of entrusting the social enterprise planning process only to one individual and to the benefits of involving a team in the process. When the organization, which works to advance minority rights in Croatia, decided to embark on the social enterprise development process, it assigned one of its team members to lead the process and be the coordinator of planning and research. Six months into the process, and after having attended a social enterprise planning workshop, the person’s role inside the organization changed and the person first became a volunteer and then left the organization – with the rest of the team not knowing the status of the social enterprise process. The organization assigned a new volunteer very quickly, who took over with lots of enthusiasm and started the process almost from scratch. This time the management decided to involve the entire team in meetings and discussion and distributed tasks in order to get everybody’s input and buy-in, as well as to share the knowledge of the process, so that all the information would not be concentrated in one person’s hands. This worked well; several team members attended workshops and provided input during the planning process, and this proved to be critical for maintaining continuity when the volunteer’s term was up. The process was easily then taken over by staff. In some limited number of cases, organizations rely on outside support for planning the enterprise. Organizations don’t usually have the resources to pay a consultant to undertake market research and develop a pre-feasibility study or business plan, but some organizations obtain funding from donors for the business planning process. The benefits of using an external consultant are: Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright © NESsT

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1. The person is selected because of prior experience in business planning or market research and thus can bring significant expertise to the project; 2. The process may progress faster because the consultant can dedicate more time to it than a staff person could, given the staff ’s other responsibilities in implementing programs. While these benefits can be significant, especially for organizations with little experience in business planning or for staffs already overworked, outsourcing the social enterprise planning process can also have drawbacks: 1. The organization does not manage the process and may not internalize the results of the planning. One of the most significant benefits of the social enterprise development process is that it builds the capacity of the organization to analyze and implement social enterprises. Business planning is fundamental in understanding the social enterprise product, client, operations, and finances so that the venture can be successfully implemented; 2. The consultant may have a different understanding or angle on the social enterprise than the organization, thereby producing results not in line with the organization’s expectations. This is especially relevant if the consultant does not have experience in social enterprise planning and brings a for-profit only perspective to the venture. Such a perspective will overlook important elements of social enterprise planning, including impact on the organization’s mission, beneficiaries, etc. Although the option of using an outside consultant should not be discarded, it is important that the organization find someone who knows and understands the organization and who will invest time in actively recruiting the participation of staff in the process. An organization promotes human rights in Croatia by monitoring and documenting human rights violations and engaging in advocacy campaigns for positive change. The organization decided to explore social enterprise as a sustainability strategy, but it quickly faced staff capacity issues during the planning process. With only three full-time employees the organization had difficulties completing its market research and developing the necessary studies to asses the potential of the social enterprise. Fortunately, the organization had recently won a sizeable institutional grant that provided funding for two outside consultants. It decided to hire an expert to help conduct the market research. The consultant, a long-standing friend of the organization, not only was well-versed in the necessary business concepts and techniques, but also understood the organization‘s mission and plans intimately. Besides helping the organization with the market survey and its interpretation, the consultant also served as a sounding board for the social enterprise and assisted the organization in clarifying its goals and market positioning through intensive discussions. While not all organizations can find funding for external experts to help them along the enterprise development process, finding the right person with the requisite business knowledge and familiarity with the organization’s work can help a great deal in facilitating a speedy, thorough and careful planning process.

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- Infrastructure capacity: this includes facilities, space and equipment necessary to implement a social enterprise, as well as resources to grow or expand existing infrastructure. Another important element of infrastructure capacity is systems such as financial management systems, human resources systems, etc. A large number of Croatian organizations feel they do not have the adequate infrastructure to start a social enterprise. Two areas of particular weakness are access to resources to expand current infrastructure to meet the demands of the new activity and access to management systems.7 Organizations can improve their chances of expanding their infrastructure by developing a business plan that describes the opportunity the social enterprise brings to the organization in terms of financial and mission impact. The business plan will identify the necessary infrastructure to implement the enterprise and also contain a funding plan to launch the activity. Donors are more open toward funding the infrastructure required by the social enterprise if they recognize the needs presented in a carefully-developed and wellarticulated business plan.

Management systems can also be identified in the business plan and implemented during the planning process or once the enterprise is launched. One of the greatest priorities for organizations is to design a financial management system that can track the revenues, expenses, and profits of the enterprise (see below Financial Readiness).

- Strategic capacity: most organizations have some or good strategic capacity in place, including strategic plans, annual work plans, and flexible decision-making processes for adapting plans to changes and challenges. Launching a for-profit activity requires planning and flexibility, since client demands may change, competition may introduce new products to compete with the social enterprise’s, etc. In spite of their strategic capacity, few Croatian organizations have ever developed a business plan. For organizations that have not previously developed business plans it is important to research what tools are available and appropriate for the organization’s capacity. Many standard business planning tools exist online and organizations can also rely on more specific social enterprise development tools and support.8 As tools for business planning are selected, it is important that organizations identify how the business plan fits in their existing strategic plan or strategy so the social enterprise responds to a clearly defined need or objective.

7 Management systems refer to the processes and procedures that produce information designed to assist decision makers in ensuring an organization fulfills all tasks required to achieve its objectives. 8 See NESsT’s Get Ready, Get Set: Starting Down the Road to Self-financing, a beginner-level handbook that helps nonprofit organizations decide whether (and how) starting up or expanding a social enterprise can help organizations reach their financial and mission goals.

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E. Financial Readiness The last area of organizational readiness for social enterprise is financial readiness. An organization is considered financially ready for social enterprise if its funding meets two basic criteria: it has enough funding to support main activities for a minimum of one to two years, and its funding mix is diverse. From this perspective, few Croatian organizations appear financially ready. While many organizations list their financial status as enough to cover their main activities, they are often dependent on one source of funding: foreign donors, including foundations and governments. For organizations in this situation social enterprise is an important strategy for diversification. Nevertheless, organizations dependent on one donor should be aware of the threat to their social enterprise planning if the source of funding dries up or decides not to recommit (see example below). For organizations having difficulties covering their basic activities because of insufficient funding, it is probably not the right time to plan for a social enterprise. Social enterprise development is a lengthy process that can take up to one year to implement and a few more years to turn the first profits (it is not uncommon for social enterprises to start making a profit in their second or third year of operations). Organizations in this situation are better off fundraising to cover gaps in their current funding and to turn to social enterprise once their financial situation is more secure. It is important for Croatian organizations that are dependent on one donor to consider the risk their funding structure might represent to social enterprise planning. A Central and Eastern European organization founded in 1995 works toward local economic development and job creation. Over the years, one of the organizationâ&#x20AC;&#x2122;s main programs has become the promotion of the return of educated professionals from foreign countries to use their skills and knowledge toward the development of their home country (reverse braindrain). Since the conception of the program, the organization wanted to provide its services to returnees and their potential employers in the form of a fee-for service social enterprise. The organization had enough funds for the first few years of the program, covering the salary of a full-time staff and the cost of events and program. The funds were provided by one single source, a government agency, which discontinued its support to the program despite earlier promises. Basing their strategy on ongoing government funding and future social enterprise revenues, the organization neglected other fundraising activities and could not bridge the financing gap they faced. Thus they suspended their activities for over a year, until the government agency decided to grant them a one-year grant to continue and expand their activities. That year, new staff was hired and a sophisticated service oriented website was developed, to provide the basis for the social enterprise. The organization concentrated on finding corporate employers to become clients of the social enterprise and thus provide revenues to sustain the NGO. No additional grant fundraising was considered and the organization ran out of funds again. Thus while they had a functioning website ready to receive visitors, they had to again suspend additional activities and let go of staff, due to the insecure funding situation.

