Balancing the Mission Checkbook

I teach a graduate class in Financial Management for Nonprofit Organizations at Hamline University in Saint Paul. This week’s class topic was social enterprise, nonprofit business start-up, and earned income strategies. One of the hurdles the class faced was with the terminology and definitions used in the “field” of social enterprise. The question that came up again and again is this: what’s the difference between “social enterprise” and ordinary, everyday program activities that have a fee for service or a price attached? I stumble over this question myself. On the one hand, we could say that it doesn’t really matter what terms we use to describe the different earned income streams for a nonprofit, but I think that the continual banging of the “social enterprise” drum make it important to face this question. Case in point: theaters generate earned income by selling tickets to audience members. When the same theater sets up a little business renting out the dark theater during the day for corporate events, they are suddenly recognized as a “social enterprise.” What about all those ticket sales?

In the FAQ section of the Social Enterprise Alliance, social enterprise is defined as “any nonprofit business, venture, activity or strategy conducted for the purpose of generating earned income in support of a social mission.” That definition would seem to include all earned income, from the ongoing theater ticket sales and community clinic’s patient fees to the start-up catering business of a daycare center or corporate events at the theater. If you read the books, articles, and research studies about social enterprise, though, you will see a distinct emphasis on the latter type of revenue – something new and different, rather than something tried and true. The Social Enterprise Alliance also has a nice article on this topic, Social Enterprise: Hype or Reality, which acknowledges that earned income has been a part of the income mix in the nonprofit world for years. The newness of these strategies may be more noticeable in social service agencies than in the arts, health care, or community development. This “new” field might be more about the importance of paying attention to the value of earned – and therefore unrestricted – income, as well as taking steps to generate earned income on purpose and purposefully.

The field of social enterprise, however you define it, is certainly well documented and analyzed. In addition to Social Enterprise Alliance, you will find interesting information and research from REDF and Community Wealth Ventures. If you want an in-depth study with lots of cases, read Community Wealth Venture’s report, Powering Social Change.

What do you think – is social enterprise a distinct and definable movement among nonprofits, or is it a just a new name?

My secret embarrassment is that evaluation has always intimidated me. I think it’s because my first experience working with an evaluation consultant was on a huge, multi-year project and the evaluation was driven by the funder with little input from the program managers. Every stereotype of evaluations was true for this program - lots of jargon, reams of data of uncertain value, hidden agendas, and a huge bill at the end. After that, I have steered clear of formal, process-laden evaluation projects. In the back of my mind, though, I always knew that we need to have a way to understand, assess, and communicate what we do and why it matters.
I am happy to report that I’ve conquered my fear and anxiety, and become a believer. I will credit three terrific, understandable, and approachable professionals - Ellen Shelton of Wilder Research, Stacey Stockdill of EnSearch, Inc., and Leah Goldstein Moses of The Improve Group - for assisting in my personal growth. The definition I like is that evaluation looks at what you did, what happened, and what difference it made. Evaluation doesn’t have to be onerous, complicated, secretive, or expensive. After listening to these masters talk, and reading some plain language articles, I can now talk logic models and understand the difference between outputs and impact (though I still don’t want to get into regression analysis).

It’s critical that nonprofits can speak this language to improve the quality of our programs and to communicate with stakeholders. If you’re still harboring a secret fear, look at these resources for understandable guidance on the purpose and strategies for useful evaluation:

• Wilder Research has a series of tip sheets on evaluation concepts and techniques. Type “tip sheets” in the search box to see this collection of materials.
• The Improve Group has an overview of logic models.
• WK Kellogg Foundation is a leader in publishing resources for nonprofits on evaluation, all available in the Knowdgebase section of their Web site, including their workbook guide to developing logic models.

Imagine this, the development director rushes in to interrupt a board meeting with the news that you have just received an unexpected, and unrestricted, gift of $50,000. How would the management and board decide how to use the new funds? (Assume for this little exercise – or fantasy, if you prefer – that your annual budget is balanced and you have sufficient cash flow to pay the bills.) For many nonprofits, there would be no doubt about it – every cent of the $50,000 would be used as soon as possible to serve as many people as possible. A homeless shelter would add more beds, a youth center would expand a program, and a clinic would increase free clinic hours. For many members of the board and staff, the decision seems simple and obvious – in the face of so much need out there, how could you not spend the money to increase services?

The long-term result of this way of approaching financial management is what Elizabeth Keating calls the “Current Services Trap.” By using all available resources to meet urgent, short-term needs, nonprofit organizations undermine their long-term stability and viability. Keating described the trap and accompanying organizational and financial characteristics at the Capital Ideas Symposium that was presented earlier this year by the Hauser Center and the Nonprofit Finance Fund. Keating’s article is printed on pages 11 – 16 of the full proceedings – it’s worth reading!

I agree with her basic premise that nonprofits and funders must understand the importance of building infrastructure, cash reserves, professional staff, and appropriate capital to support their mission. One of the toughest things to do, though, is to make the case for these investments in nonprofits, and Keating lays the groundwork for us by describing what she calls the three myths that sustain the current services trap. The myths include the notion that nonprofits address urgent needs that can be solved quickly if we have enough funding. This assumes that providing more services would be (a) easy to do, and (b) would solve the problems. But would homelessness really be “solved” by adding more beds to a shelter? The problems that nonprofits address are complex, difficult, and much bigger than a simple service. To break out of the Current Services Trap, our hypothetical nonprofit board would need to consider ways to use the windfall gift to build infrastructure, innovation, technology, and human capital. The payoff will multiply.

I read a great example of this kind of breaking out of the trap in the November 7, 2007 StarTribune story, Can Metro-Area Hunger be Eliminated in Five Years? Five Twin Cities food shelf organizations are working together to move beyond providing groceries today, so that they also address the bigger problems the cause their clients to need services. “Instead of trying to incrementally reduce hunger bit by bit, these groups want to reorganize the way food shelves work, with the goal of ending hunger altogether in the metro area by 2013.” There wasn’t a budget included, but you can be sure that this will take a lot more than funds for current services – this would require investment in long term planning, infrastructure, fundraising, staff, and communications. It’s a great case study for the future.