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?

Instead of New Year’s resolutions, my first entry for 2007 is a list of ten common mistakes (with comments) that nonprofits make in managing their financial life. This list is excerpted from a terrific paper submitted by one of my students, Nick Eoloff, in a Financial Management for Nonprofits class at Hamline University. I thank Nick for giving me permission to share his paper.

Ten Mistakes Nonprofits Make in Financial Management:

1. All your eggs in one basket – Pay attention to your reliance on any particular source of revenue, in particular government contracts.
2. Cash flow analysis done annually – You can’t know everything at the beginning of the year. Management cash flow never stops.
3. Financials that are opaque – Nonprofit financial reports can be complex and difficult but that’s not an excuse for board members that don’t understand them or poor communication about your financial situation.
4. Inflexible – Things always change – go with it.
5. Little to no overhead – Some organizations still believe that infrastructure and overhead are not a good use of resources. This decision never turns out well.
6. Low operating reserves – Everyone wants to have operating reserves but the only way to build them to by planning and managing surplus budgets.
7. Never leverage – Using loans and credit lines to build the organization and grab opportunities is smart management.
8. No long term plan – Strategic plans are great, but how much better if they include a basic financial plan for three or five years.
9. Preparing financial projections, but never reading them – See above.
10. The auditor’s notes don’t mean much – Make sure you read all the pages of your audit report. I know they don’t look interesting, but you’ll be surprised at how informative they are.

For a complete copy of Nick Eoloff’s paper with more description and references, click here. Use this list as the start of your New Year’s resolutions for better financial management.