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section 1: organizational readiness

Social enterprise requires that a nonprofit have in place financial reporting systems that allow it to easily assess the financial situation of its enterprise(s) in an accurate, regular and timely manner. Few Croatian organizations have implemented adequate financial systems for social enterprise. Financial information is often analyzed for the entire organization, and is not broken down into its various programs and activities, including its social enterprise activity. Furthermore, very seldom are revenues and expenses analyzed together, making it difficult to assess the financial situation of the organization (i.e., which activity is generating a surplus? covering costs? losing money? more difficult to fund?) and to determine whether the business activity is actually being “subsidized” by other project income of the organization. As the following example shows, an organization can implement financial systems for the entire organization that will eventually make it possible to track the performance of the enterprise. A Central and Eastern European organization promotes a deeper connection with the living environment by cultivating the land using methods that work in harmony with nature. In particular, the organization uses organic and biodynamic farming methods to establish sustainable agricultural practices. In 1999, the organization decided to launch its social enterprise, a weekly delivery service of fresh organic produce (fruits and vegetables). The produce boxes are prepackaged with the week’s available organic produce and customers call in to have their weekly supplies delivered to their home, office, restaurant, etc. Before launching the enterprise, the organization assessed its financial system and came to the conclusion that it was not designed to provide timely information on which management could act. The budget for the organization looked like the following table (numbers are fictitious). Cost Description

Amount ($ US)

General and administrative costs

58,730

Staff salaries (incl. benefits)

34,575

Rent

17250

Utilities

1100

Equipment

825

Printing

200

Telephone

980

Marketing

2300

Travel

1500

Program Costs Social Gardening Group Training in Practical Gardening

4235

Volunteer Work Days

2690

Landscaping Day

1200

Pricking Out Day

1490

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Cost Description

Amount ($ US)

Festivals Organic Spring Festival Organic Summer Festival Education and Research Total

21245 8900 12345 1600 88501

In a separate table, the organization also kept track of its grant funding from each of its donors. When the organization analyzed its financial readiness for social enterprise, it realized that its current financial system did not provide a complete picture of the organization’s financial status. For example, the organization did not know which programs were more costly to run. It also did not know if grants covered all programs evenly, or if some programs were easier to fund while others very difficult. Finally, while the organization knew from experience that donors were reluctant to fund administrative expenses, it wasn’t clear from its financial statements which types of expenses presented particular challenges. Based on NESsT’s recommendations and generally accepted business principles, the organization decided to re-design its financial system to have access to these types of information. The first step was to allocate General and Administrative costs to each of its programs and activities. The organization allocated expenses difficult to track by program or activity – staff salaries, rent, utilities, and telephone – by using an estimate of the amount of time each staff person spent on the programs. The organization allocated other General and Administrative costs directly to the programs based on the needs of each activity. The result was the following budget (only major programs are reported – numbers are fictitious).

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Social Gardening Group

Volunteer Work Days

Festivals

Education & Research

Admin. & Fundraising

10372

3458

5186

12101

3458

Airfare

300

525

Accommodations

225

Meals

100

270

Cost Description Staff salaries (incl. benefits) Travel

Program Delivery Materials (design, print)

330

770

6505

1100

Special Events

775

820

7390

350

1800

1100

4450

Supplies Training and development Workshops

1330

2700

Books, manuals

150

Conference fees

200

Operations Rent Utilities

5175

1725

2588

6038

1725

330

110

165

385

110

Printing

150

Telephone

294

147

Marketing

300

200

1800

50 343

Equipment Computers

600

Office Total

225 21306

8281

31281

21092

6541

With this in place, the organization was now able to assess the real, total costs of each program. For example, while the old budget showed the program Research and Education as the smallest and least costly, the new budget revealed that it was much costlier than previously thought. This was mainly due to the amount of indirect costs dedicated to this program, which, once property allocated, revealed the true picture of the programâ&#x20AC;&#x2122;s costs. Similarly, the organization was now able to identify with precision the total Administrative and Fundraising expenses it incurred during the year. Since the organization had had difficulties funding these types of expenses, the new budget now permitted to develop measurable funding targets to ensure the necessary Administrative and Fundraising support for its programs.

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section 1: organizational readiness

The last step in re-designing the organizationâ&#x20AC;&#x2122;s financial system was to take into account revenues. By analyzing its grants, the organization was quickly able to identify how grants were to be allocated among its programs. This exercise yielded the following budget.

Cost Description

Social Gardening Group

Volunteer Work Days

Festivals

Education & Research

Admin. & Fundraising

REVENUES International Foundations Government National Foundations Corporations Individual Donations

13700 4500

3600

11350 800

2500 12500

4000

7700

Social Enterprise Total Revenues

18500 1225

3000 20650

700 2000

32800

14925

5200

5,186

12,101

3,458

Airfare

300

525

Accommodations

225

Meals

100

270

EXPENSES Staff salaries (incl. benefits)

10,372

3,458

Travel

Program Delivery Materials (design, print) Special Events Supplies

330

770

6505

1100 350

775

820

7390

1800

1100

4450

Training and development Workshops

1330

2700

Books, manuals

150

Conference fees

200

Operations Rent Utilities

5175

1725

2588

6038

1725

330

110

165

385

110

Printing

150

Telephone

294

147

Marketing

300

200

1800

50 343

Equipment Computers

600

Office Total Expenses Surplus (Shortfall)

225 21306

8281

31281

21092

6541

(656)

4219

1519

(6167)

(1341)

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While the organization previously was aware of its budget shortfall, it was now able to identify the reasons for this overall funding gap. In particular, the organization was surprised to learn that the Education and Research program was losing money: senior management believed the large international foundation grant made this program a money generator for the organization. However, research took a lot of staff time and hence was significantly more costly than anticipated. Furthermore, the organization was now able to assess precisely its Administrative and Fundraising gap and it could now focus on identifying donors who would be willing to provide a small grant to reach their yearly fundraising target for this activity. With this new system in place, the organization added its social enterprise activity into the analysis. The organization inserted a column to the left of the Administrative and Fundraising activity and, completing revenues and expenses, was able to quickly and effectively assess the total financial health of the organization. (For more information on social enterprise v. nonprofit accounting, see Section III below and Get Ready, Get Set: Starting Down the Road to Selffinancing, Chapter 3).

