Description
The financial plan is the last section to be completed, as it reflects the decisions made in the other parts of your business plan. For example, if you project selling a certain volume of products or services at designated prices, these numbers are indicated in your sales forecast. Equally, the type and frequency of advertising you have chosen as well as the number of staff you will need to support these efforts bear costs evidenced in your marketing plan. Each planning decision is associated with numbers that when aggregated form the basis of your financial documents.
T
he Financial
he Financial
Plan
Plan
Chapter 8
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
A Business Planning Reference Guide for Social Enterprises
259
T
h
e
F
i
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a
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O
“The highest use of capital is not to
make money, but to make money to
do more for the betterment of life.”
— Henry Ford
Manufacturing Entrepreneur and Philanthropist
verview: The financial plan is the last section to be completed, as it reflects
the decisions made in the other parts of your business plan. For example, if you
project selling a certain volume of products or services at designated prices, these
numbers are indicated in your
sales forecast. Equally, the type
and frequency of advertising you
have chosen as well as the num-
ber of staff you will need to sup-
port these efforts bear costs evi-
denced in your marketing plan.
Each planning decision is associat-
ed with numbers that when aggre-
gated form the basis of your finan-
cial documents.
This chapter examines useful financial targets for social enterprise business plan-
ning as well as four critical financial tools: the balance sheet, profit and loss state-
ment, cash flow statement, and budgets and methods to quantify social costs in
accounting. Also discussed are how social enterprise cost structures and resource
acquisition differ from those in private businesses and why.
Financial Planning Objectives
As with the other operational components of the business plan, the objectives of the
financial plan must feed into the overriding objectives of the social enterprise (chap-
ter 2). In fact, there should be some overlap between the larger financially oriented
objectives, such as cost recovery or net profit/loss, and the objectives set out in your
financial plan (exhibit 8A). Other objectives stated in the financial plan support
attaining these larger objectives by giving enterprise management and PO business
advisors valuable information toward this end. For example, TARTINA uses several
ratios that determine profitability, efficiency, and liquidity to benchmark progress
toward achievement of its sustainability objectives.
Chapter 8
Treatment of Accounting and Finance
Because there are volumes of accounting and finance
books available, technical information on preparing finan-
cial statements and budgets is treated in this manual (in
relative terms) superficially. This does not diminish the
importance of having an excellent accounting system in
place and qualified accounting professionals on staff.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
260
Selecting Financial Objectives
? Financial objectives of the social enterprise must be separate from those of the
parent organization and the implementing partner (chapter 2).
? When setting objectives, wear the hat of every important stakeholder and ask the
question, “What are the financial objectives for this social enterprise from my
perspective?”
? Use exhibit 8A as a guide from which to select your financial planning objectives.
This is not a complete list of possible objectives, so additions that suit your partic-
ular social enterprise are fine.
? Select financial objectives appropriate for your enterprise. No absolute number is
specified; you will need to set a sufficient number to track financial information
pertinent to your social enterprise. TARTINA uses all the objectives in exhibit 8A.
Remember that you will have to follow and evaluate any objective you choose, a
task that takes time and human capacity. The following exercise will help you
determine if you are being unrealistic in your selections.
A sales agent sets up
TARTINA display of
Mamba products.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
A Business Planning Reference Guide for Social Enterprises
261
EXHIBIT 8A: FINANCIAL PLANNING OBJECTIVES FOR SOCIAL ENTERPRISES
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Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
262
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A Business Planning Reference Guide for Social Enterprises
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8
Setting Targets for Each Financial Objective
After selecting the most appropriate types of financial objectives for your social
enterprise, the next step is to set the targets for each one. Setting targets essentially
means quantifying objectives with a specific number or percentage and tying them
to a particular time frame. For example, to arrive at net profit/loss objectives, annual
targets are sets for both revenue and expenses (exhibit 8B).
EXHIBIT 8B: NET PROFIT/LOSS
Year 1 2 3 4 5 6 7
Total revenue $15,000 $45,000 $95,000 $145,000 $190,000 $215,000 $235,000
Total expenses $205,000 $265,000 $280,000 $285,000 $270,000 $225,000 $185,000
Net Profit/Loss ($190,000)($220,000) ($185,000)($140,000) ($80,000) ($10,000) $50,000
How to Set Targets
You can set the targets in one of two basic ways:
1. Bottom up. This approach follows the format in this manual and is the best
method for new enterprises. Begin with marketing, operations, and human
resource plan calculations found in the respective budgets, sales forecasts and
production plans. Then total projected expenses and revenues to determine
financial target. Evaluate this target. Is it achievable for the time period speci-
fied? (chapter 2 for a complete list of criteria for setting “SMART” objectives.) If
not, recalculate original numbers in the marketing, operations, and human
resource plans. Total them to derive the financial target again. Repeat until the
optimal financial target is found. Note that all of the targets that feed into the
financial target must also be achievable for the specified time period.
2. Top down. This approach can be used if you have at least one year of experi-
ence operating your social enterprise and historical records to reflect perform-
ance to date. Pick a “ballpark” target. Then work backward through the market-
ing, operations, and human resources plans to calculate what is required to meet
that target. Adjust the target as needed to ensure it is achievable for the time
period in question.
Whether you choose a top-down or bottom-up approach to establishing your
social enterprise’s financial targets, you must decide how far into the future to proj-
ect the financial targets. There is no one right answer. Generally, the detailed targets
should be set for one to three years into the enterprise’s “financial future,” and
broader-stroke calculations should be consistent with the time it takes to reach
financial viability, usually three to seven years barring country context and type of
enterprise. Social entrepreneurs define financial viability in a variety of ways. For our
purposes, a social enterprise is considered financially viable when it no longer
requires external subsidies. It may still require loans or other investments to support
its business operations, as many profitable private-sector enterprises do. A financially
viable social enterprise is one that is able to secure necessary funds through regular,
unsubsidized financial channels.
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Managing the Double Bottom Line:
264
In most cases of subsidized social enterprises, financial viability is one of the
financial objectives, which means that the financial targets should be calculated at
least to the point when the enterprise reaches financial viability. It is important, how-
ever, to distinguish between overall financial objectives as stated in chapter 2 and
financial targets that support achieving these objectives, which correspond to the
time frame of your business plan.
For TARTINA Enterprise, financial viability is estimated to be realized in the sev-
enth year of operation. Cost recovery and net profit/loss are the objectives that most
directly indicate progress toward financial viability. By the end of Year 7, cost recov-
ery is expected to be at 127 percent for TARTINA Enterprise. Since TARTINA’s busi-
ness plan is for one year, the cost recovery target of 10 percent is set for the first
year of operation (see exhibit 8C).
EXHIBIT 8C: COST RECOVERY
Year 1 2 3 4 5 6 7
Cost recovery 10% 17% 34% 51% 71% 96% 127%
TARTINA clients
wash up before beginning
a production shift.
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EXHIBIT 8D: HINTS FOR SETTING TARGETS
Financial Objective* Guidelines for Setting Targets Over Time
Budget Expenditure
Pattern
Clients’ Profit
Sales Growth
Return on Equity
(ROE)
Current Ratio
Quick Ratio
Accounts Receivable
Collection Period
Inventory Supply
Within 5% of projections. Most
donors tolerate up to a 10% devi-
ation from projected budget line
items.
Equal to or greater than what
clients can earn in other income-
generating activities.
Look for steady increase. If costs
and inflation are on the rise, then
watch for related increases in
your sales. If not, this is an indi-
cator that your prices are not
keeping up with costs.
Equal to or greater than what can
be earned from the money (equi-
ty) if invested in alternative
income-generating activities.
A ratio of 2:1 is generally consid-
ered desirable. At least the value
of the current assets must be
greater than that of current lia-
bilities, which means that the
social enterprise can meet its
short-term cash requirements.
A ratio of 1:1 is desirable. This
means that you don't have to rely
on the sale of inventory to pay
your bills.
30-90 days. The shorter the col-
lection period the sooner cash is
freed up for other uses.
A low number of inventory supply
days may mean a risk of running
out of stock. A high number of
days may mean the stock is not
selling well. The "best" target is a
balance between the two.
Depends on the subsector the
social enterprise operates in.
Poor inventory management ties
up cash.
% deviation decreases.
By the end of the subsidized period,
any overexpenditures must be
absorbed by the social enterprise.
Unspent funds are returned to the
donor.
Increase
Increase
Increase
Increase
Increase
Decrease
Approach a balance between high and
low numbers of inventory supply days
*Annual targets for a
seven-year period for
objectives: Cost recovery,
cost efficiency, and income
per client are detailed in
chapter 2 of this manual
and therefore are not repro-
duced here.
Quick ratio—a measure of
the relationaship between
the most liquid assets
(cash, short-term securi-
ties, receivables and short-
term investments) to cur-
rent liabilities, used as an
indicator of an enterprise’s
short-term liquiditiy.
Current ratio—a measure
of liquidity used as an indi-
cator of an enterprise’s abil-
ity to pay short-term debts.
The current ratio is derived
by dividing current assets
by current liabilities.
Current assets—assets
that are expected to be
turned into cash within one
year through the company's
normal operations.
Current liabilities—liabili-
ties due for payment in one
year.
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Managing the Double Bottom Line:
266
Setting Financial Targets
? Have a qualified staff accountant or financial manager participate in preparing
this section.
? Arriving at financial targets can be a time-consuming and rigorous mathematical
exercise; be sure to allow ample time for preparation and include key partici-
pants (chapter 1, Business Plan Framework, exhibit 1E).
? Begin by projecting the financial viability of your social enterprise; at what point
in time will this occur?
? Use either the “top-down” or the “bottom-up” method to set targets for each of
your financial objectives that correspond to targets in other business plan sections
as well as support overall viability objectives.
? Recalculate targets for marketing, operations, and human resource plans, if nec-
essary, until you are able to reach optimal financial targets.
Business manager, PO business advisor, program manager, finance and
accounting staff
Financial targets are included in the Business Plan.
EVALUATING FINANCIAL TARGETS
Setting financial targets helps you keep your social enterprise on track, serving to
measure and evaluate incremental progress toward achieving objectives. Therefore,
at the time of setting objectives, you will need to establish a schedule for evaluating
progress toward financial targets.
Rationale:
Establishing an evaluation schedule at the beginning is important for several reasons:
4It brings the “M” of measurable down to earth by ensuring that you have identi-
fied useful targets that warrent the time and resources required to measure them.
4It highlights whether or not you have qualified personnel to do the job by assign-
ing an evaluation task to qualified personnel.
4It helps human resource performance management by linking responsibility for
financial target results to performance appraisals (chapter 7).
4It sets a platform for communicating results of financial target assessment, i.e.
published information in newsletters or reports.
4It assists planning by considering which objectives/targets should be measured
internally or externally during an audit.
4It incorporates cost implications in business plan budgetary projections.
Role of the Audit
or Evaluation
There are two different
types of audits: internal
(which vary in frequency)
and external (which usu-
ally are annual). The pri-
mary purpose of an inter-
nal audit is to check the
systems of an organiza-
tion and ensure that all
internal controls are in
place. The primary pur-
pose of an external audit
is to ensure that the finan-
cial statements of an
organization present a
true and fair view of its
operations. External
audits are generally a
legal requirement for any
social enterprise pro-
gram. Sometimes donors
also conduct audits of
individual projects or
grants. Any large imple-
menting organization or
social enterprise should
have an internal auditor
who reports directly to the
board or, sometimes, the
head of the organization.
An internal auditor usually
has some accounting
qualifications but may not
be fully qualified.
External audit firms are
generally legally required
in most countries to be
managed by fully quali-
fied accountants.
Auditors in many coun-
tries have a code of
ethics that recommends
they undertake their work
with an attitude of
“healthy professional
skepticism,” so expect
your answers to be ques-
tioned at times.
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Preparing an Evaluation Schedule
? Develop an evaluation schedule for internal and external audits that corresponds
to the time frame of your business plan.
? Include information on how evaluations will be conducted, who will conduct
them, and who will be responsible for oversight.
? Be sure to link responsibility for target results to job performance (chapter 7).
Evaluation Plan is included in the Business Plan appendix.
Social Enterprise Cost Structure and
Financial Trends
By now you know that the difference between a social enterprise and a private busi-
ness is that a social enterprise has two bottom lines—a social and a financial one—
whereas the private business has only a financial one. Your social enterprise has to
both build local capacity and create a viable business; the private company is only
interested in increasing value for its shareholders. By the same token, social enter-
prises are expected to have returns (quantified in terms of social impact) and are
answerable to their investors—donors.
Capacity-building and investment decisions are more dramatic for social enter-
prises than they are for private businesses, with returns coming later, normally much
later, than what would be acceptable in the private sector. Capacity buildinginvolves
extra costs for training and technical assistance. A social enterprise also bears the
financial burden for social costs of executing its mission and serving a disadvantaged
population. Referred to as comparative disadvantages, these costs include: client
inefficiency allowance, extra supervision time, above market wage/income, wastage,
productivity compensation due to poor infrastructure (for programs in developing
countries), extra time required for donor reporting, and money for social program
activities. Capacity building demands investment money, whereas comparative dis-
advantages require subsidies. Regardless of the nature of costs, viability is a condi-
tion of a social enterprise, not an exception. You will not be able to satisfy your
impact objectives if you cannot achieve viability.
The next section distinguishes between investment capital and subsidies in social
enterprise programming. A good social enterprise business will need capital for
capacity building to achieve viability, whereas a bad one (a nonviable one) will need
subsidies to sustain its operations. Provided that you have selected a solid business
idea within a hospitable environment with a sufficiently large market in which to
launch your social enterprise (see chapters 3 and 4), revenue streams will be close
to those of a private business. Operating costs, however, are much higher for social
enterprises, which have to cover capacity-building and comparative disadvantages
costs before they break even.
As development practitioners can attest, capacity building per se is hard to
account for. Nonprofit professionals have tried various methods to quantify capacity
building, including logging numbers of people trained or documenting skills devel-
opment. Save the Children’s view is that capacity is the acid test of social enterprise
success and is measured by achieving business objectives (chapter 2) and financial
targets outlined in this chapter. Benchmarking progress toward reaching targets and
objectives over time indicates trends.
Comparative disad-
vantages—factors
within a social enterprise
such as expensive
capacity building, com-
pensation for loss in
productivity and materi-
als, and costs of social
programs that make it
difficult to compete with
private sector competi-
tors due to substantially
higher costs.
Subsidies—grants or
gifts by private individu-
als, governments, or
foundations aimed at
assisting a venture
reputed to be beneficial
to a target population or
the public.
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Managing the Double Bottom Line:
268
It is important to watch these trends closely; they can act as a warning system
and flag a problem endemic among nonprofits business interventionists—under-
standing the difference between a subsidized social enterprise and a variable one.
A common shortcoming of social enterprise professionals is that they often readily
accept that costs are high. While this may be partly true, if trends show a continued
deviation from projections, that is an indication that structural problems are present:
Either the cost structure is too high or revenues are too low to support the business
without continued subsidy. What this means is that the extra costs are not due to
capacity building but, rather, the enterprise is not fully in the market and without
adjustment will be doomed to failure. Ultimately, if capacity building is accom-
plished successfully the social enterprise will be able to sustain its operations after
five to 10 years without external aid other than what is provided by investors or
creditors, as in the case of any private business.
Exhibit 8E shows this relationship using projected profit/loss trends for TARTINA
compared with a similar private business. The example gives a visual representation
of numeric projections. The balloon-like shape clearly portrays the high capacity-
building costs inherent in social enterprises, but not present in private businesses.
After the enterprise achieves viability, though revenue between the two is close, cost
structures for social enterprises continue to be marginally higher than those of a pri-
vate business.
EXHIBIT 8E: FINANCIAL TRENDS
$250
$300
$200
$150
$100
$50
$0
1 2 3 4 5 6 7
SE Revenue SE Expense Business
Revenue
Business
Expense
YEARS
PO business advisor, business manager, finance and accounting staff
Projecting Financial Trends
L Using the graphics feature in a spreadsheet program, project the trend lines of
your financial targets and objectives.
Social enterprise trend projections are included in the Business Plan.
Business
Break-even Point
Social Enterprise
Break-even Point
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8
INVESTMENT AND SUBSIDIES
In the private sector investments provide the necessary capital to start and grow a
business until it is profitable. Similarly, a social enterprise requires investment, yet it
also needs a subsidy to cover social costs. Donors and private investors expect a
return on their money, and like business investments, subsidies to social enterprises
are only warranted if their costs can be justified. Simply put, will they realize a
financial or a social return?
Subsidies represent a real cost; therefore, you are accountable to your donors to
demonstrate a quantifiable return. For investment expenses, realistic financial pro-
jections must show an eventual break-even point (within an acceptable time frame)
as well as evidence that social impact targets (chapter 2) are met, ensuring that
investor money is not being squandered. When investors are dissatisfied with a busi-
ness' performance, they withdraw their support, evoking the "survival of the fittest"
rule in the business world. By the same token, auto-regulation of social enterprise
programs is the power of the donor to pull the plug if your program is underper-
forming both in financial and social impact terms.
Social subsidies are more complicated and difficult to quantify (see next section
Quantifying Social Costs) than investments. As mentioned, capacity building costs
are considered normal investment costs, though they tend to be higher for social
enterprises than in private business due to the low skills or special needs of the pop-
ulations these enterprises serve. Subsidies, on the other hand, offset losses in pro-
ductivity and expenses related to running social programs. These costs create dispar-
ity between social enterprises and their competitors in the private sector because
they substantially increase enterprise costs, making it difficult to compete, or meas-
ure business performance against industry standards. (exhibit 8F.)
$250
$300
$200
$150
$100
$50
$0
1 2 3 4 5 6 7
Enterprise
Revenue
Social
Costs
Business
Expenses
Enterprise rev-
enue subsidizes
social costs
YEARS
Break-even Point
BEFORE Social Costs
Break-even Point
AFTER Social Costs
Social Costs
Social Subsidy
Investment
Subsidy
EXHIBIT 8F: INVESTMENT AND SUBSIDY
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Donor-Investor subsi-
dizes business expenses
and social costs.
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Managing the Double Bottom Line:
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The question is: Which costs should you subsidize with donor money and
which ones should you try to cover with revenue? The structure of your organiza-
tion, requirements from current donors, internal management decisions, the nature
of the enterprise, and financing opportunities determine how to treat certain costs.
For example, Save the Children segregates its overhead and technical assistance
costs from enterprise operations, considering them a temporary but necessary
expense to finance capacity building. SC assumes that its costs will be fully subsi-
dized for at least the first donor funding cycle of the enterprise program. Start-up
costs of initial fixed assets and capital are fully subsidized by donor monies. SC does
not expect that the social enterprise will be able to recover and repay initial invest-
ments like private business. Operating deficits are subsidized on a declining basis to
fill the gap between revenues and capacity-building, loss compensation and social
program expenses. Unlike a private business that may borrow funds or use venture
capital to finance working capital and operating costs prior to breaking even, social
enterprises are not required to recuperate these costs and reimburse donors. Lastly,
some social costs will need continued subsidy. Depending on the social enterprise's
ability to generate revenue, social program mix and donor funding priorities, social
subsidies will either be provided internally from enterprise revenue or externally
from donor support.
Exhibit 8G Social Enterprise Financing Structures illustrates how subsidies work
in social enterprise programs. Although all money is fungible, subsidy must be rec-
ognized separately from income generated by the enterprise in financial statements
and budgets (see following sections on preparing financial statements). Additionally,
allocating subsidies coupled with the viability of your social enterprise have a direct
impact on your fundraising and financing strategy (see Resource Acquisition
Strategy).
Fungible—being of such a
nature that one part or quantity
may be replaced by another
equal part or quantity in the sat-
isfaction of an obligation.
TARTINA Clients clean up
after their production shift.
Working capital—the excess
amount in current assets over
current liabilities. Working capital
is the money a business uses to
run its operations and in
accounting is a measure of the
enterprise's ability to service its
financial obligations.
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EXHIBIT 8G: SOCIAL ENTERPRISE FINANCING STRUCTURE
PARENT
ORGANIZATION
BUDGET
SALARIES
TA/TRAINING
OPERATING OVERHEAD
ENTERPRISE
BUDGET
SALARIES
TA/TRAINING
OPERATING COSTS &
OVERHEAD
ENTERPRISE
BUDGET
START-UP COSTS
WHOLLY SUBSIDIZED
(FOR DURATION OF THE
PROGRAM)
WHOLLY/PARTIALLY SUBSIDIZED
(ONE TIME) (IF MATCH)
SUBSIDIZE DEFICIT
(DECLINES OVER TIME,
REPLACED BY REVENUES
AND INVESTOR/CREDITOR
CAPITAL)
SOCIAL COSTS
CAPACITY BUILDING
LOSS COMPENSATION
SOCIAL PROGRAMS
DONOR OR PARENT
ORGANIZATIONS
SUBSIDIZED/FINANCED BY
ENTERPRISE REVENUES
(POSSIBLE TO RECEIVE GRANTS FOR
SOME PROGRAM COSTS DESPITE PROF-
ITABILITY OF ENTERPRISE)
USE OF INCOME
Until the enterprise actually breaks even, revenues simply represent a decrease in
loss, but they should be acknowledged and accounted for differently from subsidy in
financial statements (explained later).
There are a variety of ways in which social enterprise revenues can be handled:
Prior to breaking even:
4First, revenues should be used to cover variable and production costs (reflected in
cost of goods sold in the profit and loss statement, which gives you gross margin).
4Second, revenues in excess of variable costs should be used to cover the fixed
costs of the social enterprise (or the operating deficit for salaries and overhead
costs).
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
4Third, revenues are used for capital assets, such as equipment investments, that
will generate additional revenue for the enterprise.
4Fourth, revenues used for pay raises to workers, clients, employees in-step with
cost of living increases and job performance promotions.
4Fifth, revenues are contributed to a revolving loan fund, savings accounts, or
insurance schemes for the microentrepreneurs operated by the social enterprise.
4Sixth, revenues applied to financial costs of borrowed capital (interest on loans) to
finance business operations and growth.
After viability is achieved:
4Use revenues for profit sharing via bonuses, dividends or increases in base salaries
or wages of workers, clients, employees to increase their overall economic security.
4Use revenues to finance the expansion phase of the social enterprise.
4Invest revenues in diversifying enterprise business or other income-generating
activities in the formal or informal markets.
4Use revenues to cross-subsidize other sector activities or add new capacity-build-
ing programs, such as literacy, that may have been too expensive to include in the
immature business.
4Invest in an endowment or long-term securities to generate income for social
programs.
Remember to consult the enterprise’s program donor(s) early on this matter, as they
are likely to have their own regulations and preferred approach. An agreement
needs to be reached before start-up of the program and the appropriate financial
instruments prepared.
Managing the Double Bottom Line:
272
How TARTINA Dealt With Revenues
TARTINA negotiated with its donor that it would use enterprise project revenues
to cover fixed costs of the enterprise. This was considered the best strategy, as it
most directly contributed to the cost recovery and financial viability objectives. In
practice, this approach required that TARTINA plan in advance which fixed costs
the revenues would cover. TARTINA chose promotional and sales staff salaries for
this purpose, as these were expenses with some degree of flexibility. That is, if
TARTINA were unable to reach its revenue targets, the budget line items project-
ed to be covered by the revenues would need to be scaled back. As well,
TARTINA’s revenues would cover depreciation of the enterprise project’s vehicle,
as this was an expense that the donor could not subsidize because of its own reg-
ulations.
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Business manager, accountants and finance staff, PO business advisor, partner
program manager
Planning for Revenue
? Write a few lines on how you plan to use enterprise revenues.
Revenue information is included in the Business Plan with your trend
projections (previous section).
Quantifying Social Costs
Rationale:
Running a social enterprise involves additional costs not incurred by traditional busi-
nesses. Directly employing disadvantaged people in your work force who face con-
straints to normal employment or providing services to them to bring their products
to market when access is otherwise not possible are expensive business propositions.
Yet, as a social enterprise you are bound by your mission to increase this popula-
tion's economic security and quality of life while operating with reference to a finan-
cial bottom line. Thus, social enterprise managers must be able to make informed
decisions with respect to both the business and the social programs. One device for
effective decision-making is to segregate the costs of these distinct functions that run
simultaneously.
