Keeping an eye on the right financial metrics can allow you to respond to issues before they spin out of control. Financial performance is a key part of the Demonstrating Value Framework. You can download specific tools for social enterprises in our resources section. (Search under Financial Performance in www.demonstratingvalue.org/tools-and-resources)
Three key financial questions:
1. Are you profitable?
Social enterprise operate to fulfill a very specific social and/or environmental mission and costs can be higher than a comparable standard business because of this. Profitability may not always be possible. Other goals could include:
- Self-sufficiency where business revenues will cover all expenses.
- Contribution where business revenues will contribute to costs. The remainder is covered by other revenue sources such as re-occurring grant, or by a non-profit parent organization.
Whether your goal is profitability or not, what is important is that you have a clear goal that makes sense for the enterprise and that you are able to track against it. Getting timely financial information structured in a way that is useful for a business decision-making can also be a big challenge, particularly if you are not counting all costs and if you operate as a non-profit program in a larger organization. For more information see DV's Financial Intelligence Guide for Social Enterprises.
2. What is driving your revenues and costs?
Financial statement are not only an accountability tool, but should be a key management tool. Set up financial statements to maximize your insights and to support decision-making and budgeting. This includes:
- Ensuring that the groupings and the level of detail in your profit and loss statement is useful to you, and with sufficient detail to provide insights into your decisions.
- Calculating gross profit. It’s a key number to understand your break-even point.
- Understanding how your social and/or environmental mission impacts your costs and revenues so that you are able to manage against multiple bottom lines. For instance, in an enterprise that provides supportive employment this may be getting a clear picture of costs that are unique to your mission (training, counselling,etc.).
3. Do you have enough cash?
Having enough cash when you need it is a big concern for small business and social enterprise alike. When Dragon’s Den hosted an on-line chat about running a small business they found the biggest challenge listed in an on-line poll was cash flow. (51% found this)
Due to timing differences between investment in inventory, earning revenue and actual cash receipts, you may be profitable but still have difficulty meeting your payment obligations. Planning and managing the timing of your cash flows will ensure that you are able to meet all of your financial obligations, whether by improving the money you have on hand to do stuff (aka working capital management) or relying on short term financing alternatives such as a line of credit. Enterprising non profits has a great example and worksheet.