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Hit the Ground Running

Cost Description

section 1: organizational readiness

Social Gardening Group

Volunteer Work Days

Festivals

Education & Research

Social Enterprise

Admin. & Fundraising

REVENUES International Foundations Government National Foundations Corporations Individual Donations

13700 4500

3600

11350 800

2500 12500

4000

7700

Social Enterprise Total Revenues

18500 1225

3000 20650

700 25750

2000

32800

14925

25750

5200

5,186

12,101

9340

3,458

EXPENSES Staff salaries (incl. benefits)

10,372

3,458

Travel Airfare

300

525

Accommodations

225

Meals

100

270

Program Delivery Materials (design, print)

330

770

6505

1100

Special Events

775

820

7390

350

1800

1100

4450

Supplies

750 3460

Training and development Workshops

1330

2700

Books, manuals

150

Conference fees

200

Operations Rent Utilities

5175

1725

2588

6038

330

110

165

385

Printing

150

Telephone

294

147

Marketing

300

200

1800

343

1725 820

110

415

580

800

Equipment Computers

600

Office Total Expenses Surplus (Shortfall)

355

225

21306

8281

31281

21092

16520

6541

(656)

4219

1519

(6167)

9230

(1341)

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section 1: organizational readiness

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F. Establishing Mission and Financial Goals for Self-financing After completing the assessment on organizational readiness for social enterprise, the organization should be ready to define its mission and financial goals for social enterprise. - Mission goals: organizations usually develop mission goals for social enterprise in line with their mission and programs. The mission goals developed by Croatian organizations can be summarized into six categories, including: 1. Increase the number of beneficiaries: use social enterprise as a way to expand existing services to more beneficiaries. In addition, Croatian organizations view social enterprise as a means to reach new beneficiary groups. 2. Run new programs or expand existing ones that have high mission impact: social enterprise gives the ability to implement or expand programs relevant to the organization’s mission. For example, some organizations identified activities in their strategic plan that they could not easily implement through donor funds. Social enterprise – and the funds it generates – now allowed these programs to be supported. A Croatian organization working to improve children’s quality of life by providing psychosocial and educational activities identified one of its mission goals for social enterprise as providing psychological support to parents. Offering a new service to parents would strengthen the organization’s mission of improving the enabling environment for the development of children. 3. Raise awareness about the mission: through social enterprise organizations also aim to attract more people to the relevant social issue. For example, some organizations provide employment to mentally disabled people through social enterprises such bakeries, restaurants, etc. One of the mission goals of these social enterprises is to educate or seek the support of the local community by exposing it to the capabilities of the target group. This in turn provides a model encouraging local businesses to employ this same target group or may create new supporters for the organization, in the form of volunteers, donors, etc. 4. Provide rehabilitation or employment to beneficiaries: one of the most common mission goals for social enterprise is to provide needed activity to beneficiaries. It is especially common for organizations to provide employment to beneficiaries who usually cannot find work in the marketplace. For example, social enterprise can provide rehabilitated employment to youth suffering from drug addiction.

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5. Increase visibility: for some Croatian organizations, social enterprise is a tool to increase the overall organization’s image. Some organizations have noted that they are not well-known to the general public, or they are known in relation to very specific issues (e.g., environmental accidents). By entering the marketplace and interacting with new customers, the organization can become better known in its community. 6. Strengthen the overall organization: through social enterprise organizations also seek to increase their organization’s management and operations. For example, an organization promoting environmentally sustainable development identified as one of its mission goals transparency and accountability. For this organization these were two important elements of its reputation that it sought to increase through an enterprise activity. Other organizations have identified improving human resources management or introducing new systems (see above example on financial readiness). - Financial goals: for many organizations the financial potential of social enterprise is an important aspect in implementing such activity and Croatian organizations have identified a range of corresponding financial goals. 1. Operational expenses: one of the main financial goals is to use social enterprise proceeds to cover organizational operational expenses. Sometimes referred to as “overhead”, these expenses are not directly linked to programs, activities, or projects, but rather support their implementation. Some operational expenses organizations plan to cover through social enterprise include salaries of administrative staff, promotional materials, and technology. 2. Specific program expenses: organizations also identify as a financial goal to fund particular program expenses that may be difficult to sustain over time. For example, an organization working in education may need to hire an educator whose salary is not covered through project funds. In this case, social enterprise can help fill this need. Some organizations also identify funding the development of publications as an important way to disseminate their work and program impact. 3. New or hard-to-fund programs: social enterprise generates untied revenues that can be used at the discretion of the organization (unlike grant revenues, which are often tied to a program and sometimes also to expenses). Untied revenues allow some organizations to implement new programs or programs difficult to fund through grants. For example, while developing its strategic plan, an organization identified programs it wanted to implement based on the needs it identified in its environment. However, two years after having completed the strategic plan, the programs were still not implemented because the organization had been unable to find funds for it. When developing financial goals for its social enterprise, the organization decided the social enterprise proceeds should cover these programs. 4. Avoid donor dependency: an overall objective of social enterprise is to make the organization more autonomous in terms of funding.

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Specifically, organizations seek to fund activities independently of donor priorities and to fund expenses that are high priority for them (e.g., operational expenses). 5. Leverage funding: some organizations have identified social enterprise as a way to leverage funding from other donors. In many instances donors require matching funds (or co-funding) before awarding a grant. Social enterprise proceeds can be used to match grant funding. 6. Expand or grow the organization: for organizations that took the decision to grow their programs or activities, social enterprise is a good way to fund this growth. For example, an organization working to foster active and creative participation in community development identified the need to expand its budget by 10% per year over the next few years to meet its program objectives. Social enterprise was the major vehicle on which the organization planned to rely to fund this expansion. In some instances, Croatian organizations have difficulties developing mission and financial goals for their social enterprise. This is often due to challenges relating to the role social enterprise will play within the overall organizational strategy. For organizations that have not developed a long-term vision (e.g., through a strategic plan) and have not identified corresponding organizational priorities, it may be difficult to integrate the social enterprise into existing activities. Social enterprise has to be part of an overall strategic and funding plan to strengthen the mission and financial sustainability of the organization. Most Croatian organizations have only vaguely defined financial goals for their social enterprise when they start the planning process, unless it is an already functioning business with sales and revenue history. Therefore the pre-feasibility and feasibility analyses help them to refine those financial goals by producing an assessment of the financial potential of the business idea. In some cases, the financial assessment results in the organizationâ&#x20AC;&#x2122;s decision to abandon an enterprise idea and to start the analysis of a new more promising one. A Croatian organization works to foster individualsâ&#x20AC;&#x2122; potential through education and the prevention of at-risk behaviors. The organization knew form the start and agreed during their initial organizational readiness assessment that they wanted the social enterprise to generate revenues to improve working conditions of staff and volunteers and to cover some overhead costs. However, when they started the social enterprise process the precise financial goal for the enterprise remained vague and not-yet quantified. After the first financial analysis, which included cost estimates and breakeven analysis, they were able to better approximate the financial potential of selling educational games and to define their financial goal for the enterprise as 20% of the total organizational budget. Once the organization completes its business plan, this financial goal will become the baseline against which they can measure future performance and decide, whether their enterprise is meeting their expectations.