Distinguishing social costs from business costs has express advantages.
Concerning the business side, knowledge of the social enterprise's profitability
shapes every strategic and operational decision made by management. It provides
the means to assess the enterprise's market position and craft a competitive strategy.
Furthermore, separating these costs permits social enterprise accountants to prepare
financial statements comparable to those of similar private businesses, enabling man-
agers to measure enterprise performance against competitors and industry standards.
This is important because it informs management about costs that may be reduced
or investments made to increase enterprise profitability and competitiveness.
Moreover, understanding the social enterprise's financial performance vis-à-vis its
for-profit colleagues provides information for strategic decision-making on issues
such as pricing, expansion, market entry, product development, exit, etc.
5
Similarly, quantifying social costs informs decision-making regarding social pro-
gramming. Understanding social cost allocations allows managers to measure the
effectiveness of achieving social impact objectives. Tracking expenses over time
informs whether costs are rising or declining to meet objectives. Evaluating program
cost effectiveness helps determine which social costs yield the largest benefit on
social impact. Likewise, when costs are separated, social cost figures can be ana-
lyzed for their impact on business performance. This enables managers to delineate
5
Investor Perspectives, “Quantifying Social Costs: A Case Example from Rubicon's Buildings and
Grounds Business,” Kim Starkey, 2000, Roberts Foundation, SF, CA.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
which social costs can be considered investments rendering a return via increased
revenues, and which are subsidized costs inherent in achieving a social mission and
never yield financial benefit to the business. (exhibit 8F, Investment and Subsidy.)
Making this distinction helps managers plot their resource acquisition strategy (see
Resource Acquisition Strategy at the end of this chapter).
Enterprise production/operations and business managers, accountants and
finance professionals, supervisors, social program directors, PO business
advisor
Quantifying social costs is a complicated and imprecise science
6
that requires
developing consistent methodologies suitable for your social enterprise.
? Find the blank table Quantifying Social Costs provided in The Workbook to use
as a template, or create your own.
? Step 1—brainstorm the types of social costs that are significant for your social
enterprise and assess the likely cost magnitude of each one. For example, if you
have clients in your labor force, and labor is one of the largest components of
your enterprise's cost base, then it is likely your most significant costs are related
to employee inefficiencies or additional supervisory time.
? Fill out table based on conclusions.
? Step 2—outline each methodology that could be used to identify social costs and
pinpoint its methodological challenges. Three examples of methodology follow:
1) time—approximately 30% of the manager's time is devoted to "extra" tasks
necessitated by the challenge of managing the enterprise's disadvantaged labor
force; thus 30% of the manager's salary and benefits would be quantified under
social costs. 2) Lost income (+ time)—poor health of clients constitutes 25 sick
days and 20% loss in productive days or income not earned. Therefore, the per-
centage of lost productive days over and above the industry standard (use for
example 3%), which would be 17% lost revenue, is allocated to social costs along
with the costs of sick day benefits of 20 days over and above industry standard
(for example 5 days). 3) Wage premium—social enterprises pay livable wages to
a population that may not have such a high earning potential. Compare salaries,
wages or piece rates across your industry. Use published industry statistics if avail-
able, or contact your competitors, suppliers, buyers to determine standard pay
scales. Deduct the social enterprise "premium," the amount above median indus-
try standard rate.
? Step 3—decide which social costs to include in the analysis by weighing method-
ological challenges and the estimated magnitude of each social cost. You will
probably not quantify all of the social costs that are relevant to your enterprise.
Some costs will be eliminated on the grounds that they are either financially
insignificant or the methodological challenges for determining them are too great.
? Step 4—execute your methodology and translate social costs into dollar amounts
or use local currency. Pay particular attention if your methodology is based on
percentage, not to confuse percentage and dollar values. Methodology should be
applied to accounting periods, and quantified monthly, quarterly and annually.
Managing the Double Bottom Line:
274
6
Ibid., steps to quantifying social costs given in exercise.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Social cost information will be used for two purposes later. First, to define both
bottom lines in financial terms when you prepare a profit and loss (income) state-
ment for your social enterprise (see Adjusting the Profit and Loss to Include Social
Costs). And second, to provide useful decision-making information for your resource
acquisition strategy (see Resource Acquisition Strategy).
A Business Planning Reference Guide for Social Enterprises
275
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EXHIBIT 8H: HOW TO DECIDE WHICH SOCIAL COSTS TO INCLUDE IN THE
ANALYSIS
7
INCLUDE IN
ANALYSIS
ELIMINATE FROM
ANALYSIS
L
O
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LOW HIGH
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Magnitude of Methodological Challenges Posed by Social Costs
Case by Case Decision-making Required
7
Investor Perspectives, “Quantifying Social Costs: A Case Example from Rubicon's Buildings and
Grounds Business,” Kim Starkey, 2000, Roberts Foundation, SF, CA.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
276
TYPE OF SOCIAL COST
CAPACITY BUILDING
Hard Skills Training
Soft Skills Training
LOSS COMPENSATION
Allowance for Inefficiency
Extra Supervisory Time
Wage/Income Premium
Wastage
Illness/Family Problems
Poor Country
Infrastructure/Inefficien-
cies (Developing country
context only)
DEFINITION
Skills training of disad-
vantaged work force.
Time and costs for transfer-
ring hard skills (production
techniques, packaging,
machine use, etc.) to work
force.
Time and costs of interper-
sonal skills, accountability,
etc).
Loss in productivity and
materials due to disad-
vantaged nature of work
force.
Time needed to complete
job due to low skills, illitera-
cy, disabilities, of disadvan-
taged work force.
Time for supervision, coun-
seling, on-the-job training
of disadvantaged work
force.
The difference between
social enterprise rate and
industry standard for level
of skills in work force.
Cost of wasted materials
due to employment of work
force in training.
Loss of work time due to
poor health, emotional or
family problems.
Time for inefficiencies and
infrastructure problems,
costs for building extra
infrastructure.
MAGNITUDE
OF COST
High
Medium
High
High
Medium
Low
Medium
Medium-
High
SUBSIDY OR
INVESTMENT
Investment
Investment
Subsidy
Subsidy
Subsidy
Subsidy
Subsidy
Subsidy
FUNDED BY
(AFTER INITIAL
INVESTMENT)
Revenue/
Grants
Revenue
Revenue
Revenue
Revenue
Revenue
Revenue
Revenue
EXHIBIT 8I: QUANTIFYING SOCIAL COSTS
8
FOR TARTINA
8
Ibid., Table modified. Assumes cost structure after start up phase is complete.
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TYPE OF SOCIAL COST
SOCIAL PROGRAM COSTS
9
Donor/Parent Organization
Activities and Fundraising
Counseling, Job Coaching
Other Vocational or
Education Services
Food, Housing, Clothing,
Health Care
DEFINITION
Integrated social pro-
grams aimed at assisting
clients or requirments of
parent organization.
Time for donor visits,
reports, fundraising, parent
organization events, meet-
ings that detract from enter-
prise productivity.
Costs for on-the-job sup-
port and emotional stability.
Costs for training to
enhance clients' employa-
bility and independence
outside of enterprise pro-
gram.
Costs that meet basic/spe-
cial needs of clients other
than economic ones.
MAGNITUDE
OF COST
Medium
Medium
High
High
SUBSIDY OR
INVESTMENT
Subsidy
Subsidy
Subsidy
Subsidy
FUNDED BY
(AFTER INITIAL
INVESTMENT)
Grants/parent
organization
Grants/
revenue
Grants/parent
organization
Grants/parent
organization
9
TARTINA does not integrate business and social programs within its enterprise structure, and there-
fore does not incur the “Social Program Costs” given in this chart. Thus, information on the magni-
tude of costs, whether it is a subsidy or an investment, and who underwrites these costs are given
generically—based on average expenses of integrated social enterprise programs.
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Managing the Double Bottom Line:
278
Financial Tools
An essential part of the social enterprise’s financial plan is preparation of four key
financial tools, namely:
4Budget—details anticipated enterprise expenses and income.
4Profit/loss statement—measures the profitability of an enterprise over a period
of time.
4Balance sheet— provides a “snapshot” of the enterprise’s financial position at a
given point in time.
4Cash flow statement—explains how cash was both generated and spent over a
period of time.
The last three tools are also
referred to as financial state-
ments in accounting and finan-
cial literature.
Financial tools represent the
financial strength and perform-
ance of a social enterprise and
are used for planning, evalua-
tion, and control purposes by
the various enterprise actors.
There is some debate about
which financial tools are most
important. Proponents of bal-
ance sheets advocate their use
over other financial tools be-
cause they represent the true
value of the enterprise. Others
prefer profit and loss statements,
as they indicate whether your
enterprise is making or losing
money. Our experience shows
that social enterprises most often
falter in cash management,
hence significant explanation is given to the subject of cash flow.
All financial tools are linked and should be used together in order to fully under-
stand the financial position of the enterprise (exhibit 8K: Interrelationship between
Financial Statements for Social Enterprises). Without these tools, you will not be able
to prepare the enterprise’s financial targets or measure its progress against these tar-
gets. Exhibit 8J, Financially Statement Overview, gives an overview, of the purpose,
time frame, and main users for each financial tool.
Financial Control
Financial statements are an important control mechanism and should be
produced regularly. They should not just be viewed as something that is
produced once a year for audit and registration purposes. The different
parts of financial statements are intrinsically linked. For example, if you see
your receivables increase, you might expect your cash to decrease and vice
versa. If you see your inventory and receivables increase drastically, you are
probably about to have significant cash flow problems. The effects of good
or weak internal control systems will show up in your financial statements.
As a social enterprise you must be strict about collection of receivables or
you will have no cash left. There’s no quicker way to destroy an enterprise
than to be slack in collecting what is owed to you. And pay everything you
owe to others early! You must know each week what is due from credit
sales and take firm action. Every dollar tied up in receivables (or excessive
inventory) is a dollar that cannot be used to expand or maintain your enter-
prise. Be strict on controls around cash. Imagine that it’s your own money.
You wouldn’t allow your personal debts to go uncollected, or pay too much
for supplies because you didn’t have time to walk 200 meters farther to a
cheaper shop, or leave your own money lying around in an unlocked draw-
er rather than in a safe. But people frequently do these things with money
that belongs to an enterprise.
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EXHIBIT 8J: FINANCIAL STATE OVERVIEW
Tool What It Tells You Time Frame for: Who Uses It
Planning Evaluation
Profit/Loss Statement How much the Annually Monthly Shareholders,
enterprise is making Quarterly Public donors,
or losing. Annually PO Business
Advisor,
Enterprise
Manager,
Entrepreneurs
Balance Sheet Financial picture Annually Quarterly Shareholders,
of the enterprise Annually Public donors,
as of a specific date. PO Business
Lists assets, Advisor,
liabilities, and equity. Enterprise
Manager
Budget All of the expenses Annually Quarterly Public donors,
of the social enterprise Annually PO Business
(profit/loss statement) Advisor
and all relevant
expenses of the PO.
Cash Flow Statement Indicates cash surplus Annually Weekly PO Business
or shortage for enterprise Monthly Advisor,
operations. Shows all Quarterly Enterprise
inflows and outflows of Annually Manager
cash in the enterprise.
Balance sheet—a
financial statement that
shows assets on the left
side and liabilities on the
right. A balance sheet
gives an overview of a
company's financial
position at any given
point.
Budget—a financial
plan based on estimates
of expenditures and rev-
enues for a period of
time.
Cash flow statement—
a financial document that
reports information
about cash receipts and
cash payments during
an accounting period.
The cash flow statement
segments cash sources
and uses into “operat-
ing”, “investing” and
financing” categories. It
is generally prepared for
the same period as the
profit and loss state-
ment.
Profit and loss statement—
financial statement that summa-
rizes the amount of revenue
earned and expenses incurred by
a business entity over a period of
time; also called an income
statement. In nonprofit account-
ing, the profit and loss statement
is sometimes referred to as the
statement of activity.
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Managing the Double Bottom Line:
280
EXHIBIT 8K: INTERRELATIONSHIP BETWEEN FINANCIAL STATEMENTS FOR
SOCIAL ENTERPRISES
Profit/Loss Statement Change in Balance Sheet
Sales Increase in accounts receivable; decrease in inventory
Less: Costs of goods sold Decrease in inventory
Equals: Gross profit No change
Less: Operating expenses Increase in accounts payable, decrease in cash, or
decrease in prepaid expenses
Equals: Net profit (or loss) Increase in retained earnings for profit, or decrease in
retained earnings for losses
Plus: Subsidy Increase in donor contribution (net worth)
Balance Sheet Change in Cash Flow Statement
Increase in assets (use) Decrease in cash
Decrease in assets (source) Increase in cash
Increase in liabilities (source) Increase in cash
Decrease in liabilities (use) Decrease in cash
Decrease in net worth (use) Decrease in cash
Increase in net worth (source) Increase in cash
Rationale:
A good accounting system and financial statements are the basis of a sound enter-
prise. Do not rely on donor program reports or fund accounting, which only tell
you in cash terms how much you have spent on a particular line item during a
month, quarter, or year. Donor project reports will tell you almost nothing about
the overall health of your enterprise, nor will they assist you in making key deci-
sions. For this you need standard financial statements as used in the business world.
They will enable you to compare your enterprise with other enterprises. You are
also far more likely to be well received by the local bank manager when your enter-
prise one day needs a cash-flow loan.
GUIDELINES FOR PREPARING FINANCIAL TOOLS
4Begin with projected financial statements and budgets. Projected, also called
pro forma, financial statements, forecast future expenses and income. Pro forma
financial tools provide the starting point for your social enterprise based on edu-
cated estimates.
4Base projections on historical information or actual costs. Use cost informa-
tion either from past experience (if yours is an existing enterprise) or from
research on market prices.
Costs of goods (COGs) sold—
Costs of inventory sold during an
accounting period by the selling enter-
prise. COGs include all costs to make
a product or render a service: labor,
raw materials, operations, factory
overhead, etc. It is important for
social enterprises to list costs of
goods sold in their income statement.
Gross profit—shows the value that
an enterprise is earning over the cost
of the merchandise sold (costs of
goods sold). Gross profit is calculat-
ed by subtracting costs of goods sold
from total sales. It is called gross
profit because other expenses still
need to be deducted in order to arrive
at net profit.
Operating expenses—the costs of
the selling and administrative activities
of a business. Operating expenses are
reported in the income statement and
are usually categorized as selling and
general administrative expenses.
Net profit—what remains after all
expenses have been subtracted from
revenue; also referred to as net
income.
Net worth—also called owner’s equi-
ty, net worth is equal to assets minus
liabilities. It represents the value of the
enterprise.
Pro forma—a projection or estimate
of what may result in the future from
actions in the present. Pro forma
budgets and financial statements esti-
mate business performance results
based on certain assumptions.
Fund Accounting—a concept partic-
ular to nonprofit organizations and
government agencies. Financial
records must be maintained for each
program that receives contributions (in
the form of grants and donations)
designated to support a specific pro-
gram. Each set of records is called a
"fund" and is considered a separate
accounting entity with its own finan-
cial statements.
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4Clearly state the assumptions behind your projections. This helps you think
through the logic and basis for your projections, and if you discover that your pro-
jections are off, you can revisit the assumptions to verify whether they are still
valid. Some examples for TARTINA include 12 gourdes per marmite for peanuts
(based on last year’s average prices plus a minor adjustment consistent with infla-
tion) and $15,758 in annual pay for a Marketing Manager based on low-end
competitive rates for the same job in the private sector.
4Use the appropriate level of detail in your financial statements.
“Appropriate” refers to information that is important for users of financial state-
ments for analytic and decision-making purposes. This may mean preparing con-
solidated statements that give financial information in summary form for external
users, such as donors and investors, and more detailed statements for internal use
by enterprise managers.
4Reconcile projected financial
statements with actual per-
formance. Report projections
against actual performance.
Reconciling differences quarter-
ly or monthly not only helps
enterprise managers verify
whether they are on track with
their estimates but signals prob-
lem areas before they become
catastrophic. Finally, using this
approach systematically should
increase accuracy of projections
as the enterprise matures.
4Set up a standard accounting
system.
10
Whether it’s an accru-
al or a cash system (see box), a
social enterprise should use an
accounting system that gener-
ates the same financial reports
as those used in the private sec-
tor. Often nonprofits use simpli-
fied cash systems or structure their accounting to respond to donor reporting
requirements, which may leave out information essential for financial analysis.
Accrual and Non-accrual (Cash)
Accounting Systems
One of the tensions between the business and nonprofit
worlds is which accounting system to use. The nonprofit
world tends to use cash accounting. The advantage of
this is simplicity: Your financial statements reflect exactly
what you have paid out in cash or by check. Some
donors also require cash accounting. The business world
generally uses accrual accounting, which in fact is a
legal requirement in most countries. Why? Well, consider
a social enterprise that paid its rent of $2,000 for calendar
year 1998 on Jan. 1, 1998, and that paid its rent of $2,000
for calendar year 1999 on Dec. 31, 1998. Accrual account-
ing would show rent of $2,000 in both the 1998 and 1999
financial statements because that is the correct amount
relating to each year. Cash accounting would show a
rental expense of $4,000 in the 1998 financial statement
and nothing in 1999—a clear distortion of the picture. The
only accurate way to evaluate financial performance
month by month or year by year is to use accrual
accounting.
10
The topic of social enterprise accounting systems is complex, particularly as it relates to the rela-
tionship between the enterprise and the parent organization. SC suggests that you consult with a
private sector accountant, tax attorney and an MIS specialist before setting up a social enterprise
accounting system. Recommended reading on this subject can be found in Investor Perspectives,
"Accounting Issues in Social Purpose Enterprise," Cynthia Gair, 2000, Roberts Foundation, SF, CA.
Accrual Accounting—a
practice of accounting where-
by revenues are accounted for
in the period in which they
occur and expenses recog-
nized when they are incurred,
rather than when a cash pay-
ment is made or received.
Accrual accounting gives a
realistic picture of the enter-
prise's financial position by
recording the effects of finan-
cial transactions on the social
enterprise regardless of when
cash is received or paid.
Cash Accounting—a practice
of accounting whereby rev-
enues and expenses are
recorded when cash is paid
and received. Cash accounting
is straightforward and is often
used by very small business-
es; however, it can overstate
or understate financial position
of the enterprise depending on
when a cash payment is made
or received.
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Managing the Double Bottom Line:
282
4
Use technology to prepare financial state-
ments. The days of the abacus are long gone:
Social enterprise managers need to embrace
technology to be able to react quickly. Relying
solely on a calculator means the enterprise
won’t have a chance of competing.
4Be clear on tax implications for your social
enterprise. There are only two certainties in
life: death and taxes. Even nonprofits are liable
for various taxes, such as property, payroll, etc.
The best way to understand what taxes the
enterprise does or might owe is to consult a
good lawyer and/or accountant. It’s money
worth paying upfront to avoid huge liabilities
later.
4Inventory valuation. Select a system for valu-
ing inventory (see box) that is appropriate for
the type of business. Inventory valuation has an
impact on the bottom line and is frequently
overlooked by social enterprise practitioners.
4Depreciation method. Use a standard
method of depreciating fixed assets suitable for
your enterprise (see box on next page).
Let Technology Be Your Friend
Nowadays there are many good off-the-shelf accounting
packages available, so don’t reinvent the wheel unless
you have to. Try to choose one that has good technical
support in the country and, if you have donor grants, one
that can deal with fund accounting (separating the funds
of different donors). Powerful spreadsheet programs such
as Excel can also assist you with various financial tasks.
But remember the old adage of garbage in, garbage out.
Technology is no substitute for having a good, solid man-
ual system underneath that feeds accurate information to
your computer.
There are also more specialized accounting/financial
management software packages that automate a number
of functions, such as inventory management and ordering.
Spreadsheet or software macros should link to financial
statements.
Inventory Valuation
The valuation of inventory is one of the most important parts of an organization’s financial statements, as it
has a direct effect on profit (via cost of goods sold). Inventory is usually valued at the lower of cost or net
realizable value, i.e., the price you would receive if you sold it. With the exception of a few commodities that
increase in value with age (whiskey and wine), the net realizable value of many commodities decreases
over time as they become obsolete or their shelf life ends and value may therefore be lower than cost.
Finding the exact cost of each unit of a commodity is obviously almost impossible if there are hundreds, so
three main methods are used: FIFO, LIFO, and average cost method. FIFO—first in, first out—assumes that
the oldest units are sold first and that remaining units are valued at the most recent prices paid or produc-
tion cost incurred. FIFO is the most commonly used and accurate method of inventory valuation. LIFO—
last in, first out—assumes that the most recent additions to inventory were sold first and therefore values
inventory at older prices. LIFO is not often used. The average cost method simply takes an average of pur-
chase prices or production costs for a commodity; its advantage is simplicity. Generally an organization
should use FIFO unless there is a good reason not to.
Average cost—a method of inventory
valuation that assumes inventory sold
during the period was purchased at the
average cost of all inventory available for
sale.
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INFORMATION FLOWS
Perhaps you are wondering where financial statement information comes from. This
is a good question. Remember that in previous chapters the indicated informa-
tion you would use in the financial section of your business plan. Exhibit 8L shows
how the information you compiled earlier will be used to prepare your financial
statements and budget.
Depreciation
Why depreciate? Let’s imagine you purchase a vehicle that has an estimated
useful life of five years. It makes sense to spread the cost of the vehicle over
the five years it is used in the social enterprise rather than take the whole
charge in one year, even though many donors would prefer that it be
charged in one year for their accounting purposes. In business accounting,
depreciation allows you to match the cost of assets with the revenues pro-
duced by them. There are two main methods: declining balance and straight
line. Most businesses use straight-line depreciation for its ease. Thus, for the
vehicle you would divide the purchase price (say $18,000) by its useful life
(say five years or 60 months), and the depreciation charge would be $3,600
per year or $300 per month. However, this may not be that accurate for a
vehicle, which typically loses 20 percent of its value the moment it is driven
out of the showroom. It might be more accurate to take a depreciation
charge of 30 percent of the net value of the vehicle each year. For Year 1 the
charge would be $18,000 x 30% = $5,400, and for Year 2 it would be
($18,000 – 5,400) x 30% = $3,780 and so on. The main difference between
the methods is that straight line is easier, the asset is fully depreciated in a
certain time period, and the charges are equal each year. With declining bal-
ance, you have higher charges in earlier years and lower charges in later
years. Generally, you should use the straight-line method unless it seems
very inaccurate.
Depreciation—the
decrease in the value of
equipment from wear and
tear and the passage of
time. Depreciation is
recorded as an expense that
allocates the cost of the
asset over the time it is
expected to generate
income.
Sales planning with
sales team.
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Managing the Double Bottom Line:
284
EXHIBIT 8L: FINANCIAL INFORMATION FLOWS
Information Used in Represented in Financial Line Items
Financial Plan Statements
Strategic Frameworks, Chapter 4
Seasonal Factors Cash flow projections Sales, COGS, operating expenses,
Profit/loss statement sales, marketing
Financial Characteristics Cash flow projections Sales, returns, COGS, commissions,
salaries
Profit/loss statement Sales, COGS, operating expenses
Break-even Sales price (not a line item)
Marketing, Chapter 5
Marketing Vehicles Cash flow projections Operating expenses
Profit/loss statement Marketing and advertising
Marketing budget All—related to promotion
Cash flow projections Operating expenses
No/Low-Cost Promotion Profit/loss statement Marketing and advertising
Marketing budget All—related to promotion
Sales Plan + Structure Profit/loss statement COGS, sales or marketing,
commissions, gross sales
Cash flow projections Cash sales, accounts receivable
Marketing Budget Social enterprise budget Marketing costs: salaries, benefits,
payroll tax, commissions
Operations, Chapter 6
Facilities Profit/loss statement Rent, utilities, maintenance,
depreciation
Cash flow projections Operating expenses, other expenses
Balance sheet Fixed assets, depreciation
Social enterprise budget Rent, building maintenance
Production Profit/loss statement COGS (inventory), salaries, benefits,
payroll tax
Cash flow projections Operating expenses
Production budget All production expenses
Break-even Variable & fixed costs of production
Social enterprise budget Raw materials, factory overhead,
labor, salaries, benefits, payroll tax
Equipment Profit/loss statement Depreciation, equipment rental,
furniture and equipment
Balance sheet Fixed assets, depreciation
Cash flow projections Operating expenses, equipment
purchase
Social enterprise budget Fixed assets: production equipment
Cash flow projection—a forecast of
the cash a business anticipates
receiving and disbursing over a given
span of time, frequently one month. It
is useful in anticipating the cash por-
tion of a business at specific times
during the period projected.
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Research & Development Profit/loss statement Operating expenses, allocated
salaries, or R&D
Social enterprise budget R&D, consultants, materials
Human Resource Plan, Chapter 7
PVO Staff Social enterprise budget Salaries, benefits, payroll tax
Enterprise Staff Social enterprise budget Salaries, benefits, payroll tax
Income statement Salaries, benefits, payroll tax
Cash flow projections Operating expenses
Recruitment Plan Income statement Salaries, benefits, payroll tax
Cash flow projections Salaries (projections for new hires)
Incentive Programs Income statement Sales commission
Cash flow projections Operating expenses
Capacity Building Income statement Training materials and services,
legal and professional services
Cash flow projections Operating expenses
Financial Plan, Chapter 8
Start-up Costs Profit/loss statement First month’s operating expenses
allocated to relative lines
Balance sheet Current assets, fixed assets,
current and long-term liabilities (for
debt secured to pay costs) or net
worth (for subsidies or contribu-
tions)
Cash flow First month’s operating expenses
and term payments for future
months
Information Used in Represented in Financial Line Items
Financial Plan Statements
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Managing the Double Bottom Line:
286
Budget
The social enterprise starts out as a program. Therefore, prior to addressing financial
statements—balance sheets, profit and loss statements, and cash flow statements—
we begin this section with a budget, the financial management planning instrument
most development practitioners are already familiar with. A budget projects all
expenses of the social enterprise as well as any additional expenses of the PO that
are charged to the social enterprise program, usually on an annual basis. Normally,
quarterly assessments are made of actual expenditures relative to those that have
been planned.
Much of the budget is drawn from financial information completed in previous
business plan chapters, such as marketing, operations, and human resources budgets
(exhibits 8L and 8M). What has not been discussed in detail—other than PO salaries
in the human resource chapter—is the parent organization’s budget for staff, capaci-
ty building, and overhead as well as social enterprise operating overhead.
EXHIBIT 8M: BUDGET INFORMATION FLOWS
HUMAN
RESOURCE
BUDGET
OPERATION
BUDGET
OVERALL SOCIAL
ENTERPRISE
PROGRAM
BUDGET
PARENT
ORGANIZATION
BUDGET FOR:
TECHNICAL
ASSISTANCE
OVERHEAD
MARKETING
BUDGET
START-UP
BUDGET
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BUDGETING START-UP COSTS
New social enterprises will need to prepare a budget for first-month start-up costs to
determine total capital requirements needed for fixed assets and working capital.
Start-up costs, or sunk costs, are the nonrecoverable costs of launching a business.
Unlike many businesses, social enterprises have the luxury of having these paid by
donors and are not required to recover this original investment. Considered pre-
operating expenses, start-up costs are included in the financial needs section or
budget of your social enterprise program proposal, as well as in the financial state-
ments in your business plan.
? Begin by looking over budgets completed in earlier sections of the business plan
(operations, marketing, and human resources). Which expenses will you have to
pay out prior to opening your doors? Which expenses will you have to pay in the
first 30 days of operations?
? Partial payments for assets, or those made on credit, are deferred payments and
will need to be included in your cash flow projections (discussed later in this
chapter).
? Don’t forget to include cash on hand for accrued salaries and working capital for
the first month of operations.
? Use the Projected Start-up Costs template found in The Workbook or create your
own. An example for TARTINA is given in exhibit 8N. Use it as a guide to pro-
jecting start-up costs for your social enterprise. Add additional line items or omit
them as they pertain to your business.
Start-up cost projections are included in the Business Plan appendix.
Sunk Costs—a cost that has been
incurred and cannot be affected by
present or future business decisions.
Production team meets with Save the Children’s advisor from headquarters.
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Managing the Double Bottom Line:
288
EXHIBIT 8N: PROJECTED ENTERPRISE START-UP COSTS
Amount
Facilities First rent/purchase 328
Deposits (security, water, utility, other hookups) 600
Improvements/refurbishing/fixtures 16,000
Other 875
Equipment Vehicles 30,000
Production machines/equipment 12,000
Computers/software 7,500
Furniture 550
Telephones 70
Other 1,000
Materials/Supplies Starting inventory (or raw materials/work in progress) 1,200
Production inputs 800
Office and packing supplies 450
Promotional materials (brochures, displays, etc.) 1,250
Training supplies 400
Other -0-
Professional Services Legal (tax, etc.) 800
and Fees Management/marketing/production consultants 1,200
Accounting -0-
Insurance 780
Design/graphic arts 250
Promotion and advertising 1,200
Licenses/permits/registration 650
Membership or association fees 200
Pre-operations Technical assistance or training consultants 2,400
Training Tuition or fees (workshops, seminars, classes, etc.) -0-
Per diem and costs associated with training (room rental) -0-
Other -0-
Cash For salaries (first month) 4,900
(First 30 Days) Reserves—operating expenses 2,500
Reserves—unanticipated costs 2,000
Other -0-
Total Start-up Costs 89,903
TARTINA needed $89,903 to open its doors and run its operations for the first 30
days. The largest expenses were for vehicles, equipment and improvements to the
production facility which included building a storage silo. Fair amounts were also
spent on marketing and promotions as well as for technical and mangagement
consultations.
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SOCIAL ENTERPRISE PROGRAM BUDGET
The budget for your social enterprise itemizes all the expenses projected for your
program. In other financial statements you may want to consolidate financial infor-
mation into broad categories, but your budget should be detailed. Exhibit 8P pro-
vides an example of a one-year budget for TARTINA Enterprise.
EXHIBIT 8P: TARTINA BUDGET: APRIL 1999—APRIL 2000
Q1 Q2 Q3 Q4
I - PERSONNEL
Salaries
Field/HR Manager (ADE Staff) 25% 3,939
Production Manager 100% 10,909
Business Manager 50% 7,758
Marketing Manager 100% 13,758
Financial Manager (ADE Staff) 30% 2,955
Accountant 100% 6,909
Inventory Manager 50% 1,891
Production Workers 100% 10,879
Production Agents 100% 5,727
Secretary (ADE Staff) 40% 1,576
Driver 100% 1,970
Guard & Stock Keeper 100% 1,182
Guard 100% 1,733
Subtotal $71,185
13th Month 5,932
Subtotal Salaries $77,117
Fringe Benefits
Retirement Plan (ONA) 6% Salaries 4,330
Medical Insurance (4%) 2,887
Subtotal Fringe Benefits $7,217
TOTAL PERSONNEL $84,334
II - OPERATING COSTS
Rent 3,939
Assets:
Motorcycle & Accessories 6,000
Production Equipment 4,000
Grinder (for sweetened peanut butter) 970
Peanut Storage Instruments:
Humidity Meter 400
Thermometer 200
Fan 1,000
$
Amount*
% of
Staff Time
*Values given in US dollars
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Managing the Double Bottom Line:
290
Q1 Q2 Q3 Q4
Insecticide 551
Grinder Maintenance 121
Building Maintenance 1,970
Vehicle Depreciation 5,000
Vehicle Maintenance 394
Fuel 1,182
Travel 788
Office Supplies 788
Training Materials 1,182
Total Overhead $29,984
Technical Assistance:
Consultants in Production Technique 5,666
Materials (for study on improving raw
materials production & quality) 1,500
Research & Development 1,300
Miscellaneous Expenses 1,450
Total Technical Assistance $8,616
TOTAL OPERATING COSTS $38,400
III - MARKETING COSTS
Promotion and advertising $10,145
Sale Agents: Base Salary
3 agents x 1 month x Gdes 3000 545
3 agents x 2 months x Gdes 3000 x 1/2 545
3 agents x 10 mos. x Gdes 3000 x 1/2 1,363
PAP/Institutional Sales Agent 2,364
PG/Sales Agent 1,182
Subtotal Base Salary $5,999
Commission
Mamba (18300 Jrs x Gdes 25) x 15% 4,159
Chadèque (12600 Jrs x Gdes 26) x 15% 2,978
Grenadia (1200 Jrs x Gdes 30) x 15% 327
Karapinia (8500 scs x Gdes 5) x 15% 386
Subtotal Commission $7,851
Total Sale Agents $13,850
TOTAL MARKETING COSTS $23,995
SUBTOTAL $146,729
Less: Revenues (14,922)
TOTAL OPERATING COSTS $131,807
$
Amount*
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Preparing the Social Enterprise Budget
? Draw from institutional experience by having a qualified accounting staff profes-
sional prepare program budgets.
? Prepare a projected (pro forma) budget for one year, and include empty columns
to reconcile actual expenses quarterly.
? Feed in budget information completed in earlier sections of the business plan
(operations, marketing, and human resources) to develop your overall program
budgets.
The social enterprise budget is included in the Business Plan appendix.
PARENT ORGANIZATIONS PROGRAM BUDGET
Most development practitioners have ample experience developing budgets for their
programs. Use the human resources information in chapter 7 to help you prepare a
program budget for the parent organization that will be providing technical support
and acting as a financial conduit. Exhibit 8Q provides an example of Save the
Children’s budget to support capacity building of TARTINA Enterprise; the actual fig-
ures have been excluded for the sake of privacy.
EXHIBIT 8Q: SAVE THE CHILDREN SOCIAL ENTERPRISE PROGRAM BUDGET
APRIL 1999—APRIL 2000
I - Salaries Amount Q1 Q2 Q3 Q4 Y-T-D
Headquarters: (U.S.)
Technical Advisor* 10% 5,000
Field Based: (Haiti)
Country Director 10% 4,935
Business Advisor 100% 43,776
Program Manager 25% 12,660
Director of Finance 15% 9,684
Driver 25% 5,914
Total Fringe 43,514
Total Salaries Fringe 125,483
Travel:
Domestic 3,939
International 3,723
Total Travel Costs 7,662
Overhead:
Rent (based on
space allocation) 3,100
Utilities 197
Building maintenance 394
Computer + office
equipment 2,313
*No fringe benefit cost covered for HQ.
% of Staff
Time
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Managing the Double Bottom Line:
292
Amount Q1 Q2 Q3 Q4 Y-T-D
Equipment maintenance 2,200
Office supplies 3,939
Assets less than $5,000 3,000
Vehicle (fuel/maintenance) 4,727
Telecommunications 2,364
Postage 45
Miscellaneous 1,970
Total Overhead 24,249
Technical Assistance:
Training materials 800
Installation of MIS 5,400
Marketing training 3,400
Quality control 2,700
Business management 2,500
Food/production
technology 4,400
Market research 4,400
Consultants 10,966
Evaluation/Audit 5,000
Total Technical Assitance 39,566
TOTAL SC EXPENSES 196,960
Preparing the Lead Organization (PVO) Budget
? Follow the instructions for preparing a social enterprise budget (previous section).
? Use the TARTINA example in exhibit 8M for reference. A blank form can be
found in The Workbook.
? Lead organization budgets are not included in the social enterprise business plan.
PO budget is included in the Business Plan appendix.
Profit/Loss Statement
The profit and loss statement is a summary of the revenue and expenses of a com-
pany for a period of time. Sometimes called the income statement, the term profit
and loss is preferable because it embodies the business reality that enterprises can
lose as well as make money. The last line in the profit and loss statement indicates
the net profit or loss of the enterprise, hence the reference to the “the bottom line.”
The profit and loss statement is used for purposes of planning, evaluation, and con-
trol. It is usually prepared for one-year increments and included in annual reports,
etc. Profit and loss statements, however, should be produced monthly for internal
management purposes.
Profit and loss statements are broken into a few sections:
Income
That which comes from sales of a product or service, as well as nonsales sources.
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Costs of Goods Sold
Is made of all the costs allocated to inventory sold during a certain period.* The
equation for calculating costs of goods sold is as follows:
Beginning Inventory
Add: Purchases or production costs
Equals: Costs of goods available for sale
Less: Ending inventory
Equals: Costs of goods sold
Deducting the costs of goods sold from income gives you gross profit, which repre-
sents the contribution that revenues make toward coverage of expenses not tied to
production and toward net profit/(loss).
*Cost of goods sold is applicable only to production companies; services industries simply itemize
their income, then deduct expenses in their income statements.
Operating Expenses
Also referred to as general and administrative and selling expenses, these are the
expenses necessary to keep daily business operations running even if no goods are
produced or services rendered. The general and administrative expenses include
management and administrative salaries, communications, utilities, vehicles, equip-
ment—such as computers used for administrative support—and other costs not asso-
ciated with production. Selling expenses include marketing and promotional costs
such as paid advertising and sales commissions.
EXHIBIT 8R: PROFIT AND LOSS STATEMENT EXPLAINED
INCOME
1. Gross sales Total sales from product/service line categories.
2. Returns and allowances Products returned; credit or discounts given to
customers.
3. (1 - 2) Net sales Total sales minus returns and allowances.
4. Other income Revenues not associated with product or service
“sales” such as rental, commissions, interest income,
services that are not included in sales.
5. (3 + 4) Income Total income from sales and non-sales activities.
Costs of Goods Sold
6. Beginning inventory Finished goods inventory on hand at the beginning
of the period.
7. Plus: Purchases or production costs Merchandise purchased for resale or costs
incurred during production: inputs, raw materials,
direct labor, depreciation on equipment used in produc
tion, factory overhead (see operations budget in
chapter 6).
8. (6 + 7) Costs of goods available Total costs of all goods for sale.
for sale
9. Ending inventory Actual value of inventory left on hand at end of
period.
10. (8 - 9) Costs of Goods Sold Costs of inventory sold during an accounting period
that includes the expenses incurred to make a product.
General and administra-
tive expenses—the
expenses of running a busi-
ness that are not directly
allocated to the cost of
making a product or render-
ing a service.
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Managing the Double Bottom Line:
294
GROSS PROFIT
12.(5 - 10) Gross profit The value that an enterprise is earning over the cost of
the merchandise sold (costs of goods sold). Operating
expenses still need to be deducted from gross profit to
arrive at net profit.
OPERATING EXPENSES
12.Salaries Salaries of management and administrative staff not
directly connected to production.
13.Employee benefits Paid vacation and leave, health insurance, 13th
month, etc.
14.Payroll taxes Self-explanatory (laws are country specific).
15.Rent Non-factory real-estate expenses—rent or mortgage
payments.
16.Repairs & maintenance Cleaning services, repairs to property.
17.Equipment rental Leased equipment for nonproduction usage.
18.Furniture and equipment purchase Self-explanatory.
19.Vehicle(s) Purchase (moped, truck, car, etc.), mileage.
20.Vehicle maintenance & repairs Service and repairs.
21.Depreciation Value of fixed assets (depreciation).
22.Insurance Liability, vehicle, theft, fire, equipment, etc.
23.Interest expense Interest owed on borrowed capital.
24.Utilities Water, heat, power, light not used in production.
25.Telephone Self-explanatory.
26.Office supplies Usual business supplies (pens, staplers, paper,
white boards, etc.) as opposed to production inputs.
27.Dues, subscriptions, licenses Membership dues for affiliations or trade associations;
fees for operating/product licenses, trademarks, or
patents.
28.Training materials + services Supplies and materials; contracted technical assistance.
29.Postage and freight Self-explanatory.
30.Marketing and promotion Advertising, design, premiums, samples, displays,etc.
31.Sales commission Self-explanatory plus bonuses.
32.Legal and professional services Any nontraining outside services (attorneys, consult-
ants, auditors, accountants, technical specialists, etc.).
33.Travel Self-explanatory.
34.Miscellaneous Self-explanatory.
35.Other Additional category pertinent to enterprise, but not
captured in itemized list.
36.(sum of 12 through 35)
Operating Expenses before Taxes
All operating expenses.
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37.(11 minus 36) Net profit/loss before tax
38.Provision for taxes Tax on profits. Country-specific requirements often
related to legal status of enterprise (see chapter 9).
39.(37 minus 38) NET PROFIT/LOSS The “bottom line”—how much the
(from operations) social enterprise is either earning or losing from
operations.
40.SUBSIDY Income from government and foundation grants or
private funds.
(39 plus 40) TOTAL NET PROFIT/LOSS
(after subsidy)
PO business advisor, business manager, qualified staff accountants and the
financial manager or director
Preparing the Profit and Loss Statement
? If yours is an existing social enterprise you may have already prepared profit
and loss statements from past years of operation. If not, use this exercise to help
you prepare both historic (previous year) and pro forma profit and loss state-
ments.
? Use the explanation of the profit and loss statement in exhibit 8R for reference
and use additional financial and accounting resources as desired.
? Prepare a projected (pro forma) profit and loss statement for each year covered
in your business plan, and include empty columns to reconcile profit and loss,
income and expenses. Copy our example or use the Profit and Loss Statement
Worksheet, which can be found in The Workbook.
? Be sure to list the assumptions behind your profit and loss projections.
The proforma profit and loss statements are included in the Business Plan
appendix.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
EXHIBIT 8S: PRO FORMA PROFIT AND LOSS STATEMENT
TARTINA ENTERPRISE Projections ACTUALS
Profit and Loss Statement (in $)
Year 1 Q1 Q2 Q3 Q4 Y-T-D
INCOME
Gross Sales 58,271
Less Cost of Goods Sold 43,349
Gross Profit $14,922
OPERATING EXPENSES
Salaries 77,117
Fringe Benefits (+ Taxes) 7,217
Total Personnel $84,334
Rent 3,939
Assets $5,000 or Less 17,570
Building Maintenance 1,970
Vehicle Maintenance 394
Fuel 1,182
Travel 788
Office Supplies 788
Training Materials 1,182
Consultants in Production Technique 5,666
Marketing Consultants /Sales Agent 13,850
Miscellaneous Expenses 1,450
Equipment Maintenance 120
Insecticide 551
Materials for Raw Materials Production 1,500
& Quality Improvement Study
Research & Development 1,300
Promotion & Advertising 10,145
Operating Expenses before Taxes $146,729
Net Profit/Loss (before tax)
1
($131,807)
Subsidy $131,807
Net Profit/Loss (after subsidy) 0
Results: Comparing the projected profit and loss figures with TARTINA’s financial
objectives for profit/loss (exhibit 8B), it is easy to see their relationship. The financial
objectives projected total expenses of $150,000 and net loss of $135,000, whereas
the profit and loss statement projected expenses are very close at $146,729 with
losses of $131,807. Similarly, projected profit and loss revenues of $14,922 are just
shy of financial objectives set at $15,000.
Note that the figure for total operating expenses of $146,729 is also the same as total
fixed costs used in the break-even analysis in chapter 5.
TARTINA, under its current legal structure as an NGO business, is not required to pay
taxes at this point. It receives a subsidy to offset its net loss of $131,807.
Managing the Double Bottom Line:
296
1
TARTINA is a registered nonprofit organization and therefore does not pay tax.
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Adjusting the Profit and Loss Statement to Include
Social Costs
11
Rationale
Once you have determined which social costs are significant to your enterprise and
developed a methodology to calculate them, both bottom lines should be quantified
in the profit and loss statement to capture the productivity of the business and the
social costs of working with a particular disadvantaged target population. The first,
“net income before social costs” reflects true business costs and provides a picture
of how the social enterprise performs as a business. The second, “net income after
social costs” indicates the program costs of providing assistance to the target popula-
tion and how well the enterprise is meeting its social mission.
12
(exhibit 8T Double
Bottom Line Profit and Loss Statement.)
The objective of this exercise is to delineate existing social costs that the busi-
ness is currently subsidizing in its operating expenses using figures derived from
methodologies developed in the exercise Quantifying Social Costs. Conducting a
social cost assessment should not be viewed by managers as a way to carry ineffi-
ciencies in the business operations not stemming from the social mission, or “bury”
costs since the total costs are still part of the overall performance of the enterprise.
13
Double bottom line profit and loss statements are essential tools for internal man-
agement decision-making that may or may not be required by donors and investors.
Business manager, accountants and finance staff, PO business
advisor
? Return to the social costs figures you calculated in the exercise Quantifying
Social Costs.
? Sum the total amount of social costs in dollar values or local currency.
International donors of development programs usually ask for financial state-
ments in dollar terms.
? Be careful not to double count. Subtract each social cost from the expense line
item as it appears in the profit and loss statement. For example, if 30% of the
enterprise manager’s overall salary and benefits is dedicated to “extra” nonbusi-
ness activities arising from the disadvantaged labor, be sure to deduct this
amount from the line item total for the manager’s salary and benefits in the
operations expenses portion of the profit and loss statement.
? Sum total operating costs less total social costs in line item “net profit/loss before
social costs.” This is your first bottom line, denoting business performance.
? Then record total social costs in following line item “less social costs”
? Subtract total social costs to derive “net profit/loss after social costs.” This is your
second bottom line, denoting overall social enterprise performance including
costs incurred to the carry out social mission.
? An example for TARTINA is included in exhibit 8T.
11
Ibid. This concept was originally introduced in New Social Entrepreneurs: The Success, Challenge
and Lessons of Nonprofit Enterprise Creation in its chapter on “True Cost Accounting,” Jed Emerson
and Fay Twersky, 1996, Roberts Foundation, SF, CA.
12
Investor Perspectives, “Quantifying Social Costs: A Case Example from Rubicon's Buildings and
Grounds Business,” Kim Starkey, 2000, Roberts Foundation, SF, CA.
13
Ibid.
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Managing the Double Bottom Line:
298
EXHIBIT 8T: DOUBLE BOTTOM LINE PROFIT AND LOSS STATEMENT
TARTINA DOUBLE BOTTOM LINE 5/99-4/00
Profit and Loss Statement
Total Operating Expenses $146,729
Total Gross Revenue $14,922
NET PROFIT/LOSS BEFORE SOCIAL COSTS ($82,395) = Financial Bottom Line
Less Social Costs ($49,412) = Social Bottom Line
NET PROFIT/LOSS AFTER SOCIAL COSTS ($131,807) = Double Bottom Line
TARTINA managers concluded that it costs an additional $49,412 in extra supervi-
sion, capacity-building, piece rate premium and loss in productivity due to ineffi-
ciency and illness to run TARTINA as a social enterprise rather than a for-profit busi-
ness in year 1. TARTINA’s operating deficit of $82,395 is considered normal for a
similar production business in its first year.
Balance Sheet
The balance sheet is a snapshot of a social enterprise’s financial position—what it
owns (assets) and what it owes (liabilities and net worth)—at a given point in time.
The liabilities and net worth on the balance sheet represent the business’ sources of
funds, whereas assets represent its use of funds. Liabilities and net worth derive
from creditors and donors (or investors) who have provided cash or its equivalent
to the enterprise or from earnings generated by the enterprise. As a source of funds,
they enable the enterprise to continue in business or expand operations. Assets
include all holdings of value that are owned or due to the business. Assets are either
purchased with assets on hand, such as cash, or financed by liabilities (debt) or net
worth (contributions or profit). Therefore, values represented in these categories
reveal how efficiently an enterprise manages resources and finances its operations
and, finally, the extent to which it is viable.
As the name implies, a balance sheet must balance. The relationship between
the three sections of a balance sheet are shown in the following equations:
Assets = liabilities + net worth
Assets – liabilities = net worth
Rationale:
Sound financial management of an enterprise involves matching the sources and
uses of cash so that obligations come due as assets mature into cash. The balance
sheet is a financial tool that monitors the enterprise’s ability to collect revenues and
manage inventory as well as assesses its ability to satisfy creditors, donors, and
investors. Although individual line items and category values change on a daily
basis, reflecting financial transactions and business activities, the balance captures
the financial picture at one moment in time, usually at the end of an accounting
period (exhibit 8V). Analyzing the changes in the balance sheet over several report-
ing periods informs enterprise trends.
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EXHIBIT 8U: BALANCE SHEET EXPLANATION
ASSETS Assets are shown at net book value rather than appreciated value.
Current Assets Assets that mature in less than one year.
Cash Cash on hand: checking, money-market and short-term savings
accounts.
Accounts receivable Money owed from customers who receive goods or services in
advance of payment. Inventory is sold and shipped, an invoice is sent
to the customer, and later cash is collected.