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section 1: organizational readiness

G. Final Word on Organizational Readiness: duration to complete this phase The time needed to complete the organizational readiness phase of the social enterprise development process varies based on the organizationâ&#x20AC;&#x2122;s capacity, resources, and knowledge of the social enterprise idea. Organizations usually assess their organizational readiness for social enterprise in a few weeks, but because this assessment requires input from many team members, the challenge often lies in finding time to meet and complete the assessment.

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Section Two: Social Enterprise Business Planning

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Section One: Social enterprise business planning

H it the gr o u n d r u nning

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section 2: business planning

Before any organization begins a social enterprise, they must perform detailed research and analysis of the idea. Organizations need to analyze a series of elements when assessing the potential of a business venture: the product or service; the market in which the product or service will be sold; the operational and managerial needs of the venture; the financial potential of the product or service; the risks involved in starting this new venture; and the mission impact the venture will have on the overall organization. NESsT’s social enterprise business planning process includes three phases – pre-feasibility study, feasibility study, and business plan – that build upon each other to explore the feasibility and implementation of the venture (see Section I-B for more detailed description of each). Below is a summary of how some Croatian organizations have completed this process for their business ideas.

A. Product Definition It’s critical to have a clear, brief, and direct definition of the product or service to be offered. The organization needs to be objective and willing to adapt the definition within certain parameters. The definition should include (where applicable): - What is the product or service? - Who will use the product or service? - Where will the product or service be found? - When will the product or service be used? - How will the product or service be obtained by or delivered to customers? Following is a series of product definitions Croatian organizations have developed during their pre-feasibility studies. After each product definition, a table summarizes which elements the definition meets and which it left out. The more elements are included in the definition the clearer is the product or service description. Our social enterprise provides consulting services to small and medium NGOs (revenues up to 200.000 Kuna) in Zabreb and the surrounding areas through the newly established Agency for Intellectual Services. The services comprise of basic training and advanced management support. The basic training includes grant writing, program design and evaluation, and minimum accounting and bookkeeping services as demanded by national legislation. The advanced management support includes strategic planning, communication, income-generation, and advanced financial management. Services are shaped according to the needs of customers and are provided at the social enterprise’s office or in the field depending on customer preference.

section 2: business planning

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What is the product or service? Who will use the product or service? Where will the product or service be found? When will the product or service be used? How will the product or service be obtained by or delivered to customers?

The social enterprise will create educational games designed to help improve family ties, educate players and prevent children from developing behavioral disorders. The educational games will have various topics: communication, teamwork in the family, solving problems, self-respect, decision-making. The games will be sold to families with primary school children, schools, or other institutions for children (libraries, children’s homes, hospitals) in the Croatian market through toy stores and the organization itself. What is the product or service? Who will use the product or service? Where will the product or service be found? When will the product or service be used? How will the product or service be obtained by or delivered to customers?

Our enterprise will provide one/two-day educational workshops to women with a secondary education or more (individual professionals, women in small and medium-sized enterprises – SMEs – business women etc.) in Zagreb, who have problems advancing their careers and/or in their professional lives. Organized in groups of maximum ten, the participants can be trained in: psychological help for self-confidence building, media, public relations and communication basic skills, use of and communication through information technologies, social and business skills. What is the product or service? Who will use the product or service? Where will the product or service be found? When will the product or service be used? How will the product or service be obtained by or delivered to customers?

Our young expert team offers consulting to CSOs, public institutions, SMEs and local governments in the region, in the field of organizational development to optimize resources and reduce costs of operation. Using the experience, contacts and material resources, the results include better promotion and greater number of customers with an increased overall satisfaction index. What is the product or service? Who will use the product or service? Where will the product or service be found? When will the product or service be used? How will the product or service be obtained by or delivered to customers?

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section 2: business planning

B. Market Research and Analysis Market research is core to social enterprise planning and to understanding all aspects of the market and its relationship to the proposed venture. The research provides the organization with the opportunity to get to know the venture before committing to it. If the organization decides not to pursue the venture, the research has saved them both time and investment – and if the organization does decide to carry on, it builds a strong base for running the venture. Market analysis allows organizations to make key decisions about the social enterprise: the target market and competition; how to position the product or service; and how to develop a successfully marketing strategy. The market analysis also helps the organization to make a convincing argument to potential investors about the viability of the venture. Doing a rigorous market analysis is an essential part of business planning. Fully aware of this, a Croatian organization committed to strengthening civil society set out to launch a social enterprise providing consulting services in organizational development. The organization set out to conduct thorough market research including an analysis of the industry, their target market and the competition, as well as careful thinking about their market positioning and strategy. To survey their target market, the organization mainly relied on the CSO network they had previously built by providing similar services through a project grant – under this grant services were provided free of charge. The organization directly contacted over one hundred CSOs with a detailed questionnaire to gauge market demand among them. Following the analysis of the results of this survey, they followed up either via phone or personally with those that showed interest and in the end met with approximately 30 of them to further discuss, promote and fine-tune their planned services. To complement this targeted research, the organization also conducted background research using the internet and other secondary sources (statistical office, company registries, etc. – see table below “Data Sources for General Market Research”) to learn about the industry and their competition, as well as the prevailing prices. The results of this research were as follows: • Industry: the organization decided to enter the organizational development consulting market, which was experiencing growth both nationwide and regionally. Although the overall market (including both for-profit and non-profit organizations) was relatively wellserved, the organization found that few already existing consulting service were reaching out to the specific needs of CSOs. This was due to the consulting service providers’ lack of expertise with CSO organizational management needs in terms of donor relationships, human resources, and program management. The organization

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found that while barriers to enter this industry were generally high (the industry required special skills and expertise, client building, etc.), the organization already possessed the infrastructure and capacity to serve the market so their start-up costs would be low (see financial example below). The market analysis revealed that the two main drivers of success in the field were: 1) quality of service, 2) acceptable price. The organization felt they could meet both of these criteria, a sign they had their basic minimum requirements to become successful in this market. During their research they also found the average market rate for basic consulting services to be in the 250-350 HRK range per month. • Target Market: The organization found in its market research that the overall market was not particularly segmented by service need: most providers offered similar organizational development services, not differentiating between basic training and advanced management support. They further found that CSOs were definitely underserved within the overall market. Interpreting these results, they decided to provide tailor-made services to the CSO market segment, and within that segment, to offer basic training as well as advanced management support. Besides differentiating between potential customers based on the level of sophistication of the services they demanded, the organization further segmented their target groups geographically (targeting local CSOs from Zagreb; Zagreb County; and the Zagorje region, with a particular focus on CSOs up to a 30-km distance from their office) and according to size (small and medium size CSOs with revenues up to 30 000 Kn and 200 000 Kn respectively). Using data such as the one found in the Data Sources for General Market Research table below, they found about 1000 active CSOs in their locality and around 4000 in their wider geographic focus (numbers are fictitious). The organization closely cooperated with approximately 30 organizations in assessing their needs and developing services that would respond to their varied needs (see Section II example). This market research and product development collaboration yielded that 10 organizations would certainly contract the organization’s services at the prices given, while a further 15 expressed some willingness. The organization used these results to develop detailed financial projections for their enterprise (see financial section for the financial analyses). All target groups (small or medium sized, local or regional) shared one common characteristic: they did not have the expertise or resources to implement a full range of professional organizational development systems and required quality support services (as defined by reliability, accuracy and transparency) to implement such a systems.