Inventory Finished goods for sale, work in progress, raw materials on hand
Prepaid expenses Goods, benefits, or services an enterprise buys or rents in advance of
use—i.e., office supplies and insurance premiums.
Other current assets Interest- or dividend-yielding holdings expected to be converted into
cash within a year—i.e., marketable securities, time deposits, etc.
Total Current Assets Self-explanatory.
Noncurrent Assets Assets that will not mature into cash within the next 12 months.
Fixed Assets Resources an enterprise owns or acquires for use in operations; not
intended for resale. Fixed assets represent the use of cash to pur-
chase physical assets whose life exceeds one year.
Land Listed at original purchase price with no allowance for appreciation or
depreciation.
Building Property owned and used by the enterprise.
Machinery & equipment Used by the enterprise; listed at original purchase price.
Furniture & fixtures Furniture used by the enterprise or permanent installations, remodel
ing, or refurbishing of the premises.
Vehicles Used by the business and listed at their original purchase price.
Less accumulated Total assets (except land) lose their value through age and wear and
depreciation tear. The enterprise claims this loss of value as an expense of doing
business and deducts it from total assets. Accumulated depreciation
is the cumulative sum of all the years’ worth of wearing out that have
occurred in the asset.
Net Fixed Assets Gross fixed assets (purchase price) – accumulated depreciation (not
including land) = net fixed assets (also known as book value).
Other assets Enterprise resources not listed in above asset categories—i.e., scrap
value of obsolete equipment or intangible assets such as trademarks,
patents, goodwill.
TOTAL ASSETS Net fixed assets + other assets (scrap value) – amortization (for
intangible assets) = TOTAL ASSETS.
LIABILITIES All monetary obligations of an enterprise and all claims creditors have
on its assets.
Current Liabilities All debts and obligations payable within one year.
Accounts payable Amount owed to suppliers.
Short-term notes Balance of principal on loans with terms of one year or less.
Interest payable Balance of interest due at period end but not yet paid on long-term
and short-term borrowing.
Accrued payroll Salaries and wages currently owed.
Taxes payable Amounts owed for real estate, Social Security, and income tax.
Total Current Liabilities Self-explanatory.
Long-Term Liabilities Debts such as mortgage and loan principal due in more than one year.
Book value—the value of an
asset whose historical cost has
been adjusted for depreciation
or amortization. Book value is
also referred to as net fixed
asset value and is reflected in
the balance sheet of an enter-
prise.
Amortization—costs of an
intangible asset are allocat-
ed over its useful life.
Goodwill—Excess value of asset
over market value (or book
value). Goodwill appears in finan-
cial statements when a business
is valued above it assets shown
on its books.
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Managing the Double Bottom Line:
300
Mortgage payable Balance owed on property.
Long-term notes Outstanding balance on loans payable in more than one year.
Total Long-Term Liabilities
TOTAL LIABILITIES Total current liabilities + total long-term liabilities.
NET WORTH Also called owners’ equity, net worth is equal to assets less liabilities.
It represents the value of the enterprise. Net worth includes subsidies,
investors’ or owners’ contributions, retained earnings, and revenue
surpluses.
14
Donor contributions Donor grants or private PO nonprofit partner funds used to subsidize
operations.
Owner contributions PO partner or individual resources allocated as an ownership stake.
Reserves for bad debt Provision against loss for uncollectible loans.
Shareholder equity Value of investor stakes for social enterprises that have formalized
into business entities.
Retained earnings Amount of income (or loss ) accumulated since the beginning of the
(Losses) prior years enterprise
15
and reinvested (for profit).
Net surplus/(deficit) Amount of income (or loss ) generated in the current year.
16
TOTAL NET WORTH Total value of the enterprise.
PO business advisor, business manager, qualified staff accountants and a
financial manager or director
Preparing a Social Enterprise Balance Sheet
? If yours is an existing social enterprise you may have already prepared balance
sheets from past years of operation. If not, use this exercise to help you prepare
both historic (previous year) and pro forma balance sheets.
? Use the balance sheet explanations in exhibit 8U for reference and additional
financial and accounting resources as required.
? Prepare a projected (pro forma) balance sheet for each year covered by the busi-
ness plan, and include empty columns to reconcile actual balance sheet assets,
liabilities, and net worth. Copy our example or use a the Balance Sheet
Worksheet, which can be found in The Workbook.
? Be sure to list the assumptions behind your balance sheet projections.
The historic and pro forma balance sheets are included in the Business
Plan appendix.
14
Adapted from SEEP Network Financial Servicew Working Group, 1995. Financial Ratio Analysis
of Microfinancial Institutions. New York: Pact Publications.
15
Ibid.
16
Ibid.
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EXHIBIT 8V: PRO FORMA BALANCE SHEET
TARTINA ENTERPRISE Projections
Projected Balance Sheet Year 1 Q1 Q2 Q3 Q4 Y-T-D
ASSETS
Current Assets
Cash on Hand 17,482
Savings Account
Accounts Receivable 15,742
Inventory
Raw Materials 1,950
Finished Products 9,276
Total Current Assets 44,450
Fixed Assets
Property, Plant, Equipment 33,524
Office Equipment 3,351
Land and Buildings 15,500
Vehicles 34,000
Less Accumulated Depreciation (526)
Total Fixed Assets 85,849
TOTAL ASSETS $130,299
LIABILITIES
Current Liabilities
Accounts Payable 15,114
Accrued Payroll 6,487
Short-Term Notes Payable 11,738
Noncurrent Liabilities 0
Long-Term Notes Payable 0
TOTAL LIABILITIES 33,339
NET WORTH
Reserves for Bad Debts 25,000
Donor Contributions 203,767
Retained Earnings (Losses) 0
Net Surplus/Loss (131,807)
TOTAL NET WORTH 96,960
TOTAL LIABILITIES $130,299
& NET WORTH
Explanation: TARTINA’s projections assume a net loss of $131,807 in its first year of
operations. Donor subsidies of $203,000 from ASSIST will be used to cover start-up
costs for fixed assets as well as bridge TARTINA’s operating deficit. TARTINA’s current
value is $90,299, roughly two-thirds of which is represented by fixed assets and the
other one-third by current assets, cash, and inventory. In this example it is easy to see
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Managing the Double Bottom Line:
302
Cash Flow
Cash is money in the bank, plain and simple. It is not merchandise, inventory,
money owed to you from credit sales (accounts receivable), and it is certainly not
property or equipment. Although these assets may eventually be converted into
cash, they don’t take the place of cash—meaning that you can’t pay your rent with
a sewing machine or moped. Invariably social entrepreneurs and business people
alike must have cash to pay their suppliers, utilities, payroll, etc. Balancing expenses
against revenues is challenging and requires careful management as cash enters and
leaves the business.
Too often, financially viable businesses fail because of cash flow problems.
Managers are unable to manage receipts and payments of cash within a business,
causing critical cash shortages. In most enterprises, the inflow of cash revenue from
product or service sales lags behind the outflow of expenses needed to produce
those goods or run the business. A cash flow statement is a financial statement that
reconciles accrual revenue and expenses in the profit and loss statement to net cash
collected or paid. It tells social enterprise managers where the money went and
where it came from and gives a picture of the cash position—or amount of money
in the bank. Of course cash on hand does not equal profit if expenses are outstand-
ing but not yet paid. Accrual accounting was developed because profit is considered
a better measure of business performance than net cash received; nonetheless, pro-
jecting and recording cash flows is an essential part of good business operations.
A cash flow projection is a financial tool used for forecasting potential cash
shortages so that the social enterprise can make plans to address these shortages.
Likewise, it also indicates the happy case of excess cash, when the enterprise may
choose to invest this cash instead of leaving it idle. For a new or growing business,
the cash flow projection can mean the difference between success and failure. For
an ongoing business, it can mean the difference between growth and stagnation.
Social enterprise managers need to be diligent about projecting cash flow regular-
ly—at least monthly.
The cash flow projection enables you to predict and plan cash outlays in order
to:
? Ensure that you have enough cash to purchase sufficient inventory or raw materi-
als to weather seasonal cycles;
? Plan your purchases of new equipment or building;
? Benefit from special offers and discounts that require advance or bulk purchase;
? Arrange for financing and identify the type of financing and duration—i.e. bank
credit line to relieve short-term overruns and shortages; working capital to absorb
ebbs and flows of the business cycle, or capital asset or debt financing for major
purchase of equipment, land or facilities); and
? Establish a history of credit worthiness for future lenders and investors.
Savvy social enterprise managers develop both short-term cash flow projections
to help them manage daily cash and long-term cash flow projections to help them
develop the necessary financing strategies to meet their business needs.
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EXHIBIT 8W: USES FOR CASH FLOW PROJECTIONS
Time Period Use
Short term (monthly) Determine immediate and short-term cash balance.
Estimate working capital requirements to finance daily operations.
Plan current asset investments such as savings deposits, money market
accounts and CDs.
Annual Determine cash needs for business operations during the year.
Identify sources of cash, including revenue and financing.
Ascertain determine seasonal fluctuations and related impact on cash
flow.
Estimate annual financing needs and the ability to make repayments on
borrowed money.
Three to five years Augment strategic and business planning.
Determine long-term equity needs, including raising equity capital.
Estimate long-term borrowing requirements for capital investments relat-
ing to growth and capital asset purchase.
Preparing the Cash Flow Projections
Rationale
Liquidity can be a killer for a social enterprise—or any business. A lack of profits will
not put you out of business as fast as a lack of cash to pay your creditors. The irony
is that profits can be negative when cash flow is positive and vice versa. Cash, how-
ever, is what you must have to keep your social enterprise running while you are try-
ing to make a profit. This requires careful cash management. At times when no
money is in the till, the business needs an extra boost of cash. Or when your enter-
prise is flush, idle cash should be invested to make more money. Projecting cash
flow, somewhere between balancing a checkbook and preparing a budget, is an
excellent way to forecast cash shortages and surpluses and plan for them.
TARTINA found that commercial customers expected to either purchase prod-
ucts on credit or sell them on commission. Both instances demanded that TARTINA
finance costs for as much as a few months before receiving payment from its super-
market customers. TARTINA management used cash flow projections to estimate
when these credit sales would be converted into cash. In addition, the availability of
peanuts and fruits for TARTINA products is seasonal. TARTINA buys its raw materials
in bulk during growing seasons in January, March and December then stores them in
silos for processing throughout the year. These bulk purchases require large outlays
of cash up front, tying up this money until goods are finished and sold. Preparing a
cash flow projection helped TARTINA determine its cash needs to purchase raw
materials and secure sources of credit to finance them.
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Managing the Double Bottom Line:
304
The template for a cash flow projection looks similar to a profit and loss state-
ment, yet certain changes can be captured in a cash flow that are not reflected well
in a profit and loss statement, such as:
?
Large inventory purchases;
?An increase in accounts receivable;
?A decrease in credit by suppliers;
?Liquidation of obsolete inventory;
?Grant closure or loan recall;
?Receipt of large payment of debt.
EXHIBIT: 8X: CASH FLOW PROJECTION EXPLAINED
CASH FLOWS IN MONTHLY RECEIPTS FROM:
1. Beginning Cash Balance Cash on hand at the beginning of the month
Cash receipts:
2. Cash from sales All cash from sales only; omit credit sales receipts
3. Accounts receivable & collected Cash collected for credit sales
4. Subsidy and loans injections from grants, PO subsidies, lenders, etc.
5. Investment and interest Cash earned on investment
6. (2+3+4+5) Total Cash In Total amount of cash received in month
7. (1+6) Total Cash Available Total cash on hand
CASH FLOWS OUT MONTHLY PAYMENTS FOR:
8. Purchases Raw materials, production inputs, or merchandise for
resale
9. Salaries Permanent management and staff
10. Wages Base pay plus overtime and bonuses for labor
11. Payroll expenses Vacation and leave, health insurance, 13th month,
employment taxes, etc.
12. Sales commission Commissions and bonuses awarded to sales staff
13. Sales tax Tax paid on sales, exercise tax, etc.
14. Rent Real estate rent only (factory, storage, and administra-
tion)
15. Repairs & maintenance Property and facilities (factory and administration)
16. Equipment rental Equipment leasing (for production and administration)
17. Furniture and equipment purchase Furniture leasing (for production and administration)
18. Vehicle(s) Purchase of vehicle (moped, truck, car, etc.) + mileage
19. Vehicle maintenance & repairs Service and repair vehicles.
20. Insurance Liability, vehicle, theft, fire, equipment, etc. (coverage
on factory and administration)
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21. Interest expense Interest payments on borrowed capital (loans)
22. Utilities Water, heat, power, light used in production and admin-
istration
23. Telephone Phone, fax, electronic communications
24. Office supplies Business supplies (pens, staplers, paper, white boards,
etc.) as opposed to production inputs
25. Dues, subscriptions, licenses Membership dues for affiliations or trade associations;
fees for operating/product licenses, trademarks, or
patents
26. Training materials + services Supplies and materials; contracted technical assistance
27. Postage and freight Self-explanatory
28. Marketing and promotion Advertising, design, premiums, samples, displays,
trade fairs fees, brochures, etc.
29. Legal and professional services Any nontraining outside services (attorneys, consult-
ants, auditors, accountants, technical specialists, etc.)
30. Travel Business travel
31. Miscellaneous Additional category pertinent to enterprise, but not cap-
tured in itemized list
32. Other
33. (Add 8 through 32) Cash Out Total Cash Out
34. Loan principal Amount of principal payments on all loans
35. Owners withdrawal Payments made in lieu of salary to cover owner’s
expenses (generally only in sole proprietorships and
partnerships) include insurance
36. (33 + 34 + 35) Cash Paid Total Cash Paid Out
37. (7 - 36) Total cash at the end of the month
ENDING CASH BALANCE
PO business advisor, business manager, accounting and finance staff
Cash Flow Projections
The first part of the cash flow projection forecasts cash coming into the enterprise;
the second part projects cash going out. When used for internal management pur-
poses cash flows should be projected on a monthly basis; however, as a financial
statement for donor-investors cash flows are generally consolidated and projected
by quarter or over a year.
? Locate the blank table Cash Flow Projections Worksheet provided in The
Workbook, or create your own template.
? Add line items where necessary to accurately reflect the cash flows in your busi-
ness. The level of detail needed in your cash flow projection will vary depending
on the complexity of your business. In our example TARTINA combines the rent,
utility, equipment leasing, repairs and insurance expenses for both its production
and administrative facilities in its cash flow projection.
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Managing the Double Bottom Line:
306
? Always start with “Beginning Balance” (the first line item); this is your cash on
hand at the start of the month.
? Fill in the worksheet using historic records (if you have been in business for a
while), market research and price quotes to project monthly income and
expenses.
? Use the cash flow projection explanation in exhibit 8X for reference and supple-
mentary financial and accounting resources if necessary.
? Follow directions, adding and subtracting columns to derive ending cash bal-
ance. Remember this figure is the beginning balance for the following
month.
? Prepare quarterly cash flow projections (four months or one worksheet) for one
year.
? Be sure to list the assumptions behind your cash flow projections.
? Eventually you should set up your cash flow projections using a PC spreadsheet.
After the initial setup, this will make the process much faster. You can enter for-
mulas for the subtotals and totals to eliminate addition/subtraction errors.
? Similar to methods used for preparing other financial tools, this one can be
applied first to projectingyour cash flow, which is then reconciled against actual
cash expenses in a cash flow statement at the end of the period.
The cash flow projections are included in the appendix section of your
Business Plan.
Explanation of TARTINA example: On the following page is a cash flow statement
for a 12-month period for the TARTINA social enterprise. This particular cash flow
statement highlights two other benefits of this financial tool. First, it highlights the
variability of TARTINA’s cash needs due to the seasonality of the business. Second,
because TARTINA planned its cash flow requirements in advance, it was able to deter-
mine when it could outlay cash for bulk purchases of key production materials, such
as peanuts, fruits, containers and labels. This translated into cost savings for TARTINA.
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A Business Planning Reference Guide for Social Enterprises
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Production agent with four client-producers
TARTINA display in
supermarket
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TARTINA CASH FLOW STATEMENT
APRIL MAY JUNE JULY AUGUST SEPT OCT
1999 1999 1999 1999 1999 1999 1999
REVENUE
OPENING BALANCE 43,765 58,530 54,767 10,365 42,869 16,438
CASH SALES 27,200 35,600 22,325 26,875 28,000 38,475 38,800
ACCOUNTS RECEIVABLE 9,067 20,933 28,375 28,267 25,733 31,117 35,092
CASH NOT AVAILABLE UNTIL END OF MONTH (36,267) (20,267) 5,833 (4,442) 1,408 (15,858) (4,300)
TOTAL REVENUE IN LOCAL CRRCY - 80,032 115,063 105,467 65,507 96,602 86,030
TOTAL REVENUE IN U.S.$ - $ 4,850 $ 6,974 $ 6,392 $ 3,970 $ 5,855 $ 5,214 $
SUBSIDY 11,279 $ 18,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $
TOTAL FUNDS AVAILABLE BEGINNING OF MTH 11,279 $ 23,559 $ 15,683 $ 15,101 $ 12,679 $ 14,564 $ 13,923 $
EXPENSES
PRODUCTION COSTS
Mamba (Peanut) : Peanuts 36,605 49,267
Spices 660 660 587 587 587 697 697
Labor 5,280 5,280 4,692 4,692 4,692 5,572 5,572
Other 1,452 1,452 1,290 1,290 1,290 1,532 1,532
Confitures (Jam): Chadeque & Spices 1,380 1,380
Sugar 2,820 2,820
Labor 1,020 1,020
Other 840 840
Grenadia & Lemon 1,440 2,520 3,888 4,248
Sugar 1,880 3,290 5,076 5,546
Labor 520 910 1,404 1,534
Other 200 350 540 590
Apricot & Lemon 1,600 1,600 1,600
Sugar 1,880 1,880 1,880
Labor 360 360 360
Other 200 200 200
Gelee (Jelly ) : Sour Fruit & Lemon 360 360 360
Sugar 2,520 2,520 2,520
Labor 200 200 200
Other 600 600 600
Karapinia : Peanuts 9,880 10,660
Spices 280 280 200 200 220 200 200
Sugar 3,360 3,360 2,400 2,400 2,640 2,400 2,400
Labor 560 560 400 400 440 400 400
Other 840 840 600 600 660 600 600
Containers : Mamba (Peanut Butter) 33,000 27,390
Confitures (Jam) 64,890 64,890
Gelee (Jelly) 13,440
Karapinia 2,400 2,400 2,400
Labels : Mamba (Peanut Butter) 10,000 8,300
Confitures (Jam) 6,300 6,300
Gelee (Jelly) 1,200
Karapinia 800 800 800
TOTAL PRODUCTION COSTS IN LCL CRRCY 190,947 20,152 17,889 85,056 17,599 135,249 32,579
TOTAL PRODUCTION COSTS IN US$ 11,573 $ 1,221 $ 1,084 $ 5,155 $ 1,067 $ 8,197 $ 1,974 $
M.E. Profit (6.70% of Production Costs)
( (3.165% of Sales) 775 $ 82 $ 73 $ 345 $ 71 $ 549 $ 132 $
TOTAL PROD. COSTS & M.E. PROFITIN US CRRCY 12,348 $ 1,303 $ 1,157 $ 5,500 $ 1,138 $ 8,746 $ 2,107 $
APV OPERATIONAL COSTS IN U.S.$
AID Funded Costs 11,279 $ 18,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $
APV Fees (21.5818% of Production Costs)
( (10.196% of Sales) 2,498 $ 264 $ 234 $ 1,113 $ 230 $
TOTAL APV OPERATIONAL COSTS IN U.S.$ 11,279 18,709 11,207 8,973 8,943 9,822 8,939
TOTAL EXPENSES 23,627 $ 20,012 $ 12,363 $ 14,473 $ 10,081 $ 18,567 $ 11,046 $
END OF MONTH SURPLUS/DFICIT IN U.S.$ (12,348) 3,547 3,319 628 2,598 (4,004) 2,877
CREDIT 15,000 $ 5,000 $
END OF MONTH NET BALANCE IN U.S.$ 2,652 3,547 3,319 628 2,598 996 2,877
END OF MONTH NET BALANCE IN LCL CRRCY 43,765 58,530 54,767 10,365 42,869 16,438 47,471
Managing the Double Bottom Line:
308
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NOV DEC JAN FEB MARCH APRIL TOTAL MAY JUNE GRAND
1999 1999 2000 2000 2000 2000 2000 2000 TOTAL
47,471 22,787 24,408 13,496 54,504 98,179 24,020 156,669
39,925 40,600 40,600 42,350 52,900 52,900 486,550 486,550
39,067 39,775 40,375 41,183 45,283 49,383 433,650 35,267 17,633 486,550
(5,100) (1,383) (600) (2,558) (14,650) (4,100) (94,917) 102,283 7,366
121,363 101,779 104,783 94,471 138,038 196,363 825,283 161,570 174,302 980,466
7,355 $ 6,168 $ 6,351 $ 5,725 $ 8,366 $ 11,901 $ 50,017 $ 9,792 $ 10,564 $ 59,422 $
8,709 $ 14,723 $ 8,709 $ 8,709 $ 13,715 $ 8,709 $ 136,807 $ 136,807 $
16,064 $ 20,891 $ 15,060 $ 14,434 $ 22,081 $ 20,610 $ 186,824 $ 9,792 $ 10,564 $ 196,229 $
29,933 29,933 29,942 175,680 175,680
697 899 899 899 989 297 9,150 9,150
5,572 7,188 7,188 7,188 7,908 2,376 73,200 73,200
1,532 1,977 1,977 1,977 2,175 653 20,130 20,130
1,380 1,380 2,300 2,300 1,380 11,500 11,500
2,820 2,820 4,700 4,700 2,820 23,500 23,500
1,020 1,020 1,700 1,700 1,020 8,500 8,500
840 840 1,400 1,400 840 7,000 7,000
3,888 3,528 3,528 23,040 23,040
5,076 4,606 4,606 30,080 30,080
1,404 1,274 1,274 8,320 8,320
540 490 490 3,200 3,200
4,800 4,800
5,640 5,640
1,080 1,080
600 600
1,080 1,080
7,560 7,560
600 600
1,800 1,800
6,370 6,370 6,240 39,520 39,520
220 200 200 220 310 310 3,040 3,040
2,640 2,400 2,400 2,640 3,720 3,720 36,480 36,480
440 400 400 440 620 620 6,080 6,080
660 600 600 660 930 930 9,120 9,120
60,390 60,390
129,780 129,780
13,440 13,440
1,920 9,120 9,120
18,300 18,300
12,600 12,600
1,200 1,200
640 3,040 3,040
65,032 65,924 72,404 24,123 22,711 8,906 758,570 - - 758,570
3,941 $ 3,995 $ 4,388 $ 1,462 $ 1,376 $ 540 $ 45,974 $ - $ - $ 45,974 $
264 $ 268 $ 294 $ 98 $ 92 $ 36 $ 3,079 $ - $ - $ 3,079 $
4,205 $ 4,263 $ 4,682 $ 1,560 $ 1,469 $ 576 $ 49,053 $ - $ - $ 49,053 $
-
-
8,709 $ 14,723 $ 8,709 $ 8,709 $ 13,715 $ 8,709 $ 136,807 $ 136,807 $
1,769 $ 426 $ 851 $ 862 $ 947 $ 316 $ 9,508 297 $ 116 $ 9,922
10,478 15,149 9,560 9,571 14,662 9,025 146,315 297 116 146,729
14,683 $ 19,412 $ 14,242 $ 11,131 $ 16,131 $ 9,600 $ 195,368 $ 297 $ 116 $ 195,782 $
-
1,381 1,479 818 3,303 5,950 11,009 (8,544) 9,495 10,447 447
(10,000) $ 10,000 $ (10,000) $ - $
1,381 1,479 818 3,303 5,950 1,009 1,456 9,495 447 447
22,787 24,408 13,496 54,504 98,179 16,654 24,020 156,669 7,380 7,380
A Business Planning Reference Guide for Social Enterprises
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Managing the Double Bottom Line:
310
Preparing the Cash Flow Statement
Rationale
Cash flow statements made a relatively late appearance in the world of required
financial statements. The widespread recognition that cash flow problems often
result in the premature death of a business is the reason why more and more
lenders, donors and stakeholders are requiring social enterprises and business to
remit cash flow statements along with balance sheets and profit and loss statements.
Cash flow statements classify cash receipts and payments into three categories:
operating, investing and financing.
?Operating cash flow—is sometimes called working capital; it flows from cash
internally generated from operations such as sales—and to expenses that sustain
operations such as salaries, rent materials and supplies.
?Investing cash flow—flows from internally generated nonoperating activities,
such as sales of long-term investments—and to investments such as purchase of
property or equipment.
?Financing cash flow—flows from and to external sources, such as donors,
lenders, investors, and shareholders in the form of a disbursement or payment of
a grant or loan.
EXHIBIT 8Y: CLASSIFICATION OF CASH INFLOWS AND OUTFLOWS
CASH INFLOWS ACTIVITY CASH OUTFLOWS
Marketable securities—short-
term investments with well-
defined dollar value such as
bonds, treasury bills, or stocks
that are easily convertible into
cash.
Equity—monetary value that
represents an ownership stake or
net worth in an enterprise.
Issuing stock or selling equity
stakes raises capital for a busi-
ness. For example if a PO takes
equity in its social enterprise it
purchased partial ownership of
the enterprise. In publicly traded
companies, issuance of stock
signifies selling very small pieces
of the company.
From sales of products and
services
From interest or dividends on
loans or investments
From sale of plant, property,
equipment or other capital asset
From sale of long- or short-
term marketable securities
From collection of loans
From grant or subsidy
From borrowed capital (loan)
From the sale of stock/equity
OPERATING
INVESTING
FINANCING
To employee salaries and wages
To suppliers for inventory
To creditors for interest
To other operating expenses (rent,
utilities, equipment, etc.)
To purchase new plant, property,
equipment or capital asset
To purchase long or short term
marketable securities
To make loans
To repay loans
To pay dividends
To purchase stock
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A Business Planning Reference Guide for Social Enterprises
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There are two methods for preparing a cash flow statement. The first, the direct
method, involves making adjustments to convert income and expense items from
accrual to cash basis. The indirect method starts with net income (or loss) before
non-cash expenses, then makes adjustments for inflows and outflows of cash that
were not included in the net income/loss calculation. This method is simpler
because 90% of the cash flow calculation is completed in the net income calcula-
tion, which is in fact an estimate of your cash flow. This book teaches the indirect
method for preparing a cash flow statement; if you are interested in learning the
direct method ask your accountant, or check other accounting resources.
Exhibit 8Z is a conceptual example of a consolidated cash flow statement using
the indirect method. It illustrates the three basic steps required to complete a cash
flow statement: 1) Begin with net income; 2) add in non-cash expenses (this is
because your net income can be reduced by expenses such as depreciation that
were never disbursed); and 3) adjust for inflows and outflows of cash for investing
and financing activities not recorded in the net income calculation (but reflected in
the balance sheet).
EXHIBIT 8Z: EXAMPLE OF INDIRECT CASH FLOW METHOD
NET INCOME BEFORE NON-CASH EXPENSES
Begin with Net Income (loss) $800,000
Add in Depreciation 100,000
$900,000
ADJUSTMENTS TO CASH FROM OPERATING ACTIVITIES
Flows in (add) Decrease in accounts payable $200,000
Flows out (subtract) Increase in accounts receivable (300,000)
Increase in inventory (150,000)
Increase operating expenses (250,000)
Net Cash from Operating activities $400,000
ADJUSTMENT TO CASH FLOW FROM INVESTING ACTIVITIES
Flows in (add) Decrease in notes receivable $100,000
Flows out (subtract) Purchases: equipment, land, plant (250,000)
ADJUSTMENT TO CASH FLOW FROM FINANCING ACTIVITIES
Flows in (add) Grants and subsidy received 200,000
Flows out (subtract) Repayment on loan (long-term debt) (100,000)
Net Cash provided (used) $350,000
Cash Flow Statement
? Locate the blank Cash Flow Statement in worksheet in The Workbook, or cre-
ate your own.
? !!! It is important to note that the cash flow statement begins with net
income as if all expenses were paid in cash and all income was received in
cash. The formula then makes adjustments to reconcile net income to net cash
flow from operating, investing and financing activities.
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Managing the Double Bottom Line:
312
? Calculate net income before non-cash expenses.
? Add back non-cash expenses that did not result in inflows or outflows of cash.
Depreciation is the most common non-cash expense.
? Identity operating cash flows. Refer to exhibit 8Y: Classification of Cash Inflows
and Outflows for help identifying receipts and payments classified as operating
activities.
? Subtract out flows and add inflows. Be careful not to confuse inflows with out-
flows; receipts (added) and payments (subtracted). Follow the example in exhibit
8Z: Example of Indirect Cash Flow Method.
? Repeat steps for investing cash flow and financing cash flow.
The cash flow statement is included in the appendix section of your
Business Plan.
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A Business Planning Reference Guide for Social Enterprises
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the balance sheet equation at work.
Risk/Sensitivity Analysis and Contingency Planning
It is essential to know the financially vulnerable points of your social enterprise
(which are often in the categories where the largest expenditures occur). What hap-
pens to social enterprise profitability if raw material costs increase by 10 percent? If
inflation goes up to 15 percent or 20 percent? What if the sales forecast is realized
only at 80 percent? What happens to cash flow if a major piece of equipment conks
out before its projected usable life?
Projecting financial statements and budgets requires troubleshooting different
potential scenarios that can impact your bottom line. Playing out “what if” scenarios
enables you to see that financial impact and allows for contingency planning, so
that you are ready with plan B if necessary. Most changes in the operating environ-
ment do not drop from the sky but can be predicted to some degree if enterprise
managers continually appraise the strategic environment, and the enterprise’s
strengths and weaknesses (chapter 4). For example, TARTINA’s peanut butter and
jam production is mainly a variable-cost business highly susceptible to changes in
the price of raw materials. Bad weather affects crop yields, causing peanut prices to
go up. Seasonality is another factor; when peanuts or fruits are out of season, their
prices increase. Therefore, TARTINA management makes its financial projections at
different peanut costs, beginning as low as 10 gourdes per marmite and going up to
as much as 16 gourdes, to see how price fluctuations impact the bottom line and
think through decisions it will need to make based on different peanut price levels.
PO business advisor, business manager, financial manager, accountant, pro-
gram manager, other relevant functional managers
Preparing a Sensitivity Analysis and Contingency Plans
? Use a PC spreadsheet or other software program that generates your financial
statements. After the initial formulas are set up, computer programs make sensi-
tivity analysis much faster and more reliable.
? Isolate the largest expenditures of your social enterprise, and use these as the
variables in your sensitivity analysis to develop two or three “what if” scenarios
by changing variable values, and then review the impact of these changes on
financial statements.
? Now select key variables reflected in anticipated or likely changes to the operat-
ing environment based on your market research (i.e., inflation); plug these num-
bers into your sensitivity analysis and repeat the previous step.
? Analysis: What decisions will you make based on the sensitivity analysis results?
How will these decisions affect business operations? For example, will you have
to lay people off, enter a market more rapidly than expected, forsake a fixed-
asset purchase for several months, invest in new-product development to remain
competitive, take a short-term loan for operations to bridge income lags, etc.?
? Contingency plans explaining how management plans to respond to certain risk
exposure in a given industry, market, or strategic environment strengthen a busi-
ness plan by increasing the perception of the social enterprise management’s
credibility and capacity.
Contingency plans are included in Business Plan.
Contingency planning—Pre-
paring alternative strategies and
plans that correspond to a liable
risk occurring, which threatens
the plausibility of the chosen
plan.
Sensitivity analysis—a tool
used to project expense and
income levels by manipulating
cost and revenue variables in a
company, such as changes to
production level, costs of inputs
(fixed or variable), or prices.
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Managing the Double Bottom Line:
314
Resource Acquisition
Rationale:
Several elements shape the resource acquisition strategy: investor-donor landscape,
reputation of the parent organization, management competence and development
stage of the enterprise. Most donors and investors have specific criteria that must be
met by applicants in order to receive their money (exhibit 8DD: Donor-Investor
Criteria and Applications). Another important aspect is captured in the adage "peo-
ple give money to people"; leveraging the brand equity of the parent organization or
the expertise of your management team can attract investment funds. The maturity
of the enterprise, the strength of its financial position, and its ability to generate rev-
enue will also dictate the type of funds required and most suitable source for them
(see box: Enterprise Development Stage).
Just as savvy financial investing involves balancing risk by diversifying the invest-
ment portfolio, in resource acquisition it is unwise to depend solely on a single
donor or investor for all the financial needs of the enterprise. During startup it is dif-
ficult to find investors willing to assume risk for the novice. In this case, small, short-
term (i.e. one year or less) funding is cobbled together from various sources includ-
ing the parent organization and grants until the enterprise pilot can demonstrate
some success. Once a track record is establish and the enterprise program enters
growth stage, mezzanine level funds, which are easier to obtain, are sought. The
startup funding is usually awarded as an investor vote of confidence based on the
reputation of the parent organization. On the other hand, if the social enterprise is
mature, at or near break-even and has significant assets reflected in its balance
sheet, the enterprise may be able to leverage borrowed funds. As a social enterprise
develops it needs to professionalize and diversify its funding base from typical non-
profit donors to seeking money from quasi-formal and formal sources that will intro-
duce financial rigor and accountability. Once the enterprise has reached a certain
scale, working capital and fixed asset requirements exceed the reserves of the parent
organization and fall outside the parameters of traditional donor funding.
Commercial banks in general are dubious about lending to social enterprises, yet
venture philanthropists, development banks, community development funds, munic-
ipal governments and progressive donors are increasingly making soft loans to social
enterprises. These may be either interest-free loans or subsidized loans at below
market interest rates. Nonetheless, for bank borrowing low debt to equity ratios and
break-even are usually requirements. Banks also scrutinize cash flow statements to
ensure that the social enterprise has the capacity to repay the loan on a regular
schedule. Capital assets such as building and land can also serve as collateral to
secure a loan or line of credit at market rates. Traditional nonprofit donors on the
other hand, may cover capital assets for equipment, operating costs, parent organi-
zation overhead related to the enterprise program and technical assistance costs dur-
ing startup and growth stages. And though many will not directly support the operat-
ing costs of a business beyond early phases, they will often contribute to social costs,
either for capacity building or social programming. (exhibit 8I: Quantifying Social
Costs). Enterprise revenue is an internal fundraising mechanism and must be allocat-
ed to costs of business operations and social costs not covered by grants.
Understanding these intricacies in the funding landscape requires a considerable
amount of research.
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A Business Planning Reference Guide for Social Enterprises
315
Enterprise Development Stages
Like product life cycles (chapter 5), a social enterprise passes through discrete stages of develop-
ment from startup to profitable business. The stage of development is characterized by enterprise
sophistication and ability to cover its costs. Conversely, it determines the type of financing the enterprise
is able to secure. The table below shows this relationship.
DEVELOPMENT
STAGE
Timeline
?
Characteristics
Funding Needs
Funders
STARTUP
0 - 1 year
Small-scale enter-
prise pilot; testing
business concept/
products in market;
little or no revenue;
dependence on PO
for technical sup-
port; low capacity.
PO overhead &
salaries related to
program; sunk costs
for equipment, facili-
ties, raw materials,
cash, etc.; enter-
prise operations; TA;
social programs;
inefficiencies and
loss.
PO, risk taking non-
profit donors with
exiting PO or man-
agement relation-
ship; grants are
generally small and
short term.
GROWTH
1- 3 years
Success in limited
market, demon-
strates potential via-
bility, research and
expansion into new
markets, operating
loss, heavy techni-
cal support needs
for capacity building
and TA; PO depend-
ence.
PO overhead &
salaries related to
program; TA and
capacity building;
operating deficit;
investment $ for:
market research
R&D, product devel-
opment; social pro-
gram costs and
inefficiencies and
loss.
Foundations or gov-
ernment agencies
larger size grants for
multiple years.
Some VPs.
BREAK-EVEN
?
OPERATING
COSTS
3-5 years
Established track
record; proven busi-
ness model; oper-
ates in several mar-
kets-still growing;
income covers cost
of business opera-
tions including inef-
ficiencies and loss;
social costs subsi-
dized; PO role
diminished; TA for
specific constraints;
capacity fairly solid.
Limited PO indirect
costs; social pro-
gram costs; capital
assets (technology,
equipment) pur-
chases for expan-
sion; working capital
credit needs; specif-
ic TA and targeted
capacity building.
Small- to mid-size
foundation and gov-
ernment grants for
social programs; in-
kind TA; quasi-for-
mal sources of soft
money; VPs.
BREAK-EVEN ?
OPERATING +
SOCIAL COSTS
5-7 years
Solid social enter-
prise model, suffi-
cient income to
cover operating and
social costs, diversi-
fied and sophisticat-
ed, competitive
business, may spin
off from PO, compe-
tent staff, contracts
expert TA for specif-
ic needs.
Working capital
(especially for capi-
tal intensive busi-
ness-i.e. financial
services); capital
assets (technology,
equipment) pur-
chase for expan-
sion; investment
capital (new facili-
ties or technology
innovations).
Limited social costs.
Investors, banks,
quasi-formal and
financial institutions,
professional in-kind
TA. Foundation/PO
small grants for
social programs not
expected to cover
costs.
PROFITABLE
Over 7 years
Able to cover oper-
ating and social
costs plus realize a
profit with internally
generated revenue;
professional staff
and management.
Often separate entity
with PO members
on board.
Working capital;
capital assets pur-
chase for expan-
sion; possible
investment financ-
ing.
Investors, banks,
financial institutions.
?
The timeline is given as a guide based upon averages from financial service businesses; country context and type of business may
determine how quickly a given social enterprise passes through development stages.
?
Enterprise covers business operating costs with revenue.
?
Enterprise covers business operating costs (including financial costs of borrowed capital) and social cost (or specified social costs) with
revenue.
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Managing the Double Bottom Line:
316
Taking this "big picture" investment approach to social enterprise financing can
be a huge departure in thinking for nonprofit professionals. Most are accustomed to
tapering organizational needs to donor priorities or thinking in "grant-size" boxes-
meaning that the social enterprise's financial needs are dictated by specified grant
amounts rather than actual costs. SC refers to this as being donor-driven rather than
market-driven. Social enterprise managers need to learn to think like for-profit man-
agers who analyze their businesses' financial needs by using actual and realistic pro-
jected cost and then seek resources accordingly.
Securing funding is a time consuming venture requiring a significant amount of
research and planning. The following three-part exercise will guide you through this
process by: 1) determining the mix of funding sources in your enterprise and the
uses of those funds; 2) identifying future funding sources; and 3) developing a
resource acquisition plan.
Same for all three parts of Resource Acquisition section: business manager,
accountants and finance professionals, PO business advisor and development
director (and/or PO or implementing organization executive director).
Financing Mix
The first step to developing your resource acquisition strategy is to identify your uses
of funds (financial needs) and their sources to determine your financing mix.
? Using historic donor records and financial statements determine the sources and
uses of enterprise funds. Begin by indicating in which category funds were spent
in the previous year as well as the sources of those funds (by category rather than
by donor). If your venture is a startup you will have no historic records.
? Prepare a “Financing Mix Table,” like the one in our example (exhibit AA) or
use the template provided in The Workbook. Financing Mix Table should
include all years covered in your business plan. !!! Hint: If your plan is only for
one to two years, it is prudent to include an additional year or two in projec-
tions.
? From the projected, or pro forma, budget and profit and loss statements, you
should have a good sense of what funds will be needed and how you will use
these funds.
? Fill out the “Uses” section of the table.
? Total the amount of funds needed identified in the "uses" categories.
? Next, discern sources that are obligated for the current period (in our example
funding is committed for business plan year 1 and how you plan to use these
funds. Depending on your current funding situation non-obligated sources other
than projected income sources (from pro forma and profit and loss statement)
may be less obvious than uses.
? Fill out the “sources” section of the table as completely as you can. Gaps will
indicate what you will need to find money for, and how much you need.
Additionally, it will help you identify potential funding sources.
? Total the funding gaps. Once you have completed the following exercise,
Identifying Funding Sources, you will return to the table.
Sources and uses of funds information is included in the Business Plan.
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EXHIBIT 8AA: TARTINA ENTERPRISE'S FINANCING MIX
Sources/Uses of Funds Historic Year 1 Year 2
(Previous Year) (Business Plan) (Post B-Plan Period)
Uses:
HQ/Parent Overhead (+ internal TA-salaries)
Technical Assistance (external contractual)
SE Operating Costs (+ salaries; w/out TA)
Capital Equipment
Working Capital
Financial Costs (borrowed capital)
Capacity Building
Social Program Costs & Loss Compensation
?
Total Resources Needed $342,164 $328,757 $359,972
Sources:
Income
Grants
PO Match
In-Kind
?
Soft Loans
Investment Funds
Commercial Loans
Total Sources Identified $342,164 $328,757 $338,678
Funding Gap -0- -0- $29,794
$102,390
15,828
40,639
116,000
-0-
-0-
6,037
61,270
$155,184
41,766
62,809
10,970
25,000
-0-
8,616
49,412
$80,560
57,800
88,652
15,600
70,000
-0-
11,320
36,040
(obligated)
-0-
$280,000
62,164
-0-
-0-
-0-
-0-
(obligated)
$15,922
220,000
47,835
20,000
25,000
-0-
-0-
(non-obligated)
$48,678
116,500
-0-
40,000
50,000
75,000
-0-
?
In TARTINA's example loss compensation and social program costs are combined. Normally these
costs should be segregated.
?
Estimated value for in-kind contributions for services or assets.
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Managing the Double Bottom Line:
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DONOR-INVESTOR RESEARCH
Nonprofit organization development professionals are generally competent in
identifying traditional funding sources within the donor community, such as
private and corporate foundations, government agencies and multilateral
organizations. They are, however, largely ignorant of nontraditional sources
of funds.
Some examples include: community banks (or those with a portion of
their portfolios dedicated to community reinvestment), venture philanthro-
pists (VPs), development banks, economic development funds, HUD loans,
Small Business Administration (SBA) loans, municipal government programs,
donor venture or social investment funds, universities and corporations
(often fund or donate in-kind support for R&D, market research, product
development, technical assistance), etc. Appropriateness of these different
sources depends upon enterprise location, type of business and develop-
ment stage. The research period may take several weeks. Information can be
gathered through networking with other social entrepreneurs, annual reports
of similar programs; libraries, foundation centers and donor directories;
attending industry conferences; contacting lenders, venture philanthropists
and foundations regarding their funding or other sources they know. The
development department of the parent organization along with board mem-
bers should supply entrees to individual donors. Small business services
(SCORE, Women's Business Development Centers, etc.), provide information
on how and where to seek enterprise financing. Review social fund prospec-
tuses (Calvert, New Profit, development banks, etc.) for sources of soft
funds. Contact nonprofit organizations and universities that provide assis-
tance (in-kind). And of course don't forget the Internet, which has become a
valuable and efficient research tool available in many countries.
Same as previous exercise
Identify Funding Sources
In the previous exercise you determined how much money you will need and what
you will need it for to finance your enterprise for the period covered by your busi-
ness plan. In this exercise you will identify potential funding sources to meet these
financial needs.
!!! Hint: If your business plan is less than five years it helps to look beyond the busi-
ness plan period when identifying future donor and investors. Remember "money
begets money." Donors and investors want to know that their funding will terminate.
Donors especially feel more confident giving money when they know other funding
prospects exist beyond their grant period and that the enterprise is graduating to
more formal sources.
? Mostly, this is a research exercise into particular funding sources. Refer to exhibit
DD: Donor - Investor Criteria and Applications to guide your research agenda.
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? For each potential source find out the funding criteria, the approximate financial
size of the support, the purpose or specified use of the funds they provide, the
type of funds (grant, in-kind, loans, etc.), the potential (your chances) for receiv-
ing funds through this source. Be realistic!
? Keep notes on the preferences and interests of your prospective donors. This
information has important strategic relevance for planning future resource acqui-
sition.
? Prepare a "Funding Source List," like the one in our example (exhibit BB) or use
the template provided in The Workbook.
? When you have prepared your resource list, return to the non-obligated sources
section of your Financing Mix Table and complete the exercise based on your
projections.
Be sure you are clear about investor funding preferences and terms. Most donor-investors
expect the social enterprise to generate sufficient revenue to cover its social costs. They regard
their investment as a limited and efficient use of funds. On the other hand, some donor-investors
may award grants to subsidize social costs over the long term, accepting double bottom line profit
and loss statements as a standard part of reporting. Thorough research on the funding landscape
informs business planning and can help shape the design of your social enterprise. For example,
Save the Children does not integrate its business programs with nonbusiness social services, in
part because funding is more difficult to obtain. If SC wants to render both types of services to the
same target population it runs parallel programs, seeking funding for each.
Source
ASSIST
International cur-
rent funder
ASSIST/Haiti
Continuation grant
Criteria
Provided current
funding to TARTI-
NA; no continua-
tion funds beyond
next year.
Evidence progres-
sion toward
break-even and
sustainable busi-
ness model; 25%
match.
Approx. Size
$220,000; total
grant $500,000 for 2
years.
Up to 150,000 for
three years; discre-
tionary money
30,000.
Purpose
Increase impact;
capacity of social
enterprise to be sus-
tainable.
Operating cost deficit;
capacity of social
enterprise to be sus-
tainable.
Potential
None; will not give
repeat funding.
High for $150,000;
low for $30,000 dis-
cretionary (competi-
tive).
Type of Funds
Grants
EXHIBIT 8BB: FUNDING SOURCE LIST
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
320
Type of Funds
Investors
In-kind
donations
Source
French Embassy
Dutch Aid
HELP2U
Foundation
SC
TARTINA Board
Farmer to Farmer
U of NM
Criteria
Intention to export
to France/EU.
Locally operated
business, evi-
dence of positive
business trends.
TARTINA is regis-
tered as Haitian
business; exis-
tence of local
board.
49% equity stake
in TARTINA; must
be registered as a
separate busi-
ness; moving
toward self-suffi-
ciency.
Board member
with financial
capability to
donate.
Product develop-
ment of Mamba.
Development of
sustainable envi-
ronment program
for agricultural
cultivation
Approx. Size
$15,000.
$150,000; $50,000
per year for three
years.
Up to $100,000 over
three years.
Up to $75,000 inter-
est free, repayment
schedule after
break-even.
$16,500, not includ-
ing SC.
$15,000
$25K
Purpose
Market research for
exportation of prod-
ucts to France.
Training and capacity
building of indigenous
staff.
Support development
of local Haitian econ-
omy through local
business creation.
Operating cost deficit;
capacity building.
Unspecified. Can be
used for operations.
Cover professional
consulting fees/travel
to train staff on emul-
sification process.
Cover professional
consulting fees/travel
to train peanut and
fruit farmers in envi-
ronmentally sound
cultivation.
Potential
Medium; unlikely will
export products in
near term.
High.
Low-disorganized;
slow moving; possibil-
ity for next year.
Medium-requires
approval by SC legal
department.
High, committed
High.
High, but deviates
from program focus;
adds to mission
creep.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
A Business Planning Reference Guide for Social Enterprises
321
T
h
e
F
i
n
a
n
c
i
a
l
P
l
a
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T
h
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F
i
n
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P
l
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C
h
a
p
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r
8
Type of Funds
Soft Loans
Commercial
sources
Source
Tyler Graduate
School of
Management UM
BFI Social Fund
Carib Development
Bank
SC/Haiti
First International
Bank
Criteria
Must be locally
operated (but does
not need to be
separate legal enti-
ty form PO); good
experience for
MBA students.
Loan guaranteed
by PO assets.
Break-even; solid
cash flow projec-
tion of revenue
Cash flow con-
straints
Borrowed against
SC assets in Haiti.
Approx. Size
Up to $25,000.
Up to $150,000
interest free for three
years.
Up to $200,000 at
3% interest for three
years.
$50,000 interest free.
$200,000 at 27%.
Purpose
Cover professional
consulting fees for 3
graduate management
students to assist with
any business needs
(must be predefined).
Working capital and
fixed asset loans.
Working capital, busi-
ness expansion can
be used for capacity
building.
Working capital credit
line only.
Business expansion
and fixed asset loans.
Potential
High. Excellent
source.