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Table 1: The social enterprise’s market segmentation and target markets Size and service need Segmentation criteria

Geographic

Medium (Advanced Management)

Small (Basic Training)

Local

Primary

Regional

Secondary

Don’t serve

The organization segmented its market both by geographic location and organization size. After assessing the market potential of each segment, it decided to target primarily local small and medium organizations. In addition, it identified medium regional organizations as a potential market segment to target. However, the organization decided not to focus on small regional CSOs, as it would not be profitable to serve this market given the distance. • Competition: the organization found that eight firms provided consulting services in organizational development in Zagreb, with two to eight employees each, while there were approximately 20 organizational consulting firms operating within the wider region, employing about 60 people in total (numbers are fictitious). These competitors mostly covered the needs of for-profit companies and only a few catered to CSOs, which they only started targeting in the previous two years. While most of these competitors were already well-positioned in the market with established customer bases and stable revenues, the organization found that most of them were offering only a standard package of accounting services and they were not familiar with the specific characteristics and needs of CSOs. • Positioning: Accordingly, the organization positioned its service as CSO expert services, as this was the area where their competitive advantage and connections lay and was at the same time underserved by competitors. They decided to concentrate on small and medium-size CSOs with a wide range of services comprised of basic training (including grant writing, program design and evaluation, and basic accounting and bookkeeping) and advanced management support (including strategic planning, communication, income-generation, and advanced financial management). Their prices were comparable (on par or slightly below) to competitors’ and thus they were providing tailor-made high quality services at competitive rates.

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• Market Strategy: They planned to market both their Basic Training and Advanced Management Packages among local and small CSOs, and they would primarily promote the Advanced Package to groups outside of their immediate surroundings (it would not be profitable to market the Basic Package to organizations located far away) and larger CSOs (their management needs required more complex solutions) – see Table 1 above. They planned to serve between 20 to 30 organizations during their first few years of operations – the estimation was based on their market research (the specific declared interest of future clients), as well as their initial capacity (for capacity calculations, see the breakeven section below). In the following years, they thought it realistic to increase these numbers to between 50 and 70 organizations, which would be covering about 5-8% (number is fictitious) of CSOs from Zagreb County. These projections were in line with their capacity as well as financial goals. Following a longer term strategy, the organization also plans to analyze the market for the same services in other regions where it has offices.

To conduct market analysis, organizations will first need to gather the appropriate data using both primary (interviews, surveys, etc.) and secondary (reports, articles, books, etc.) data. This includes finding out information about the competition, interviewing potential clients through a pilot project, focus group or survey and using all of the resources at their disposal to get a clear picture of the field the social enterprise is entering. The table below provides a list of secondary resources to help in the market research.

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Data Sources for General Market Research Level of Analysis

Type of Data

Data found

Individual

Geographic and demographic

Population by sex, age, educational level, etc. Population by province

Individual

Economic statistics

Cost of living indexes

Household surveys Consumer prices Income distribution

Corporation

Geographic and demographic

Database of large enterprises, turnover, etc.

Statistics on industries (exports, imports, prices, salaries, jobs, etc.)

Sectoral reports

Number of businesses by type and size

Source Drzavni zavod za statistiku (Central Bureau of Statistics) Statistical Information Statistical Yearbook Series www.dzs.hr Drzavni zavod za statistiku (Central Bureau of Statistics) Statistical Information Statistical Yearbook Series www.dzs.hr Drzavni zavod za statistiku (Central Bureau of Statistics) www.dzs.hr The Institute of Economics, Zagreb http://www.eizg.hr/ Drzavni zavod za statistiku (Central Bureau of Statistics) www.dzs.hr Drzavni zavod za statistiku (Central Bureau of Statistics) www.dzs.hr Drzavni zavod za statistiku (Central Bureau of Statistics) www.dzs.hr Independent Croatian Union www.nhs.hr Hrvatska Gospodarska Komora (Croatian Chamber of Economy) www.hgk.hr Biznet www1.biznet.hr/HgkWeb/do/language?lang=hr_HR The Institute of Economics, Zagreb http://www.eizg.hr/ Hrvatska Gospodarska Komora (Croatian Chamber of Economy) Economic Reports & Proposals www.hgk.hr Independent Croatian Union www.nhs.hr Drzavni zavod za statistiku (Central Bureau of Statistics) Statistical Information Statistical Yearbook Series www.dzs.hr Hrvatska Gospodarska Komora (Croatian Chamber of Economy) Economic Reports & Proposals www.hgk.hr Academy for Educational Development (AED) An Overview of corporate social responsibility in Croatia www.aed.hr Hrvatska Gospodarska Komora (Croatian Chamber of Commerce) Entrepreneurship in numbers 2003-2005 Catalog of products and services by entrepreneurs in 2006 www.hgk.hr Biznet www1.biznet.hr/HgkWeb/do/language?lang=hr_HR

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Data Sources for General Market Research Level of Analysis

Type of Data

Data found

Reports on SME sector

NGO

Geographic and demographic

NGOs by sector

NGOs by geography

Employment in NGO sector

Source Hrvatska Gospodarska Komora (Croatian Chamber of Economy) Economic Reports & Proposals Small Business www.hgk.hr CEPOR http://www.cepor.hr/publikacije.html Hrvatska anka za obnovu i razvitak http://www.hbor.hr/o_izvjesca.asp SEE-Database www.see-database.org/ World Association of NGOs (WANGO) www.wango.org OneWorld Southeast Europe see.oneworld.net SEE online http://www.southeasteurope.org/ World Association of NGOs (WANGO) www.wango.org OneWorld Southeast Europe see.oneworld.net SEE online http://www.southeasteurope.org/ B.a.B.e. The Worth of Values – Civil society and Croatian democratization www.babe.hr

Civil Society

Multi-sectoral

Trends

USAID The NGO Sustainability Index www.usaid.gov/locations/europe_eurasia/ dem_gov/ngoindex/ Freedom House Nations in Transit www.freedomhouse.hu Civicus Croatia Country Report www.civicus.org Open Society Institute Openness of Society: Croatia 2005 Croatia’s Openness Index and Initial Findings on Society Openness in Croatia Croatia 2006 www.idemo.hr Academy for Educational Development (AED) NGOs in the Public Eye Survey on Public Attitudes Towards NGOs Foundation and Philanthropy in Croatia www.aed.hr European Commission Progress Report – Croatia 2006 http://www.nhs.hr/download/izvjesce_EK_napredak_2006.pdf

Accession

Legislation, harmonization, standards, etc.