High, legal approval
for SC to assume risk
(difficult).
Low, insufficient rev-
enue; high risk.
High; HQ must
approve
Low; too risky for
SC/Haiti.
Same as previous exercise
Resource Acquisition Plan
In this exercise you will plan your fundraising, drawing on information from the two
previous exercises: how much money you need to run your social enterprise and
confirmed and potential sources to meet those financial obligations.
? Follow TARTINA's example (exhibit 8CC: TARTINA Resource Acquisition Plan).
? Use research findings to support your resource acquisition plan and to convince
business plan readers that you can raise the necessary funds.
Resource Acquisition Plan is included in the Business Plan.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
322
EXHIBIT 8CC: TARTINA RESOURCE ACQUISITION PLAN
YEAR 1
TARTINA Enterprise needs a total of $328,757 in Year 1. $312,835 of these
funds are obligated through a comprehensive central grant from
ASSIST/International. Under the terms of this grant, Save the Children has
committed a 30% match for $72,835, split between operations ($47,835) and
a working capital soft loan ($25,000). In-kind support from Farmer to Farmer
program for peanut processing and storage technology is equivalent to
$20,000. The remainder will be met by projected sales revenues of $15,922.
YEAR 2
TARTINA Enterprise needs a total of $359,972 in Year 2. TARTINA anticipates
$50,000 funding from ASSIST/Haiti for a three-year continuation grant totaling
$150,000. ASSIST/International will have invested $500,000 in TARTINA and
therefore continuation from its Haiti branch is probable. Dutch Aid, which has
viewed SC's work favorably, is expected to fund TARTINA's capacity building
and technical assistance needs, $50,000 a year for three years ($150,000).
Consistent with Save the Children's social enterprise program strategy,
SC/HQ will become a minority shareholder in TARTINA and provide $75,000
investment funding. Other TARTINA board members have committed a total
of $16,500 for operating expenses. SC/Haiti will also plans to open an inter-
est free $50,000 credit line to ease TARTINA's cash flow constraints. In-kind
technical assistance valued at $40,000 is expected from Farmer to Farmer
($15,000) and Tyler Graduate Management School ($25,000). TARTINA has
an established relationship with these service providers and is confident
about securing their continued support. Moderate growth targets project
TARTINA sales revenues of $48,678.
A funding gap of $29,794 remains. TARTINA plans to pursue secondary
grant sources such as HELP2U, seek discretionary monies, borrow soft
funds, or trim planned activities in year 2 to bridge financial needs with avail-
able funds.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
V
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Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
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Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
doc_184176371.pdf
The financial plan is the last section to be completed, as it reflects the decisions made in the other parts of your business plan. For example, if you project selling a certain volume of products or services at designated prices, these numbers are indicated in your sales forecast. Equally, the type and frequency of advertising you have chosen as well as the number of staff you will need to support these efforts bear costs evidenced in your marketing plan. Each planning decision is associated with numbers that when aggregated form the basis of your financial documents.
T
he Financial
he Financial
Plan
Plan
Chapter 8
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
A Business Planning Reference Guide for Social Enterprises
259
T
h
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O
“The highest use of capital is not to
make money, but to make money to
do more for the betterment of life.”
— Henry Ford
Manufacturing Entrepreneur and Philanthropist
verview: The financial plan is the last section to be completed, as it reflects
the decisions made in the other parts of your business plan. For example, if you
project selling a certain volume of products or services at designated prices, these
numbers are indicated in your
sales forecast. Equally, the type
and frequency of advertising you
have chosen as well as the num-
ber of staff you will need to sup-
port these efforts bear costs evi-
denced in your marketing plan.
Each planning decision is associat-
ed with numbers that when aggre-
gated form the basis of your finan-
cial documents.
This chapter examines useful financial targets for social enterprise business plan-
ning as well as four critical financial tools: the balance sheet, profit and loss state-
ment, cash flow statement, and budgets and methods to quantify social costs in
accounting. Also discussed are how social enterprise cost structures and resource
acquisition differ from those in private businesses and why.
Financial Planning Objectives
As with the other operational components of the business plan, the objectives of the
financial plan must feed into the overriding objectives of the social enterprise (chap-
ter 2). In fact, there should be some overlap between the larger financially oriented
objectives, such as cost recovery or net profit/loss, and the objectives set out in your
financial plan (exhibit 8A). Other objectives stated in the financial plan support
attaining these larger objectives by giving enterprise management and PO business
advisors valuable information toward this end. For example, TARTINA uses several
ratios that determine profitability, efficiency, and liquidity to benchmark progress
toward achievement of its sustainability objectives.
Chapter 8
Treatment of Accounting and Finance
Because there are volumes of accounting and finance
books available, technical information on preparing finan-
cial statements and budgets is treated in this manual (in
relative terms) superficially. This does not diminish the
importance of having an excellent accounting system in
place and qualified accounting professionals on staff.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
260
Selecting Financial Objectives
? Financial objectives of the social enterprise must be separate from those of the
parent organization and the implementing partner (chapter 2).
? When setting objectives, wear the hat of every important stakeholder and ask the
question, “What are the financial objectives for this social enterprise from my
perspective?”
? Use exhibit 8A as a guide from which to select your financial planning objectives.
This is not a complete list of possible objectives, so additions that suit your partic-
ular social enterprise are fine.
? Select financial objectives appropriate for your enterprise. No absolute number is
specified; you will need to set a sufficient number to track financial information
pertinent to your social enterprise. TARTINA uses all the objectives in exhibit 8A.
Remember that you will have to follow and evaluate any objective you choose, a
task that takes time and human capacity. The following exercise will help you
determine if you are being unrealistic in your selections.
A sales agent sets up
TARTINA display of
Mamba products.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
A Business Planning Reference Guide for Social Enterprises
261
EXHIBIT 8A: FINANCIAL PLANNING OBJECTIVES FOR SOCIAL ENTERPRISES
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Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
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EXHIBIT 8A: FINANCIAL PLANNING OBJECTIVES FOR SOCIAL ENTERPRISES
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.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
A Business Planning Reference Guide for Social Enterprises
263
T
h
e
F
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r
8
Setting Targets for Each Financial Objective
After selecting the most appropriate types of financial objectives for your social
enterprise, the next step is to set the targets for each one. Setting targets essentially
means quantifying objectives with a specific number or percentage and tying them
to a particular time frame. For example, to arrive at net profit/loss objectives, annual
targets are sets for both revenue and expenses (exhibit 8B).
EXHIBIT 8B: NET PROFIT/LOSS
Year 1 2 3 4 5 6 7
Total revenue $15,000 $45,000 $95,000 $145,000 $190,000 $215,000 $235,000
Total expenses $205,000 $265,000 $280,000 $285,000 $270,000 $225,000 $185,000
Net Profit/Loss ($190,000)($220,000) ($185,000)($140,000) ($80,000) ($10,000) $50,000
How to Set Targets
You can set the targets in one of two basic ways:
1. Bottom up. This approach follows the format in this manual and is the best
method for new enterprises. Begin with marketing, operations, and human
resource plan calculations found in the respective budgets, sales forecasts and
production plans. Then total projected expenses and revenues to determine
financial target. Evaluate this target. Is it achievable for the time period speci-
fied? (chapter 2 for a complete list of criteria for setting “SMART” objectives.) If
not, recalculate original numbers in the marketing, operations, and human
resource plans. Total them to derive the financial target again. Repeat until the
optimal financial target is found. Note that all of the targets that feed into the
financial target must also be achievable for the specified time period.
2. Top down. This approach can be used if you have at least one year of experi-
ence operating your social enterprise and historical records to reflect perform-
ance to date. Pick a “ballpark” target. Then work backward through the market-
ing, operations, and human resources plans to calculate what is required to meet
that target. Adjust the target as needed to ensure it is achievable for the time
period in question.
Whether you choose a top-down or bottom-up approach to establishing your
social enterprise’s financial targets, you must decide how far into the future to proj-
ect the financial targets. There is no one right answer. Generally, the detailed targets
should be set for one to three years into the enterprise’s “financial future,” and
broader-stroke calculations should be consistent with the time it takes to reach
financial viability, usually three to seven years barring country context and type of
enterprise. Social entrepreneurs define financial viability in a variety of ways. For our
purposes, a social enterprise is considered financially viable when it no longer
requires external subsidies. It may still require loans or other investments to support
its business operations, as many profitable private-sector enterprises do. A financially
viable social enterprise is one that is able to secure necessary funds through regular,
unsubsidized financial channels.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
264
In most cases of subsidized social enterprises, financial viability is one of the
financial objectives, which means that the financial targets should be calculated at
least to the point when the enterprise reaches financial viability. It is important, how-
ever, to distinguish between overall financial objectives as stated in chapter 2 and
financial targets that support achieving these objectives, which correspond to the
time frame of your business plan.
For TARTINA Enterprise, financial viability is estimated to be realized in the sev-
enth year of operation. Cost recovery and net profit/loss are the objectives that most
directly indicate progress toward financial viability. By the end of Year 7, cost recov-
ery is expected to be at 127 percent for TARTINA Enterprise. Since TARTINA’s busi-
ness plan is for one year, the cost recovery target of 10 percent is set for the first
year of operation (see exhibit 8C).
EXHIBIT 8C: COST RECOVERY
Year 1 2 3 4 5 6 7
Cost recovery 10% 17% 34% 51% 71% 96% 127%
TARTINA clients
wash up before beginning
a production shift.
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EXHIBIT 8D: HINTS FOR SETTING TARGETS
Financial Objective* Guidelines for Setting Targets Over Time
Budget Expenditure
Pattern
Clients’ Profit
Sales Growth
Return on Equity
(ROE)
Current Ratio
Quick Ratio
Accounts Receivable
Collection Period
Inventory Supply
Within 5% of projections. Most
donors tolerate up to a 10% devi-
ation from projected budget line
items.
Equal to or greater than what
clients can earn in other income-
generating activities.
Look for steady increase. If costs
and inflation are on the rise, then
watch for related increases in
your sales. If not, this is an indi-
cator that your prices are not
keeping up with costs.
Equal to or greater than what can
be earned from the money (equi-
ty) if invested in alternative
income-generating activities.
A ratio of 2:1 is generally consid-
ered desirable. At least the value
of the current assets must be
greater than that of current lia-
bilities, which means that the
social enterprise can meet its
short-term cash requirements.
A ratio of 1:1 is desirable. This
means that you don't have to rely
on the sale of inventory to pay
your bills.
30-90 days. The shorter the col-
lection period the sooner cash is
freed up for other uses.
A low number of inventory supply
days may mean a risk of running
out of stock. A high number of
days may mean the stock is not
selling well. The "best" target is a
balance between the two.
Depends on the subsector the
social enterprise operates in.
Poor inventory management ties
up cash.
% deviation decreases.
By the end of the subsidized period,
any overexpenditures must be
absorbed by the social enterprise.
Unspent funds are returned to the
donor.
Increase
Increase
Increase
Increase
Increase
Decrease
Approach a balance between high and
low numbers of inventory supply days
*Annual targets for a
seven-year period for
objectives: Cost recovery,
cost efficiency, and income
per client are detailed in
chapter 2 of this manual
and therefore are not repro-
duced here.
Quick ratio—a measure of
the relationaship between
the most liquid assets
(cash, short-term securi-
ties, receivables and short-
term investments) to cur-
rent liabilities, used as an
indicator of an enterprise’s
short-term liquiditiy.
Current ratio—a measure
of liquidity used as an indi-
cator of an enterprise’s abil-
ity to pay short-term debts.
The current ratio is derived
by dividing current assets
by current liabilities.
Current assets—assets
that are expected to be
turned into cash within one
year through the company's
normal operations.
Current liabilities—liabili-
ties due for payment in one
year.
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Managing the Double Bottom Line:
266
Setting Financial Targets
? Have a qualified staff accountant or financial manager participate in preparing
this section.
? Arriving at financial targets can be a time-consuming and rigorous mathematical
exercise; be sure to allow ample time for preparation and include key partici-
pants (chapter 1, Business Plan Framework, exhibit 1E).
? Begin by projecting the financial viability of your social enterprise; at what point
in time will this occur?
? Use either the “top-down” or the “bottom-up” method to set targets for each of
your financial objectives that correspond to targets in other business plan sections
as well as support overall viability objectives.
? Recalculate targets for marketing, operations, and human resource plans, if nec-
essary, until you are able to reach optimal financial targets.
Business manager, PO business advisor, program manager, finance and
accounting staff
Financial targets are included in the Business Plan.
EVALUATING FINANCIAL TARGETS
Setting financial targets helps you keep your social enterprise on track, serving to
measure and evaluate incremental progress toward achieving objectives. Therefore,
at the time of setting objectives, you will need to establish a schedule for evaluating
progress toward financial targets.
Rationale:
Establishing an evaluation schedule at the beginning is important for several reasons:
4It brings the “M” of measurable down to earth by ensuring that you have identi-
fied useful targets that warrent the time and resources required to measure them.
4It highlights whether or not you have qualified personnel to do the job by assign-
ing an evaluation task to qualified personnel.
4It helps human resource performance management by linking responsibility for
financial target results to performance appraisals (chapter 7).
4It sets a platform for communicating results of financial target assessment, i.e.
published information in newsletters or reports.
4It assists planning by considering which objectives/targets should be measured
internally or externally during an audit.
4It incorporates cost implications in business plan budgetary projections.
Role of the Audit
or Evaluation
There are two different
types of audits: internal
(which vary in frequency)
and external (which usu-
ally are annual). The pri-
mary purpose of an inter-
nal audit is to check the
systems of an organiza-
tion and ensure that all
internal controls are in
place. The primary pur-
pose of an external audit
is to ensure that the finan-
cial statements of an
organization present a
true and fair view of its
operations. External
audits are generally a
legal requirement for any
social enterprise pro-
gram. Sometimes donors
also conduct audits of
individual projects or
grants. Any large imple-
menting organization or
social enterprise should
have an internal auditor
who reports directly to the
board or, sometimes, the
head of the organization.
An internal auditor usually
has some accounting
qualifications but may not
be fully qualified.
External audit firms are
generally legally required
in most countries to be
managed by fully quali-
fied accountants.
Auditors in many coun-
tries have a code of
ethics that recommends
they undertake their work
with an attitude of
“healthy professional
skepticism,” so expect
your answers to be ques-
tioned at times.
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A Business Planning Reference Guide for Social Enterprises
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Preparing an Evaluation Schedule
? Develop an evaluation schedule for internal and external audits that corresponds
to the time frame of your business plan.
? Include information on how evaluations will be conducted, who will conduct
them, and who will be responsible for oversight.
? Be sure to link responsibility for target results to job performance (chapter 7).
Evaluation Plan is included in the Business Plan appendix.
Social Enterprise Cost Structure and
Financial Trends
By now you know that the difference between a social enterprise and a private busi-
ness is that a social enterprise has two bottom lines—a social and a financial one—
whereas the private business has only a financial one. Your social enterprise has to
both build local capacity and create a viable business; the private company is only
interested in increasing value for its shareholders. By the same token, social enter-
prises are expected to have returns (quantified in terms of social impact) and are
answerable to their investors—donors.
Capacity-building and investment decisions are more dramatic for social enter-
prises than they are for private businesses, with returns coming later, normally much
later, than what would be acceptable in the private sector. Capacity buildinginvolves
extra costs for training and technical assistance. A social enterprise also bears the
financial burden for social costs of executing its mission and serving a disadvantaged
population. Referred to as comparative disadvantages, these costs include: client
inefficiency allowance, extra supervision time, above market wage/income, wastage,
productivity compensation due to poor infrastructure (for programs in developing
countries), extra time required for donor reporting, and money for social program
activities. Capacity building demands investment money, whereas comparative dis-
advantages require subsidies. Regardless of the nature of costs, viability is a condi-
tion of a social enterprise, not an exception. You will not be able to satisfy your
impact objectives if you cannot achieve viability.
The next section distinguishes between investment capital and subsidies in social
enterprise programming. A good social enterprise business will need capital for
capacity building to achieve viability, whereas a bad one (a nonviable one) will need
subsidies to sustain its operations. Provided that you have selected a solid business
idea within a hospitable environment with a sufficiently large market in which to
launch your social enterprise (see chapters 3 and 4), revenue streams will be close
to those of a private business. Operating costs, however, are much higher for social
enterprises, which have to cover capacity-building and comparative disadvantages
costs before they break even.
As development practitioners can attest, capacity building per se is hard to
account for. Nonprofit professionals have tried various methods to quantify capacity
building, including logging numbers of people trained or documenting skills devel-
opment. Save the Children’s view is that capacity is the acid test of social enterprise
success and is measured by achieving business objectives (chapter 2) and financial
targets outlined in this chapter. Benchmarking progress toward reaching targets and
objectives over time indicates trends.
Comparative disad-
vantages—factors
within a social enterprise
such as expensive
capacity building, com-
pensation for loss in
productivity and materi-
als, and costs of social
programs that make it
difficult to compete with
private sector competi-
tors due to substantially
higher costs.
Subsidies—grants or
gifts by private individu-
als, governments, or
foundations aimed at
assisting a venture
reputed to be beneficial
to a target population or
the public.
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Managing the Double Bottom Line:
268
It is important to watch these trends closely; they can act as a warning system
and flag a problem endemic among nonprofits business interventionists—under-
standing the difference between a subsidized social enterprise and a variable one.
A common shortcoming of social enterprise professionals is that they often readily
accept that costs are high. While this may be partly true, if trends show a continued
deviation from projections, that is an indication that structural problems are present:
Either the cost structure is too high or revenues are too low to support the business
without continued subsidy. What this means is that the extra costs are not due to
capacity building but, rather, the enterprise is not fully in the market and without
adjustment will be doomed to failure. Ultimately, if capacity building is accom-
plished successfully the social enterprise will be able to sustain its operations after
five to 10 years without external aid other than what is provided by investors or
creditors, as in the case of any private business.
Exhibit 8E shows this relationship using projected profit/loss trends for TARTINA
compared with a similar private business. The example gives a visual representation
of numeric projections. The balloon-like shape clearly portrays the high capacity-
building costs inherent in social enterprises, but not present in private businesses.
After the enterprise achieves viability, though revenue between the two is close, cost
structures for social enterprises continue to be marginally higher than those of a pri-
vate business.
EXHIBIT 8E: FINANCIAL TRENDS
$250
$300
$200
$150
$100
$50
$0
1 2 3 4 5 6 7
SE Revenue SE Expense Business
Revenue
Business
Expense
YEARS
PO business advisor, business manager, finance and accounting staff
Projecting Financial Trends
L Using the graphics feature in a spreadsheet program, project the trend lines of
your financial targets and objectives.
Social enterprise trend projections are included in the Business Plan.
Business
Break-even Point
Social Enterprise
Break-even Point
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8
INVESTMENT AND SUBSIDIES
In the private sector investments provide the necessary capital to start and grow a
business until it is profitable. Similarly, a social enterprise requires investment, yet it
also needs a subsidy to cover social costs. Donors and private investors expect a
return on their money, and like business investments, subsidies to social enterprises
are only warranted if their costs can be justified. Simply put, will they realize a
financial or a social return?
Subsidies represent a real cost; therefore, you are accountable to your donors to
demonstrate a quantifiable return. For investment expenses, realistic financial pro-
jections must show an eventual break-even point (within an acceptable time frame)
as well as evidence that social impact targets (chapter 2) are met, ensuring that
investor money is not being squandered. When investors are dissatisfied with a busi-
ness' performance, they withdraw their support, evoking the "survival of the fittest"
rule in the business world. By the same token, auto-regulation of social enterprise
programs is the power of the donor to pull the plug if your program is underper-
forming both in financial and social impact terms.
Social subsidies are more complicated and difficult to quantify (see next section
Quantifying Social Costs) than investments. As mentioned, capacity building costs
are considered normal investment costs, though they tend to be higher for social
enterprises than in private business due to the low skills or special needs of the pop-
ulations these enterprises serve. Subsidies, on the other hand, offset losses in pro-
ductivity and expenses related to running social programs. These costs create dispar-
ity between social enterprises and their competitors in the private sector because
they substantially increase enterprise costs, making it difficult to compete, or meas-
ure business performance against industry standards. (exhibit 8F.)
$250
$300
$200
$150
$100
$50
$0
1 2 3 4 5 6 7
Enterprise
Revenue
Social
Costs
Business
Expenses
Enterprise rev-
enue subsidizes
social costs
YEARS
Break-even Point
BEFORE Social Costs
Break-even Point
AFTER Social Costs
Social Costs
Social Subsidy
Investment
Subsidy
EXHIBIT 8F: INVESTMENT AND SUBSIDY
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Donor-Investor subsi-
dizes business expenses
and social costs.
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Managing the Double Bottom Line:
270
The question is: Which costs should you subsidize with donor money and
which ones should you try to cover with revenue? The structure of your organiza-
tion, requirements from current donors, internal management decisions, the nature
of the enterprise, and financing opportunities determine how to treat certain costs.
For example, Save the Children segregates its overhead and technical assistance
costs from enterprise operations, considering them a temporary but necessary
expense to finance capacity building. SC assumes that its costs will be fully subsi-
dized for at least the first donor funding cycle of the enterprise program. Start-up
costs of initial fixed assets and capital are fully subsidized by donor monies. SC does
not expect that the social enterprise will be able to recover and repay initial invest-
ments like private business. Operating deficits are subsidized on a declining basis to
fill the gap between revenues and capacity-building, loss compensation and social
program expenses. Unlike a private business that may borrow funds or use venture
capital to finance working capital and operating costs prior to breaking even, social
enterprises are not required to recuperate these costs and reimburse donors. Lastly,
some social costs will need continued subsidy. Depending on the social enterprise's
ability to generate revenue, social program mix and donor funding priorities, social
subsidies will either be provided internally from enterprise revenue or externally
from donor support.
Exhibit 8G Social Enterprise Financing Structures illustrates how subsidies work
in social enterprise programs. Although all money is fungible, subsidy must be rec-
ognized separately from income generated by the enterprise in financial statements
and budgets (see following sections on preparing financial statements). Additionally,
allocating subsidies coupled with the viability of your social enterprise have a direct
impact on your fundraising and financing strategy (see Resource Acquisition
Strategy).
Fungible—being of such a
nature that one part or quantity
may be replaced by another
equal part or quantity in the sat-
isfaction of an obligation.
TARTINA Clients clean up
after their production shift.
Working capital—the excess
amount in current assets over
current liabilities. Working capital
is the money a business uses to
run its operations and in
accounting is a measure of the
enterprise's ability to service its
financial obligations.
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EXHIBIT 8G: SOCIAL ENTERPRISE FINANCING STRUCTURE
PARENT
ORGANIZATION
BUDGET
SALARIES
TA/TRAINING
OPERATING OVERHEAD
ENTERPRISE
BUDGET
SALARIES
TA/TRAINING
OPERATING COSTS &
OVERHEAD
ENTERPRISE
BUDGET
START-UP COSTS
WHOLLY SUBSIDIZED
(FOR DURATION OF THE
PROGRAM)
WHOLLY/PARTIALLY SUBSIDIZED
(ONE TIME) (IF MATCH)
SUBSIDIZE DEFICIT
(DECLINES OVER TIME,
REPLACED BY REVENUES
AND INVESTOR/CREDITOR
CAPITAL)
SOCIAL COSTS
CAPACITY BUILDING
LOSS COMPENSATION
SOCIAL PROGRAMS
DONOR OR PARENT
ORGANIZATIONS
SUBSIDIZED/FINANCED BY
ENTERPRISE REVENUES
(POSSIBLE TO RECEIVE GRANTS FOR
SOME PROGRAM COSTS DESPITE PROF-
ITABILITY OF ENTERPRISE)
USE OF INCOME
Until the enterprise actually breaks even, revenues simply represent a decrease in
loss, but they should be acknowledged and accounted for differently from subsidy in
financial statements (explained later).
There are a variety of ways in which social enterprise revenues can be handled:
Prior to breaking even:
4First, revenues should be used to cover variable and production costs (reflected in
cost of goods sold in the profit and loss statement, which gives you gross margin).
4Second, revenues in excess of variable costs should be used to cover the fixed
costs of the social enterprise (or the operating deficit for salaries and overhead
costs).
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
4Third, revenues are used for capital assets, such as equipment investments, that
will generate additional revenue for the enterprise.
4Fourth, revenues used for pay raises to workers, clients, employees in-step with
cost of living increases and job performance promotions.
4Fifth, revenues are contributed to a revolving loan fund, savings accounts, or
insurance schemes for the microentrepreneurs operated by the social enterprise.
4Sixth, revenues applied to financial costs of borrowed capital (interest on loans) to
finance business operations and growth.
After viability is achieved:
4Use revenues for profit sharing via bonuses, dividends or increases in base salaries
or wages of workers, clients, employees to increase their overall economic security.
4Use revenues to finance the expansion phase of the social enterprise.
4Invest revenues in diversifying enterprise business or other income-generating
activities in the formal or informal markets.
4Use revenues to cross-subsidize other sector activities or add new capacity-build-
ing programs, such as literacy, that may have been too expensive to include in the
immature business.
4Invest in an endowment or long-term securities to generate income for social
programs.
Remember to consult the enterprise’s program donor(s) early on this matter, as they
are likely to have their own regulations and preferred approach. An agreement
needs to be reached before start-up of the program and the appropriate financial
instruments prepared.
Managing the Double Bottom Line:
272
How TARTINA Dealt With Revenues
TARTINA negotiated with its donor that it would use enterprise project revenues
to cover fixed costs of the enterprise. This was considered the best strategy, as it
most directly contributed to the cost recovery and financial viability objectives. In
practice, this approach required that TARTINA plan in advance which fixed costs
the revenues would cover. TARTINA chose promotional and sales staff salaries for
this purpose, as these were expenses with some degree of flexibility. That is, if
TARTINA were unable to reach its revenue targets, the budget line items project-
ed to be covered by the revenues would need to be scaled back. As well,
TARTINA’s revenues would cover depreciation of the enterprise project’s vehicle,
as this was an expense that the donor could not subsidize because of its own reg-
ulations.
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Business manager, accountants and finance staff, PO business advisor, partner
program manager
Planning for Revenue
? Write a few lines on how you plan to use enterprise revenues.
Revenue information is included in the Business Plan with your trend
projections (previous section).
Quantifying Social Costs
Rationale:
Running a social enterprise involves additional costs not incurred by traditional busi-
nesses. Directly employing disadvantaged people in your work force who face con-
straints to normal employment or providing services to them to bring their products
to market when access is otherwise not possible are expensive business propositions.
Yet, as a social enterprise you are bound by your mission to increase this popula-
tion's economic security and quality of life while operating with reference to a finan-
cial bottom line. Thus, social enterprise managers must be able to make informed
decisions with respect to both the business and the social programs. One device for
effective decision-making is to segregate the costs of these distinct functions that run
simultaneously.
Distinguishing social costs from business costs has express advantages.
Concerning the business side, knowledge of the social enterprise's profitability
shapes every strategic and operational decision made by management. It provides
the means to assess the enterprise's market position and craft a competitive strategy.
Furthermore, separating these costs permits social enterprise accountants to prepare
financial statements comparable to those of similar private businesses, enabling man-
agers to measure enterprise performance against competitors and industry standards.
This is important because it informs management about costs that may be reduced
or investments made to increase enterprise profitability and competitiveness.
Moreover, understanding the social enterprise's financial performance vis-à-vis its
for-profit colleagues provides information for strategic decision-making on issues
such as pricing, expansion, market entry, product development, exit, etc.
5
Similarly, quantifying social costs informs decision-making regarding social pro-
gramming. Understanding social cost allocations allows managers to measure the
effectiveness of achieving social impact objectives. Tracking expenses over time
informs whether costs are rising or declining to meet objectives. Evaluating program
cost effectiveness helps determine which social costs yield the largest benefit on
social impact. Likewise, when costs are separated, social cost figures can be ana-
lyzed for their impact on business performance. This enables managers to delineate
5
Investor Perspectives, “Quantifying Social Costs: A Case Example from Rubicon's Buildings and
Grounds Business,” Kim Starkey, 2000, Roberts Foundation, SF, CA.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
which social costs can be considered investments rendering a return via increased
revenues, and which are subsidized costs inherent in achieving a social mission and
never yield financial benefit to the business. (exhibit 8F, Investment and Subsidy.)
Making this distinction helps managers plot their resource acquisition strategy (see
Resource Acquisition Strategy at the end of this chapter).
Enterprise production/operations and business managers, accountants and
finance professionals, supervisors, social program directors, PO business
advisor
Quantifying social costs is a complicated and imprecise science
6
that requires
developing consistent methodologies suitable for your social enterprise.
? Find the blank table Quantifying Social Costs provided in The Workbook to use
as a template, or create your own.
? Step 1—brainstorm the types of social costs that are significant for your social
enterprise and assess the likely cost magnitude of each one. For example, if you
have clients in your labor force, and labor is one of the largest components of
your enterprise's cost base, then it is likely your most significant costs are related
to employee inefficiencies or additional supervisory time.
? Fill out table based on conclusions.
? Step 2—outline each methodology that could be used to identify social costs and
pinpoint its methodological challenges. Three examples of methodology follow:
1) time—approximately 30% of the manager's time is devoted to "extra" tasks
necessitated by the challenge of managing the enterprise's disadvantaged labor
force; thus 30% of the manager's salary and benefits would be quantified under
social costs. 2) Lost income (+ time)—poor health of clients constitutes 25 sick
days and 20% loss in productive days or income not earned. Therefore, the per-
centage of lost productive days over and above the industry standard (use for
example 3%), which would be 17% lost revenue, is allocated to social costs along
with the costs of sick day benefits of 20 days over and above industry standard
(for example 5 days). 3) Wage premium—social enterprises pay livable wages to
a population that may not have such a high earning potential. Compare salaries,
wages or piece rates across your industry. Use published industry statistics if avail-
able, or contact your competitors, suppliers, buyers to determine standard pay
scales. Deduct the social enterprise "premium," the amount above median indus-
try standard rate.
? Step 3—decide which social costs to include in the analysis by weighing method-
ological challenges and the estimated magnitude of each social cost. You will
probably not quantify all of the social costs that are relevant to your enterprise.
Some costs will be eliminated on the grounds that they are either financially
insignificant or the methodological challenges for determining them are too great.
? Step 4—execute your methodology and translate social costs into dollar amounts
or use local currency. Pay particular attention if your methodology is based on
percentage, not to confuse percentage and dollar values. Methodology should be
applied to accounting periods, and quantified monthly, quarterly and annually.
Managing the Double Bottom Line:
274
6
Ibid., steps to quantifying social costs given in exercise.
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Social cost information will be used for two purposes later. First, to define both
bottom lines in financial terms when you prepare a profit and loss (income) state-
ment for your social enterprise (see Adjusting the Profit and Loss to Include Social
Costs). And second, to provide useful decision-making information for your resource
acquisition strategy (see Resource Acquisition Strategy).
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EXHIBIT 8H: HOW TO DECIDE WHICH SOCIAL COSTS TO INCLUDE IN THE
ANALYSIS
7
INCLUDE IN
ANALYSIS
ELIMINATE FROM
ANALYSIS
L
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Magnitude of Methodological Challenges Posed by Social Costs
Case by Case Decision-making Required
7
Investor Perspectives, “Quantifying Social Costs: A Case Example from Rubicon's Buildings and
Grounds Business,” Kim Starkey, 2000, Roberts Foundation, SF, CA.
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Managing the Double Bottom Line:
276
TYPE OF SOCIAL COST
CAPACITY BUILDING
Hard Skills Training
Soft Skills Training
LOSS COMPENSATION
Allowance for Inefficiency
Extra Supervisory Time
Wage/Income Premium
Wastage
Illness/Family Problems
Poor Country
Infrastructure/Inefficien-
cies (Developing country
context only)
DEFINITION
Skills training of disad-
vantaged work force.
Time and costs for transfer-
ring hard skills (production
techniques, packaging,
machine use, etc.) to work
force.
Time and costs of interper-
sonal skills, accountability,
etc).
Loss in productivity and
materials due to disad-
vantaged nature of work
force.
Time needed to complete
job due to low skills, illitera-
cy, disabilities, of disadvan-
taged work force.
Time for supervision, coun-
seling, on-the-job training
of disadvantaged work
force.
The difference between
social enterprise rate and
industry standard for level
of skills in work force.
Cost of wasted materials
due to employment of work
force in training.
Loss of work time due to
poor health, emotional or
family problems.
Time for inefficiencies and
infrastructure problems,
costs for building extra
infrastructure.
MAGNITUDE
OF COST
High
Medium
High
High
Medium
Low
Medium
Medium-
High
SUBSIDY OR
INVESTMENT
Investment
Investment
Subsidy
Subsidy
Subsidy
Subsidy
Subsidy
Subsidy
FUNDED BY
(AFTER INITIAL
INVESTMENT)
Revenue/
Grants
Revenue
Revenue
Revenue
Revenue
Revenue
Revenue
Revenue
EXHIBIT 8I: QUANTIFYING SOCIAL COSTS
8
FOR TARTINA
8
Ibid., Table modified. Assumes cost structure after start up phase is complete.
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TYPE OF SOCIAL COST
SOCIAL PROGRAM COSTS
9
Donor/Parent Organization
Activities and Fundraising
Counseling, Job Coaching
Other Vocational or
Education Services
Food, Housing, Clothing,
Health Care
DEFINITION
Integrated social pro-
grams aimed at assisting
clients or requirments of
parent organization.
Time for donor visits,
reports, fundraising, parent
organization events, meet-
ings that detract from enter-
prise productivity.
Costs for on-the-job sup-
port and emotional stability.
Costs for training to
enhance clients' employa-
bility and independence
outside of enterprise pro-
gram.
Costs that meet basic/spe-
cial needs of clients other
than economic ones.
MAGNITUDE
OF COST
Medium
Medium
High
High
SUBSIDY OR
INVESTMENT
Subsidy
Subsidy
Subsidy
Subsidy
FUNDED BY
(AFTER INITIAL
INVESTMENT)
Grants/parent
organization
Grants/
revenue
Grants/parent
organization
Grants/parent
organization
9
TARTINA does not integrate business and social programs within its enterprise structure, and there-
fore does not incur the “Social Program Costs” given in this chart. Thus, information on the magni-
tude of costs, whether it is a subsidy or an investment, and who underwrites these costs are given
generically—based on average expenses of integrated social enterprise programs.
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Managing the Double Bottom Line:
278
Financial Tools
An essential part of the social enterprise’s financial plan is preparation of four key
financial tools, namely:
4Budget—details anticipated enterprise expenses and income.
4Profit/loss statement—measures the profitability of an enterprise over a period
of time.
4Balance sheet— provides a “snapshot” of the enterprise’s financial position at a
given point in time.
4Cash flow statement—explains how cash was both generated and spent over a
period of time.
The last three tools are also
referred to as financial state-
ments in accounting and finan-
cial literature.
Financial tools represent the
financial strength and perform-
ance of a social enterprise and
are used for planning, evalua-
tion, and control purposes by
the various enterprise actors.
There is some debate about
which financial tools are most
important. Proponents of bal-
ance sheets advocate their use
over other financial tools be-
cause they represent the true
value of the enterprise. Others
prefer profit and loss statements,
as they indicate whether your
enterprise is making or losing
money. Our experience shows
that social enterprises most often
falter in cash management,
hence significant explanation is given to the subject of cash flow.
All financial tools are linked and should be used together in order to fully under-
stand the financial position of the enterprise (exhibit 8K: Interrelationship between
Financial Statements for Social Enterprises). Without these tools, you will not be able
to prepare the enterprise’s financial targets or measure its progress against these tar-
gets. Exhibit 8J, Financially Statement Overview, gives an overview, of the purpose,
time frame, and main users for each financial tool.
Financial Control
Financial statements are an important control mechanism and should be
produced regularly. They should not just be viewed as something that is
produced once a year for audit and registration purposes. The different
parts of financial statements are intrinsically linked. For example, if you see
your receivables increase, you might expect your cash to decrease and vice
versa. If you see your inventory and receivables increase drastically, you are
probably about to have significant cash flow problems. The effects of good
or weak internal control systems will show up in your financial statements.
As a social enterprise you must be strict about collection of receivables or
you will have no cash left. There’s no quicker way to destroy an enterprise
than to be slack in collecting what is owed to you. And pay everything you
owe to others early! You must know each week what is due from credit
sales and take firm action. Every dollar tied up in receivables (or excessive
inventory) is a dollar that cannot be used to expand or maintain your enter-
prise. Be strict on controls around cash. Imagine that it’s your own money.
You wouldn’t allow your personal debts to go uncollected, or pay too much
for supplies because you didn’t have time to walk 200 meters farther to a
cheaper shop, or leave your own money lying around in an unlocked draw-
er rather than in a safe. But people frequently do these things with money
that belongs to an enterprise.
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EXHIBIT 8J: FINANCIAL STATE OVERVIEW
Tool What It Tells You Time Frame for: Who Uses It
Planning Evaluation
Profit/Loss Statement How much the Annually Monthly Shareholders,
enterprise is making Quarterly Public donors,
or losing. Annually PO Business
Advisor,
Enterprise
Manager,
Entrepreneurs
Balance Sheet Financial picture Annually Quarterly Shareholders,
of the enterprise Annually Public donors,
as of a specific date. PO Business
Lists assets, Advisor,
liabilities, and equity. Enterprise
Manager
Budget All of the expenses Annually Quarterly Public donors,
of the social enterprise Annually PO Business
(profit/loss statement) Advisor
and all relevant
expenses of the PO.
Cash Flow Statement Indicates cash surplus Annually Weekly PO Business
or shortage for enterprise Monthly Advisor,
operations. Shows all Quarterly Enterprise
inflows and outflows of Annually Manager
cash in the enterprise.
Balance sheet—a
financial statement that
shows assets on the left
side and liabilities on the
right. A balance sheet
gives an overview of a
company's financial
position at any given
point.
Budget—a financial
plan based on estimates
of expenditures and rev-
enues for a period of
time.
Cash flow statement—
a financial document that
reports information
about cash receipts and
cash payments during
an accounting period.
The cash flow statement
segments cash sources
and uses into “operat-
ing”, “investing” and
financing” categories. It
is generally prepared for
the same period as the
profit and loss state-
ment.
Profit and loss statement—
financial statement that summa-
rizes the amount of revenue
earned and expenses incurred by
a business entity over a period of
time; also called an income
statement. In nonprofit account-
ing, the profit and loss statement
is sometimes referred to as the
statement of activity.
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Managing the Double Bottom Line:
280
EXHIBIT 8K: INTERRELATIONSHIP BETWEEN FINANCIAL STATEMENTS FOR
SOCIAL ENTERPRISES
Profit/Loss Statement Change in Balance Sheet
Sales Increase in accounts receivable; decrease in inventory
Less: Costs of goods sold Decrease in inventory
Equals: Gross profit No change
Less: Operating expenses Increase in accounts payable, decrease in cash, or
decrease in prepaid expenses
Equals: Net profit (or loss) Increase in retained earnings for profit, or decrease in
retained earnings for losses
Plus: Subsidy Increase in donor contribution (net worth)
Balance Sheet Change in Cash Flow Statement
Increase in assets (use) Decrease in cash
Decrease in assets (source) Increase in cash
Increase in liabilities (source) Increase in cash
Decrease in liabilities (use) Decrease in cash
Decrease in net worth (use) Decrease in cash
Increase in net worth (source) Increase in cash
Rationale:
A good accounting system and financial statements are the basis of a sound enter-
prise. Do not rely on donor program reports or fund accounting, which only tell
you in cash terms how much you have spent on a particular line item during a
month, quarter, or year. Donor project reports will tell you almost nothing about
the overall health of your enterprise, nor will they assist you in making key deci-
sions. For this you need standard financial statements as used in the business world.
They will enable you to compare your enterprise with other enterprises. You are
also far more likely to be well received by the local bank manager when your enter-
prise one day needs a cash-flow loan.
GUIDELINES FOR PREPARING FINANCIAL TOOLS
4Begin with projected financial statements and budgets. Projected, also called
pro forma, financial statements, forecast future expenses and income. Pro forma
financial tools provide the starting point for your social enterprise based on edu-
cated estimates.
4Base projections on historical information or actual costs. Use cost informa-
tion either from past experience (if yours is an existing enterprise) or from
research on market prices.
Costs of goods (COGs) sold—
Costs of inventory sold during an
accounting period by the selling enter-
prise. COGs include all costs to make
a product or render a service: labor,
raw materials, operations, factory
overhead, etc. It is important for
social enterprises to list costs of
goods sold in their income statement.
Gross profit—shows the value that
an enterprise is earning over the cost
of the merchandise sold (costs of
goods sold). Gross profit is calculat-
ed by subtracting costs of goods sold
from total sales. It is called gross
profit because other expenses still
need to be deducted in order to arrive
at net profit.
Operating expenses—the costs of
the selling and administrative activities
of a business. Operating expenses are
reported in the income statement and
are usually categorized as selling and
general administrative expenses.
Net profit—what remains after all
expenses have been subtracted from
revenue; also referred to as net
income.
Net worth—also called owner’s equi-
ty, net worth is equal to assets minus
liabilities. It represents the value of the
enterprise.
Pro forma—a projection or estimate
of what may result in the future from
actions in the present. Pro forma
budgets and financial statements esti-
mate business performance results
based on certain assumptions.
Fund Accounting—a concept partic-
ular to nonprofit organizations and
government agencies. Financial
records must be maintained for each
program that receives contributions (in
the form of grants and donations)
designated to support a specific pro-
gram. Each set of records is called a
"fund" and is considered a separate
accounting entity with its own finan-
cial statements.
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4Clearly state the assumptions behind your projections. This helps you think
through the logic and basis for your projections, and if you discover that your pro-
jections are off, you can revisit the assumptions to verify whether they are still
valid. Some examples for TARTINA include 12 gourdes per marmite for peanuts
(based on last year’s average prices plus a minor adjustment consistent with infla-
tion) and $15,758 in annual pay for a Marketing Manager based on low-end
competitive rates for the same job in the private sector.
4Use the appropriate level of detail in your financial statements.
“Appropriate” refers to information that is important for users of financial state-
ments for analytic and decision-making purposes. This may mean preparing con-
solidated statements that give financial information in summary form for external
users, such as donors and investors, and more detailed statements for internal use
by enterprise managers.
4Reconcile projected financial
statements with actual per-
formance. Report projections
against actual performance.
Reconciling differences quarter-
ly or monthly not only helps
enterprise managers verify
whether they are on track with
their estimates but signals prob-
lem areas before they become
catastrophic. Finally, using this
approach systematically should
increase accuracy of projections
as the enterprise matures.
4Set up a standard accounting
system.
10
Whether it’s an accru-
al or a cash system (see box), a
social enterprise should use an
accounting system that gener-
ates the same financial reports
as those used in the private sec-
tor. Often nonprofits use simpli-
fied cash systems or structure their accounting to respond to donor reporting
requirements, which may leave out information essential for financial analysis.
Accrual and Non-accrual (Cash)
Accounting Systems
One of the tensions between the business and nonprofit
worlds is which accounting system to use. The nonprofit
world tends to use cash accounting. The advantage of
this is simplicity: Your financial statements reflect exactly
what you have paid out in cash or by check. Some
donors also require cash accounting. The business world
generally uses accrual accounting, which in fact is a
legal requirement in most countries. Why? Well, consider
a social enterprise that paid its rent of $2,000 for calendar
year 1998 on Jan. 1, 1998, and that paid its rent of $2,000
for calendar year 1999 on Dec. 31, 1998. Accrual account-
ing would show rent of $2,000 in both the 1998 and 1999
financial statements because that is the correct amount
relating to each year. Cash accounting would show a
rental expense of $4,000 in the 1998 financial statement
and nothing in 1999—a clear distortion of the picture. The
only accurate way to evaluate financial performance
month by month or year by year is to use accrual
accounting.
10
The topic of social enterprise accounting systems is complex, particularly as it relates to the rela-
tionship between the enterprise and the parent organization. SC suggests that you consult with a
private sector accountant, tax attorney and an MIS specialist before setting up a social enterprise
accounting system. Recommended reading on this subject can be found in Investor Perspectives,
"Accounting Issues in Social Purpose Enterprise," Cynthia Gair, 2000, Roberts Foundation, SF, CA.
Accrual Accounting—a
practice of accounting where-
by revenues are accounted for
in the period in which they
occur and expenses recog-
nized when they are incurred,
rather than when a cash pay-
ment is made or received.
Accrual accounting gives a
realistic picture of the enter-
prise's financial position by
recording the effects of finan-
cial transactions on the social
enterprise regardless of when
cash is received or paid.
Cash Accounting—a practice
of accounting whereby rev-
enues and expenses are
recorded when cash is paid
and received. Cash accounting
is straightforward and is often
used by very small business-
es; however, it can overstate
or understate financial position
of the enterprise depending on
when a cash payment is made
or received.
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Managing the Double Bottom Line:
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4
Use technology to prepare financial state-
ments. The days of the abacus are long gone:
Social enterprise managers need to embrace
technology to be able to react quickly. Relying
solely on a calculator means the enterprise
won’t have a chance of competing.
4Be clear on tax implications for your social
enterprise. There are only two certainties in
life: death and taxes. Even nonprofits are liable
for various taxes, such as property, payroll, etc.
The best way to understand what taxes the
enterprise does or might owe is to consult a
good lawyer and/or accountant. It’s money
worth paying upfront to avoid huge liabilities
later.
4Inventory valuation. Select a system for valu-
ing inventory (see box) that is appropriate for
the type of business. Inventory valuation has an
impact on the bottom line and is frequently
overlooked by social enterprise practitioners.
4Depreciation method. Use a standard
method of depreciating fixed assets suitable for
your enterprise (see box on next page).
Let Technology Be Your Friend
Nowadays there are many good off-the-shelf accounting
packages available, so don’t reinvent the wheel unless
you have to. Try to choose one that has good technical
support in the country and, if you have donor grants, one
that can deal with fund accounting (separating the funds
of different donors). Powerful spreadsheet programs such
as Excel can also assist you with various financial tasks.
But remember the old adage of garbage in, garbage out.
Technology is no substitute for having a good, solid man-
ual system underneath that feeds accurate information to
your computer.
There are also more specialized accounting/financial
management software packages that automate a number
of functions, such as inventory management and ordering.
Spreadsheet or software macros should link to financial
statements.
Inventory Valuation
The valuation of inventory is one of the most important parts of an organization’s financial statements, as it
has a direct effect on profit (via cost of goods sold). Inventory is usually valued at the lower of cost or net
realizable value, i.e., the price you would receive if you sold it. With the exception of a few commodities that
increase in value with age (whiskey and wine), the net realizable value of many commodities decreases
over time as they become obsolete or their shelf life ends and value may therefore be lower than cost.
Finding the exact cost of each unit of a commodity is obviously almost impossible if there are hundreds, so
three main methods are used: FIFO, LIFO, and average cost method. FIFO—first in, first out—assumes that
the oldest units are sold first and that remaining units are valued at the most recent prices paid or produc-
tion cost incurred. FIFO is the most commonly used and accurate method of inventory valuation. LIFO—
last in, first out—assumes that the most recent additions to inventory were sold first and therefore values
inventory at older prices. LIFO is not often used. The average cost method simply takes an average of pur-
chase prices or production costs for a commodity; its advantage is simplicity. Generally an organization
should use FIFO unless there is a good reason not to.
Average cost—a method of inventory
valuation that assumes inventory sold
during the period was purchased at the
average cost of all inventory available for
sale.
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INFORMATION FLOWS
Perhaps you are wondering where financial statement information comes from. This
is a good question. Remember that in previous chapters the indicated informa-
tion you would use in the financial section of your business plan. Exhibit 8L shows
how the information you compiled earlier will be used to prepare your financial
statements and budget.