Euro Info Correspondence Centre Zagreb www.euroinfo.hr/index_en.php?page=index

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While secondary data can provide excellent information about the market, this information needs verification through the organization’s own data gathering. A key aspect of the research is to conduct a market survey to find out directly from potential customers if they want to buy the product or service, the features they want, the price they’re willing to pay, etc. Market surveys follow a standard format, always starting with general questions (i.e., demographics) and moving to more precise ones related to the specific product or service. Standard Survey Question Format General Demographics Industry/Market Product

This example illustrates how to structure a market survey. This questionnaire can be delivered through different channels: email, inperson, telephone, or regular mail. It is up to the enterprise to decide which channel provides the best information quality, response rate, and cost effectiveness. Due to cost reasons, social enterprises usually conduct their market survey in person or by email. Most surveys begin with simple demographic information. • What is your gender? • What is your age? • What is your income? • What is your nationality? • Are you married or single? Using questions like these enables the organization to profile its customer. Once the organization has gathered the general demographic information from the surveyor, the next set of questions should focus on the information it is hoping to gather related to the product or service.

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How do you spend your vacation? Resting Hiking

Skiing

At the Beach

Do you own your home? Yes No How important is helping the environment to you? 1=not so important, 5=very important 1 2 3 4 5 How do you spend your unrestricted/discretionary income? Save Gifts Fixing your home Entertainment How far do you travel from home on holiday? Stay home 1-100km 100 – 400km

Travel

Other

400+km

If offered, would you purchase organic ice cream instead of regular ice cream? Yes No What factors would affect your decision-making? Price Quality Availability Beliefs The goal of these questions is to establish a purchasing habit, or particular tendency or interest in a good or service. These questions tend to be at the industry or market level. Finally, the last set of questions can refer to your particular product or service. These questions should be designed to test the interest in your particular product and the willingness for customers to pay for the good or service. On an eco-tour do you prefer viewing: Landscape Animal life

Plant life

When remodeling your home you prefer to: Hire locally Hire a large construction company

Do the remodel yourself

How much would you be willing to spend on XX product or service? 1-10 dollars 11-20 dollars 21-30 dollars

over 30 dollars

How often do you vacation? 1-2 times per year

3-5 times per year

Once the social enterprise has summarized the results of the survey, it will be able to target its product or service more effectively by taking into account customers’ tastes. For example, the enterprise may refine its pricing strategy with pricing data collected directly from customers; it may also decide to add or drop features from its product because they are not demanded by customers; finally, for surveys that provide a large enough sample of answers, the results will help the social enterprise to develop accurate financial analyses.

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C. Operations CSOs face typical operational challenges when starting a social enterprise. These challenges include: - Acquiring the property or equipment needed to run the enterprise. - Attracting staff with the appropriate skills to run the enterprise, or improving inadequate in-house capacity. • The CSO cannot or will not pay a salary high enough to attract staff • There are very few people with the skills needed and/or with the values and style that fit the organizational culture - Providing jobs that are appropriate for the target population/beneficiaries (high skill jobs wouldn’t work). - Incorporating social costs into the operations analysis (additional costs incurred due to the social nature of the enterprise i.e. higher supervision, lower production levels, etc.). - Collecting not-specific enough research on operations and being overwhelmed by the actual needs of the business. A Croatian organization with only one full-time staff and mostly volunteers realized early on that their social enterprise may bring to surface internal tensions that could pose risks to the success of their income-generating activity. On the one hand, the full-time employee carries most responsibilities relating to mission activities and would, according to plans, supervise the venture as well. While the full-time employee felt overwhelmed with the extension of her duties, no increase in remuneration was possible in the planning phase due to the precarious financial situation of the organization. On the other hand, volunteers, not being compensated for their work, were only willing to commit a limited number of extra hours to the planning of the venture. With no immediate ways of compensating for additional tasks or delegation, the risk of the only full-time employee leaving her position for a better paid job was very real. To remedy the situation the organization decided to develop a financial incentive system based on additional sales made for the full-time employee once the venture is up and running. While this scheme may convince her to stay on until the full implementation of the enterprise, it can potentially create another internal division as the remuneration for her work grows while volunteers continue to bring their contributions to the organization pro bono.

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In order to solve the issue of internal tensions that can arise between potentially better-paid enterprise staff and lower compensated mission staff, it is advisable to develop schemes that provide financial as well as professional incentives to the entire staff – full- and part-time as well as volunteers – that are central to the continued existence of the CSO. Such schemes could include: providing a bonus payment not only to the enterprise manager or the person who proactively brings in additional sales, but the whole team and/or CSO; including everyone in both the planning as well as implementation of the venture to secure their buy-in and sense of ownership; or offering other incentives such as training in business planning and concepts.

D. Financial Analysis Having an understandable and accurate financial plan is crucial to determine if the venture will really meet the organization’s financial goals. It is also critical in marketing the enterprise business plan to outside investors. Despite high quality market research, operational plans, mission and strategies, if the financials of the enterprise do not convince the reader or investor that the enterprise can meet financial goals, they may not approve the plan. The business plan includes three financial analyses: 1. start-up costs; 2. break-even analysis; and 3. income and cost projections. Depending on the type of social enterprise that is being launched, the organization may also want to develop cash-flow and balance sheet statements. With solid market research in hand, the Croatian organization providing consulting services in organizational development set out to develop financial analyses to determine the revenue (and profit) potential of its proposed venture. The organization developed three analyses: Start-up costs; Break-even analysis; and Financial projections. 1. Start-up Costs Already having much of the required supporting infrastructure in place, the organization identified its start-up costs at 17.750 Kn. The major expenses were salaries, equipment, needed software, and registration fee.

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Type of Cost

Specific Cost

Facilities

First rent/purchase

Deposits (security, water, utilities)

Equipment

Materials/ Supplies

Amount

Other

Vehicles

Equipment/Computers

6.000

Software

4.500

Other

Starting inventory (raw materials/work in progress)

Office and packing supplies Promotional materials (brochures, displays, etc.)

500 0

Other

Professional Legal Services & Fees

Management /marketing production consultants

Accounting

Insurance

Design/graphic arts Promotion and advertising

Pre-operations Training

0 250

Licenses/permits/registration

Membership or association fees

Technical assistance or training consultants

Tuition or fees (workshops, seminars, classes, etc.) Per diem and costs associated with training

500 0

Other

Cash

For salaries during start-up phase

Other

Operating capital cushion (10%)

Reserves-unanticipated costs Total Start up costs

0 6.000 17.750

Organizations planning to start the social enterprise process can solicit institutional grants from donors to plan and start a social enterprise. Alternatively, with a business plan in hand, organizations can also present their business plans to prospective donors, who may be interested in providing seed funding given the enterpriseâ&#x20AC;&#x2122;s potential (both in terms of financial and mission impact). For organizations participating in the NESsT Venture Fund social enterprise development process, NESsT also provides funding to cover some start-up costs.

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It is important to plan for funding sources otherwise the enterprise will be difficult to launch (or launched without the proper resources). If not all startup investment can be raised, the social enterprise can prioritize its expenses or postpone investments not absolutely necessary before launching. 2. Break-even calculations The break-even point is the sales level – expressed in units – at which revenues equal expenses. At this level, the enterprise does not make any profits, nor does it lose money. The formula to calculate the breakeven point is the following (for more information on conducting a breakeven analysis, see Get Ready, Get Set, Chapter 5):

Fixed cost for the desired period Price per unit – Variable cost per unit

Following from the formula, the following information is needed to determine the break-even point: - Define a unit of the product or service: This enables the organization to have a consistent basis for comparison throughout the analysis and should reflect the way it thinks about the product or services (i.e. one subscription, one book, one training day, etc.). - Set the price: This is usually one of the most difficult steps but an enterprise can consider three pricing strategies separately or in combination: • Base the enterprise price on what customers are willing to pay for the product; • Determine the enterprise price based on what competitors are charging; • Base the enterprise price on cost calculations and profitability expectations. - Identify and analyze costs: With detailed research, the organization should be able to estimate costs fairly accurately. • Calculate fixed costs. Fixed costs are costs that the business incurs on a regular basis and that do not depend on the level of sales. For example, rent, utilities, equipment, and salaries. Fixed costs are calculated over a fixed period of time (usually a month or year). • Calculate variable costs per unit. Variable costs are costs that vary with the number of units sold. If the number of units sold goes up, variable costs also go up. If the number of units sold goes down, so do variable costs. In other words, these costs are directly linked to the product or service provided. Examples of variable costs include the cost of materials, direct labor costs of employees involved in product or service production, delivery costs, etc.

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After completing its start-up costs analysis, the Croatian organization planning to launch consulting services in organization development conducted a breakeven analysis consisting of the following elements: - Unit: one contract of consulting services (either Basic Training or Advanced Management) - Prices: • Basic Training: 300 Kn per month • Advanced Management: between 500 and 1.500 Kn per month - Costs: • Fixed: 6210 Kn per month (staff and advertising) • Variable: 50 Kn per unit (telephone, postage, printing, office supplies) The nature of the organization’s social enterprise (a consulting service) dictated that telephone, postage, printing, and office supplies were variable costs. In most businesses, however, these costs tend to be fixed and not changed with the number of units sold. Based on these data, the organization calculated its break-even for both services: - Breakeven for Basic Training:

6.210 Kn

(300 Kn – 50 Kn)

= 25

To breakeven on the Basic Training service, the organization needed to deliver 25 units per month. - Breakeven for Advanced Management: 6.210 Kn

(1.200 Kn – 50 Kn)

To breakeven on the Advanced Management service, the organization needed to deliver 6 units per month. Since the organization planned to sell two services, it also did the analysis for the combined services by taking a weighted average of the price and variable costs per unit (fixed costs, by definition, did not change). This analysis of combined services was especially useful in demonstrating different possibilities of ratio between clients that will use the Basic Training service and the one that will use the Advanced Management service, i.e. how many of each would the organization need to sell to break-even, assuming the organization sells both packages. The organization also conducted a profit margin analysis

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and found that sales of the Advanced Management service are more profitable (requires proportionately less work and resources), while sales of the Basic Training service are not as desirable in terms of profit potential. On the other hand, they realized that relying only on the Advanced Management service – which brings in fewer clients – would be a risk for stability of revenues: losing one Advanced Management customer could only be substituted by five users of the Basic Training service, which would be hard to achieve in a short period of time. The organization concluded that users of the Advanced Management service bring profit, and users of the Basic Training service bring stability, and decided to balance the two. Its break-even point for the two services yielded that it needed to sell 10 Basic Training and 4 Advanced Management services per month to breakeven. To determine how difficult it would be to reach its breakeven point each month, the organization assessed this figure against its capacity and market demand. It knew that its monthly staff capacity to deliver consulting services was 170 hours (half the time of two full-time employees). As Basic Training services would require an average of 5-8 hours per month, and Advanced Management services would require around 15-20 hours per month, the break-even combination of 10 Basic Training and 4 Advanced Management services would require a maximum of 160 hours, which meant they could reach this break-even sales number from the capacity point of view. Therefore the organization felt comfortable that it had enough staff to meet its breakeven point. Assessing this break-even figure against the indicated market demand also satisfied the organization, as it already had 10 organizations expressing their need for the services and 15 others indicating willingness to contract it sooner or later, even before any major advertising campaign has been launched. Although most social enterprises do not break-even during their first year of operations, the organization felt confident that even if not all of these sales prospects materialized, they could easily reach the break-even figure rather soon. Based on this breakeven analysis, the organization determined the enterprise had financial potential and it now decided to measure this potential through income-projections. 3. Financial projections Income statement is a financial statement that summarizes an organization’s earnings (also referred to as surplus or profits) during a specified period of time. It contains at least two major sections: income and expenses. These projections rely heavily on the findings of the market research, in terms of price setting, market demand, and growth. It is important to develop financial projections that show the profit potential of the enterprise for year 1 and over the first three to five years. Financial projections will also help to identify when the enterprise will break-even, so the enterprise’s cash flow can be planned accordingly. Hit the Ground Running: Getting a head start with local lessons for sustainable social enterprise Copyright © NESsT

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Based on their market survey, in-depth interviews and feedback from the market research and product development workshops, the Croatian organization planning to offer consulting services in organizational development projected sales volume (i.e., number of consulting contracts sold) of both services over the first twelve months of operations as follows: Sales Volume Basic Training

MONTH 1

Advanced Management

Total

As these figures derived from actual research and indicated willingness to contract their services, they felt confident that they were indeed attainable. Multiplying the sales volumes by their respective prices the projected revenues for the enterprise were as follows: Revenues

MONTH 1

3300

3600

Basic Training

600

900

1200

1500

1800

2100

2400

2700

3000

Advanced Management Income

2400 3000

2400 3200

3600 4800

3600 5100

4800 6600

4800 6900

6000 8400

6000 8700

7200 7200 8400 10200 10500 12000

With the monthly income projected, the final step in the organizationâ&#x20AC;&#x2122;s financial analysis was to factor in variable and fixed costs. As mentioned above, variable costs, also called cost of goods sold (COGS), are all of the costs directly related to making the product or delivering the service. The difference between revenues and the cost of goods sold is called gross profit, which is the amount available to cover operating expenses. Fixed costs, as described above, represent operating expenses such rent, supplies, administrative payroll, etc. Adding both COGS and fixed costs to its financial projections, the organization was able to determine its level of profits during the first year of operations. Profits Basic Training Advanced Management Income COGS Gross Profit Fixed Costs Net Profit

MONTH 1

600 2400 3000 200 2800 6210 -3410

900 2400 3200 600 2600 6210 -3610

1200 3600 4800 400 4400 6210 -1810

1500 3600 5100 550 4550 6210 -1660

1800 4800 6600 650 5950 6210 -260

2100 4800 6900 700 6200 6210 -10

2400 6000 8400 750 7650 6210 1440

2700 3000 3300 3600 6000 7200 7200 8400 8700 10200 10500 12000 850 900 1000 1000 8850 9300 9500 11000 6210 6210 6210 6210 2640 3090 3290 4790

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The organization calculated their break-even to occur in month eight, after which they could count on increasing profits. As mentioned above, reaching the break-even point during the first year of operations is rather exceptional as most social enterprises break-even during years two or three. So even if sales would not grow as predicted – despite their thorough market research indicating otherwise – the organization could expect its venture to be successful within a foreseeable timeframe.

E. Risk Analysis Everyone knows that businesses have risks. Identifying and explaining the risks of the enterprise demonstrates the organization has thoroughly considered its potential downsides. In implementing the enterprise, the organization may run into different types of risk, which can be summarized in two categories: internal risks, which include all risks that may occur from within the organization or venture, such as changes in the organizational culture, management, etc; and external risks, which include all risks outside of the venture’s direct control such as changes in market conditions, supplier problems, venture reputation, etc. The typical risks that face Croatian organizations when planning or implementing a social enterprise are: regulatory, economic, and staff-related. Similarly to the nonprofit sector in other countries in the region, Croatian NGOs are facing uncertainties with regard to the regulatory environment for social enterprise and the general economic situation of the country. These factors present external risks that need to be taken into account when planning and implementing a social enterprise. The regulatory risks not only involve those that arise from the field of nonprofit and social enterprise legislation itself (see NESsT’s Legal and Regulatory Framework for CSO Self-financing in Croatia), but also those that are industry specific risks, such as toughening tax or accounting laws, which would affect an organization, whose social enterprise provides accounting and financial management services to fellow NGOs. Changing economic and market conditions affect social enterprises as well as any other enterprises, and carry the typical risks of reduced market demand or potential loss of customers, increasing prices, growing competition or increasing costs. In these cases, the social enterprise has to have strategies to adjust to the more or less favorable conditions. General reduction of purchasing power due to economic austerity measures is the most difficult to handle. Social enterprises that offer personalized services (e.g. personal counseling or consulting services) can successfully deal with it by building customer loyalty. Social enterprises that offer specialized products that are not essential, such as the educational games, may come up with marketing and sales strategies that target customers less affected by economic hardship (public institutions, schools) rather than the general population.

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F. Mission Impact The goal of a social enterprise is to accomplish the organization’s mission more effectively. This could happen directly through a mission-related venture where some of the goals of the mission are being carried out through the venture itself. Or, indirectly, through a non-mission related venture that generates profits to financially support mission-related programs. Once the organization has defined the desired mission impact of the social enterprise, it is important to have a plan in place to measure the enterprise’s effectiveness at reaching its goals. By monitoring social impact – i.e. the number of beneficiaries reached, the number of new programs launched, the number of public policies affected, etc. – the organization can assess whether the enterprise is meeting its mission goals for the social enterprise. During the business planning process, the Croatian organization that set out to sell consulting services in organizational development constructed mission impact indicators to measure the effect of the social enterprise on the organization’s beneficiaries. The organization designed four core sets of indicators: 1. Number of clients implementing strategic plans: this indicator was important in advancing the organization’s mission of supporting civil society organizations’ development. The organization viewed strategic management as an important aspect of an organization’s sustainability because it would allow organizations to plan their activities more effectively and have better long-term impact. 2. Number of organizations having financial reports: part of the organization’s mission was to increase transparency and accountability in the civil society sector. The organization hoped to meet this objective by assisting client organizations with developing financial reports, which would present the financial position of organizations at the end of each year. This would have the purpose of clarifying organizations’ finances both for internal and external purposes. 3. Decrease in time dedicated to overall management: By assisting client organizations implement effective management systems, the organization hoped clients would free up staff time and resources to focus on their core mission. With effective systems in place, client organizations could now develop better and more effective management information, implement their programs better, and focus their efforts on advancing their mission. 4. Increased success rate in clients obtaining grants: one of the organization’s consulting services was to assist with the development of grant budgets for/together with client organizations. Through this service, the organization hoped to increase the financial sustainability of client organizations which would in turn make them more attractive to donors. The organization decided to measure their success in advancing client organizations’ sustainability through the increased success rate in their obtaining grants.

Conclusion

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Conclusion

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CONCLUSION

Social enterprise in Croatia is playing an increasing role in strengthening organizationsâ&#x20AC;&#x2122; sustainability and mission impact. Many Croatian organizations recognize the potential that social enterprise has in reaching both financial and mission goals. As shown in this manual, it is crucial to take social enterprise ideas through the development process to verify and enhance their potential to meet these goals. The lessons of other organizations that have gone through this process are important and can be useful learning tools for others contemplating this process. Croatian organizations have developed a set of strategies relating to their organizationâ&#x20AC;&#x2122;s readiness and business planning that will be very useful to others attempting to launch their own ventures. While social enterprise is a challenging strategy, it can have important benefits if carefully planned and implemented. We encourage readers of this manual to contact NESsT for further information.

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About NESsT NESsT is an international, non-profit organization that develops sustainable social enterprises that solve critical social problems in emerging markets. NESsT achieves its mission through three main initiatives that combine the tools and strategies of business leadership with the mission and values of nonprofit entrepreneurship: - NESsT Portfolio: providing ongoing financial capital, capacity building, mentoring and strategic advice on enterprise development to a portfolio of social enterprises. - NESsT Thought Leadership: promoting accountability, leadership, innovation and professionalism to ensure best practices and thoughtful and strategic development within the social enterprise field. - NESsT Consulting: providing advice on issues of sustainability and social enterprise development to clients in more than 40 countries worldwide. Founded in 1997, NESsT has been a pioneer in the engaged philanthropy field, particularly in emerging market countries. NESsT is incorporated as a nonprofit organization and operates from regional offices in Budapest (Hungary) and Santiago (Chile), and San Francisco (USA). The NESsT team represents a combination of non-profit and business professionals and ten nationalities. NESsT receives support for its work from leading private philanthropies, individuals and corporations, principally in the European Union and the USA. Approximately 30 percent of NESsTâ&#x20AC;&#x2122;s annual income is self-generated through its consulting enterprise. In 2004, NESsT was awarded the Skoll Award for Social Entrepreneurship by the Skoll Foundation.

NESsT

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