Depreciation
Why depreciate? Let’s imagine you purchase a vehicle that has an estimated
useful life of five years. It makes sense to spread the cost of the vehicle over
the five years it is used in the social enterprise rather than take the whole
charge in one year, even though many donors would prefer that it be
charged in one year for their accounting purposes. In business accounting,
depreciation allows you to match the cost of assets with the revenues pro-
duced by them. There are two main methods: declining balance and straight
line. Most businesses use straight-line depreciation for its ease. Thus, for the
vehicle you would divide the purchase price (say $18,000) by its useful life
(say five years or 60 months), and the depreciation charge would be $3,600
per year or $300 per month. However, this may not be that accurate for a
vehicle, which typically loses 20 percent of its value the moment it is driven
out of the showroom. It might be more accurate to take a depreciation
charge of 30 percent of the net value of the vehicle each year. For Year 1 the
charge would be $18,000 x 30% = $5,400, and for Year 2 it would be
($18,000 – 5,400) x 30% = $3,780 and so on. The main difference between
the methods is that straight line is easier, the asset is fully depreciated in a
certain time period, and the charges are equal each year. With declining bal-
ance, you have higher charges in earlier years and lower charges in later
years. Generally, you should use the straight-line method unless it seems
very inaccurate.
Depreciation—the
decrease in the value of
equipment from wear and
tear and the passage of
time. Depreciation is
recorded as an expense that
allocates the cost of the
asset over the time it is
expected to generate
income.
Sales planning with
sales team.
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EXHIBIT 8L: FINANCIAL INFORMATION FLOWS
Information Used in Represented in Financial Line Items
Financial Plan Statements
Strategic Frameworks, Chapter 4
Seasonal Factors Cash flow projections Sales, COGS, operating expenses,
Profit/loss statement sales, marketing
Financial Characteristics Cash flow projections Sales, returns, COGS, commissions,
salaries
Profit/loss statement Sales, COGS, operating expenses
Break-even Sales price (not a line item)
Marketing, Chapter 5
Marketing Vehicles Cash flow projections Operating expenses
Profit/loss statement Marketing and advertising
Marketing budget All—related to promotion
Cash flow projections Operating expenses
No/Low-Cost Promotion Profit/loss statement Marketing and advertising
Marketing budget All—related to promotion
Sales Plan + Structure Profit/loss statement COGS, sales or marketing,
commissions, gross sales
Cash flow projections Cash sales, accounts receivable
Marketing Budget Social enterprise budget Marketing costs: salaries, benefits,
payroll tax, commissions
Operations, Chapter 6
Facilities Profit/loss statement Rent, utilities, maintenance,
depreciation
Cash flow projections Operating expenses, other expenses
Balance sheet Fixed assets, depreciation
Social enterprise budget Rent, building maintenance
Production Profit/loss statement COGS (inventory), salaries, benefits,
payroll tax
Cash flow projections Operating expenses
Production budget All production expenses
Break-even Variable & fixed costs of production
Social enterprise budget Raw materials, factory overhead,
labor, salaries, benefits, payroll tax
Equipment Profit/loss statement Depreciation, equipment rental,
furniture and equipment
Balance sheet Fixed assets, depreciation
Cash flow projections Operating expenses, equipment
purchase
Social enterprise budget Fixed assets: production equipment
Cash flow projection—a forecast of
the cash a business anticipates
receiving and disbursing over a given
span of time, frequently one month. It
is useful in anticipating the cash por-
tion of a business at specific times
during the period projected.
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Research & Development Profit/loss statement Operating expenses, allocated
salaries, or R&D
Social enterprise budget R&D, consultants, materials
Human Resource Plan, Chapter 7
PVO Staff Social enterprise budget Salaries, benefits, payroll tax
Enterprise Staff Social enterprise budget Salaries, benefits, payroll tax
Income statement Salaries, benefits, payroll tax
Cash flow projections Operating expenses
Recruitment Plan Income statement Salaries, benefits, payroll tax
Cash flow projections Salaries (projections for new hires)
Incentive Programs Income statement Sales commission
Cash flow projections Operating expenses
Capacity Building Income statement Training materials and services,
legal and professional services
Cash flow projections Operating expenses
Financial Plan, Chapter 8
Start-up Costs Profit/loss statement First month’s operating expenses
allocated to relative lines
Balance sheet Current assets, fixed assets,
current and long-term liabilities (for
debt secured to pay costs) or net
worth (for subsidies or contribu-
tions)
Cash flow First month’s operating expenses
and term payments for future
months
Information Used in Represented in Financial Line Items
Financial Plan Statements
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Managing the Double Bottom Line:
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Budget
The social enterprise starts out as a program. Therefore, prior to addressing financial
statements—balance sheets, profit and loss statements, and cash flow statements—
we begin this section with a budget, the financial management planning instrument
most development practitioners are already familiar with. A budget projects all
expenses of the social enterprise as well as any additional expenses of the PO that
are charged to the social enterprise program, usually on an annual basis. Normally,
quarterly assessments are made of actual expenditures relative to those that have
been planned.
Much of the budget is drawn from financial information completed in previous
business plan chapters, such as marketing, operations, and human resources budgets
(exhibits 8L and 8M). What has not been discussed in detail—other than PO salaries
in the human resource chapter—is the parent organization’s budget for staff, capaci-
ty building, and overhead as well as social enterprise operating overhead.
EXHIBIT 8M: BUDGET INFORMATION FLOWS
HUMAN
RESOURCE
BUDGET
OPERATION
BUDGET
OVERALL SOCIAL
ENTERPRISE
PROGRAM
BUDGET
PARENT
ORGANIZATION
BUDGET FOR:
TECHNICAL
ASSISTANCE
OVERHEAD
MARKETING
BUDGET
START-UP
BUDGET
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8
BUDGETING START-UP COSTS
New social enterprises will need to prepare a budget for first-month start-up costs to
determine total capital requirements needed for fixed assets and working capital.
Start-up costs, or sunk costs, are the nonrecoverable costs of launching a business.
Unlike many businesses, social enterprises have the luxury of having these paid by
donors and are not required to recover this original investment. Considered pre-
operating expenses, start-up costs are included in the financial needs section or
budget of your social enterprise program proposal, as well as in the financial state-
ments in your business plan.
? Begin by looking over budgets completed in earlier sections of the business plan
(operations, marketing, and human resources). Which expenses will you have to
pay out prior to opening your doors? Which expenses will you have to pay in the
first 30 days of operations?
? Partial payments for assets, or those made on credit, are deferred payments and
will need to be included in your cash flow projections (discussed later in this
chapter).
? Don’t forget to include cash on hand for accrued salaries and working capital for
the first month of operations.
? Use the Projected Start-up Costs template found in The Workbook or create your
own. An example for TARTINA is given in exhibit 8N. Use it as a guide to pro-
jecting start-up costs for your social enterprise. Add additional line items or omit
them as they pertain to your business.
Start-up cost projections are included in the Business Plan appendix.
Sunk Costs—a cost that has been
incurred and cannot be affected by
present or future business decisions.
Production team meets with Save the Children’s advisor from headquarters.
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Managing the Double Bottom Line:
288
EXHIBIT 8N: PROJECTED ENTERPRISE START-UP COSTS
Amount
Facilities First rent/purchase 328
Deposits (security, water, utility, other hookups) 600
Improvements/refurbishing/fixtures 16,000
Other 875
Equipment Vehicles 30,000
Production machines/equipment 12,000
Computers/software 7,500
Furniture 550
Telephones 70
Other 1,000
Materials/Supplies Starting inventory (or raw materials/work in progress) 1,200
Production inputs 800
Office and packing supplies 450
Promotional materials (brochures, displays, etc.) 1,250
Training supplies 400
Other -0-
Professional Services Legal (tax, etc.) 800
and Fees Management/marketing/production consultants 1,200
Accounting -0-
Insurance 780
Design/graphic arts 250
Promotion and advertising 1,200
Licenses/permits/registration 650
Membership or association fees 200
Pre-operations Technical assistance or training consultants 2,400
Training Tuition or fees (workshops, seminars, classes, etc.) -0-
Per diem and costs associated with training (room rental) -0-
Other -0-
Cash For salaries (first month) 4,900
(First 30 Days) Reserves—operating expenses 2,500
Reserves—unanticipated costs 2,000
Other -0-
Total Start-up Costs 89,903
TARTINA needed $89,903 to open its doors and run its operations for the first 30
days. The largest expenses were for vehicles, equipment and improvements to the
production facility which included building a storage silo. Fair amounts were also
spent on marketing and promotions as well as for technical and mangagement
consultations.
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8
SOCIAL ENTERPRISE PROGRAM BUDGET
The budget for your social enterprise itemizes all the expenses projected for your
program. In other financial statements you may want to consolidate financial infor-
mation into broad categories, but your budget should be detailed. Exhibit 8P pro-
vides an example of a one-year budget for TARTINA Enterprise.
EXHIBIT 8P: TARTINA BUDGET: APRIL 1999—APRIL 2000
Q1 Q2 Q3 Q4
I - PERSONNEL
Salaries
Field/HR Manager (ADE Staff) 25% 3,939
Production Manager 100% 10,909
Business Manager 50% 7,758
Marketing Manager 100% 13,758
Financial Manager (ADE Staff) 30% 2,955
Accountant 100% 6,909
Inventory Manager 50% 1,891
Production Workers 100% 10,879
Production Agents 100% 5,727
Secretary (ADE Staff) 40% 1,576
Driver 100% 1,970
Guard & Stock Keeper 100% 1,182
Guard 100% 1,733
Subtotal $71,185
13th Month 5,932
Subtotal Salaries $77,117
Fringe Benefits
Retirement Plan (ONA) 6% Salaries 4,330
Medical Insurance (4%) 2,887
Subtotal Fringe Benefits $7,217
TOTAL PERSONNEL $84,334
II - OPERATING COSTS
Rent 3,939
Assets:
Motorcycle & Accessories 6,000
Production Equipment 4,000
Grinder (for sweetened peanut butter) 970
Peanut Storage Instruments:
Humidity Meter 400
Thermometer 200
Fan 1,000
$
Amount*
% of
Staff Time
*Values given in US dollars
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Managing the Double Bottom Line:
290
Q1 Q2 Q3 Q4
Insecticide 551
Grinder Maintenance 121
Building Maintenance 1,970
Vehicle Depreciation 5,000
Vehicle Maintenance 394
Fuel 1,182
Travel 788
Office Supplies 788
Training Materials 1,182
Total Overhead $29,984
Technical Assistance:
Consultants in Production Technique 5,666
Materials (for study on improving raw
materials production & quality) 1,500
Research & Development 1,300
Miscellaneous Expenses 1,450
Total Technical Assistance $8,616
TOTAL OPERATING COSTS $38,400
III - MARKETING COSTS
Promotion and advertising $10,145
Sale Agents: Base Salary
3 agents x 1 month x Gdes 3000 545
3 agents x 2 months x Gdes 3000 x 1/2 545
3 agents x 10 mos. x Gdes 3000 x 1/2 1,363
PAP/Institutional Sales Agent 2,364
PG/Sales Agent 1,182
Subtotal Base Salary $5,999
Commission
Mamba (18300 Jrs x Gdes 25) x 15% 4,159
Chadèque (12600 Jrs x Gdes 26) x 15% 2,978
Grenadia (1200 Jrs x Gdes 30) x 15% 327
Karapinia (8500 scs x Gdes 5) x 15% 386
Subtotal Commission $7,851
Total Sale Agents $13,850
TOTAL MARKETING COSTS $23,995
SUBTOTAL $146,729
Less: Revenues (14,922)
TOTAL OPERATING COSTS $131,807
$
Amount*
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8
Preparing the Social Enterprise Budget
? Draw from institutional experience by having a qualified accounting staff profes-
sional prepare program budgets.
? Prepare a projected (pro forma) budget for one year, and include empty columns
to reconcile actual expenses quarterly.
? Feed in budget information completed in earlier sections of the business plan
(operations, marketing, and human resources) to develop your overall program
budgets.
The social enterprise budget is included in the Business Plan appendix.
PARENT ORGANIZATIONS PROGRAM BUDGET
Most development practitioners have ample experience developing budgets for their
programs. Use the human resources information in chapter 7 to help you prepare a
program budget for the parent organization that will be providing technical support
and acting as a financial conduit. Exhibit 8Q provides an example of Save the
Children’s budget to support capacity building of TARTINA Enterprise; the actual fig-
ures have been excluded for the sake of privacy.
EXHIBIT 8Q: SAVE THE CHILDREN SOCIAL ENTERPRISE PROGRAM BUDGET
APRIL 1999—APRIL 2000
I - Salaries Amount Q1 Q2 Q3 Q4 Y-T-D
Headquarters: (U.S.)
Technical Advisor* 10% 5,000
Field Based: (Haiti)
Country Director 10% 4,935
Business Advisor 100% 43,776
Program Manager 25% 12,660
Director of Finance 15% 9,684
Driver 25% 5,914
Total Fringe 43,514
Total Salaries Fringe 125,483
Travel:
Domestic 3,939
International 3,723
Total Travel Costs 7,662
Overhead:
Rent (based on
space allocation) 3,100
Utilities 197
Building maintenance 394
Computer + office
equipment 2,313
*No fringe benefit cost covered for HQ.
% of Staff
Time
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Managing the Double Bottom Line:
292
Amount Q1 Q2 Q3 Q4 Y-T-D
Equipment maintenance 2,200
Office supplies 3,939
Assets less than $5,000 3,000
Vehicle (fuel/maintenance) 4,727
Telecommunications 2,364
Postage 45
Miscellaneous 1,970
Total Overhead 24,249
Technical Assistance:
Training materials 800
Installation of MIS 5,400
Marketing training 3,400
Quality control 2,700
Business management 2,500
Food/production
technology 4,400
Market research 4,400
Consultants 10,966
Evaluation/Audit 5,000
Total Technical Assitance 39,566
TOTAL SC EXPENSES 196,960
Preparing the Lead Organization (PVO) Budget
? Follow the instructions for preparing a social enterprise budget (previous section).
? Use the TARTINA example in exhibit 8M for reference. A blank form can be
found in The Workbook.
? Lead organization budgets are not included in the social enterprise business plan.
PO budget is included in the Business Plan appendix.
Profit/Loss Statement
The profit and loss statement is a summary of the revenue and expenses of a com-
pany for a period of time. Sometimes called the income statement, the term profit
and loss is preferable because it embodies the business reality that enterprises can
lose as well as make money. The last line in the profit and loss statement indicates
the net profit or loss of the enterprise, hence the reference to the “the bottom line.”
The profit and loss statement is used for purposes of planning, evaluation, and con-
trol. It is usually prepared for one-year increments and included in annual reports,
etc. Profit and loss statements, however, should be produced monthly for internal
management purposes.
Profit and loss statements are broken into a few sections:
Income
That which comes from sales of a product or service, as well as nonsales sources.
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Costs of Goods Sold
Is made of all the costs allocated to inventory sold during a certain period.* The
equation for calculating costs of goods sold is as follows:
Beginning Inventory
Add: Purchases or production costs
Equals: Costs of goods available for sale
Less: Ending inventory
Equals: Costs of goods sold
Deducting the costs of goods sold from income gives you gross profit, which repre-
sents the contribution that revenues make toward coverage of expenses not tied to
production and toward net profit/(loss).
*Cost of goods sold is applicable only to production companies; services industries simply itemize
their income, then deduct expenses in their income statements.
Operating Expenses
Also referred to as general and administrative and selling expenses, these are the
expenses necessary to keep daily business operations running even if no goods are
produced or services rendered. The general and administrative expenses include
management and administrative salaries, communications, utilities, vehicles, equip-
ment—such as computers used for administrative support—and other costs not asso-
ciated with production. Selling expenses include marketing and promotional costs
such as paid advertising and sales commissions.
EXHIBIT 8R: PROFIT AND LOSS STATEMENT EXPLAINED
INCOME
1. Gross sales Total sales from product/service line categories.
2. Returns and allowances Products returned; credit or discounts given to
customers.
3. (1 - 2) Net sales Total sales minus returns and allowances.
4. Other income Revenues not associated with product or service
“sales” such as rental, commissions, interest income,
services that are not included in sales.
5. (3 + 4) Income Total income from sales and non-sales activities.
Costs of Goods Sold
6. Beginning inventory Finished goods inventory on hand at the beginning
of the period.
7. Plus: Purchases or production costs Merchandise purchased for resale or costs
incurred during production: inputs, raw materials,
direct labor, depreciation on equipment used in produc
tion, factory overhead (see operations budget in
chapter 6).
8. (6 + 7) Costs of goods available Total costs of all goods for sale.
for sale
9. Ending inventory Actual value of inventory left on hand at end of
period.
10. (8 - 9) Costs of Goods Sold Costs of inventory sold during an accounting period
that includes the expenses incurred to make a product.
General and administra-
tive expenses—the
expenses of running a busi-
ness that are not directly
allocated to the cost of
making a product or render-
ing a service.
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Managing the Double Bottom Line:
294
GROSS PROFIT
12.(5 - 10) Gross profit The value that an enterprise is earning over the cost of
the merchandise sold (costs of goods sold). Operating
expenses still need to be deducted from gross profit to
arrive at net profit.
OPERATING EXPENSES
12.Salaries Salaries of management and administrative staff not
directly connected to production.
13.Employee benefits Paid vacation and leave, health insurance, 13th
month, etc.
14.Payroll taxes Self-explanatory (laws are country specific).
15.Rent Non-factory real-estate expenses—rent or mortgage
payments.
16.Repairs & maintenance Cleaning services, repairs to property.
17.Equipment rental Leased equipment for nonproduction usage.
18.Furniture and equipment purchase Self-explanatory.
19.Vehicle(s) Purchase (moped, truck, car, etc.), mileage.
20.Vehicle maintenance & repairs Service and repairs.
21.Depreciation Value of fixed assets (depreciation).
22.Insurance Liability, vehicle, theft, fire, equipment, etc.
23.Interest expense Interest owed on borrowed capital.
24.Utilities Water, heat, power, light not used in production.
25.Telephone Self-explanatory.
26.Office supplies Usual business supplies (pens, staplers, paper,
white boards, etc.) as opposed to production inputs.
27.Dues, subscriptions, licenses Membership dues for affiliations or trade associations;
fees for operating/product licenses, trademarks, or
patents.
28.Training materials + services Supplies and materials; contracted technical assistance.
29.Postage and freight Self-explanatory.
30.Marketing and promotion Advertising, design, premiums, samples, displays,etc.
31.Sales commission Self-explanatory plus bonuses.
32.Legal and professional services Any nontraining outside services (attorneys, consult-
ants, auditors, accountants, technical specialists, etc.).
33.Travel Self-explanatory.
34.Miscellaneous Self-explanatory.
35.Other Additional category pertinent to enterprise, but not
captured in itemized list.
36.(sum of 12 through 35)
Operating Expenses before Taxes
All operating expenses.
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37.(11 minus 36) Net profit/loss before tax
38.Provision for taxes Tax on profits. Country-specific requirements often
related to legal status of enterprise (see chapter 9).
39.(37 minus 38) NET PROFIT/LOSS The “bottom line”—how much the
(from operations) social enterprise is either earning or losing from
operations.
40.SUBSIDY Income from government and foundation grants or
private funds.
(39 plus 40) TOTAL NET PROFIT/LOSS
(after subsidy)
PO business advisor, business manager, qualified staff accountants and the
financial manager or director
Preparing the Profit and Loss Statement
? If yours is an existing social enterprise you may have already prepared profit
and loss statements from past years of operation. If not, use this exercise to help
you prepare both historic (previous year) and pro forma profit and loss state-
ments.
? Use the explanation of the profit and loss statement in exhibit 8R for reference
and use additional financial and accounting resources as desired.
? Prepare a projected (pro forma) profit and loss statement for each year covered
in your business plan, and include empty columns to reconcile profit and loss,
income and expenses. Copy our example or use the Profit and Loss Statement
Worksheet, which can be found in The Workbook.
? Be sure to list the assumptions behind your profit and loss projections.
The proforma profit and loss statements are included in the Business Plan
appendix.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
EXHIBIT 8S: PRO FORMA PROFIT AND LOSS STATEMENT
TARTINA ENTERPRISE Projections ACTUALS
Profit and Loss Statement (in $)
Year 1 Q1 Q2 Q3 Q4 Y-T-D
INCOME
Gross Sales 58,271
Less Cost of Goods Sold 43,349
Gross Profit $14,922
OPERATING EXPENSES
Salaries 77,117
Fringe Benefits (+ Taxes) 7,217
Total Personnel $84,334
Rent 3,939
Assets $5,000 or Less 17,570
Building Maintenance 1,970
Vehicle Maintenance 394
Fuel 1,182
Travel 788
Office Supplies 788
Training Materials 1,182
Consultants in Production Technique 5,666
Marketing Consultants /Sales Agent 13,850
Miscellaneous Expenses 1,450
Equipment Maintenance 120
Insecticide 551
Materials for Raw Materials Production 1,500
& Quality Improvement Study
Research & Development 1,300
Promotion & Advertising 10,145
Operating Expenses before Taxes $146,729
Net Profit/Loss (before tax)
1
($131,807)
Subsidy $131,807
Net Profit/Loss (after subsidy) 0
Results: Comparing the projected profit and loss figures with TARTINA’s financial
objectives for profit/loss (exhibit 8B), it is easy to see their relationship. The financial
objectives projected total expenses of $150,000 and net loss of $135,000, whereas
the profit and loss statement projected expenses are very close at $146,729 with
losses of $131,807. Similarly, projected profit and loss revenues of $14,922 are just
shy of financial objectives set at $15,000.
Note that the figure for total operating expenses of $146,729 is also the same as total
fixed costs used in the break-even analysis in chapter 5.
TARTINA, under its current legal structure as an NGO business, is not required to pay
taxes at this point. It receives a subsidy to offset its net loss of $131,807.
Managing the Double Bottom Line:
296
1
TARTINA is a registered nonprofit organization and therefore does not pay tax.
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Adjusting the Profit and Loss Statement to Include
Social Costs
11
Rationale
Once you have determined which social costs are significant to your enterprise and
developed a methodology to calculate them, both bottom lines should be quantified
in the profit and loss statement to capture the productivity of the business and the
social costs of working with a particular disadvantaged target population. The first,
“net income before social costs” reflects true business costs and provides a picture
of how the social enterprise performs as a business. The second, “net income after
social costs” indicates the program costs of providing assistance to the target popula-
tion and how well the enterprise is meeting its social mission.
12
(exhibit 8T Double
Bottom Line Profit and Loss Statement.)
The objective of this exercise is to delineate existing social costs that the busi-
ness is currently subsidizing in its operating expenses using figures derived from
methodologies developed in the exercise Quantifying Social Costs. Conducting a
social cost assessment should not be viewed by managers as a way to carry ineffi-
ciencies in the business operations not stemming from the social mission, or “bury”
costs since the total costs are still part of the overall performance of the enterprise.
13
Double bottom line profit and loss statements are essential tools for internal man-
agement decision-making that may or may not be required by donors and investors.
Business manager, accountants and finance staff, PO business
advisor
? Return to the social costs figures you calculated in the exercise Quantifying
Social Costs.
? Sum the total amount of social costs in dollar values or local currency.
International donors of development programs usually ask for financial state-
ments in dollar terms.
? Be careful not to double count. Subtract each social cost from the expense line
item as it appears in the profit and loss statement. For example, if 30% of the
enterprise manager’s overall salary and benefits is dedicated to “extra” nonbusi-
ness activities arising from the disadvantaged labor, be sure to deduct this
amount from the line item total for the manager’s salary and benefits in the
operations expenses portion of the profit and loss statement.
? Sum total operating costs less total social costs in line item “net profit/loss before
social costs.” This is your first bottom line, denoting business performance.
? Then record total social costs in following line item “less social costs”
? Subtract total social costs to derive “net profit/loss after social costs.” This is your
second bottom line, denoting overall social enterprise performance including
costs incurred to the carry out social mission.
? An example for TARTINA is included in exhibit 8T.
11
Ibid. This concept was originally introduced in New Social Entrepreneurs: The Success, Challenge
and Lessons of Nonprofit Enterprise Creation in its chapter on “True Cost Accounting,” Jed Emerson
and Fay Twersky, 1996, Roberts Foundation, SF, CA.
12
Investor Perspectives, “Quantifying Social Costs: A Case Example from Rubicon's Buildings and
Grounds Business,” Kim Starkey, 2000, Roberts Foundation, SF, CA.
13
Ibid.
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Managing the Double Bottom Line:
298
EXHIBIT 8T: DOUBLE BOTTOM LINE PROFIT AND LOSS STATEMENT
TARTINA DOUBLE BOTTOM LINE 5/99-4/00
Profit and Loss Statement
Total Operating Expenses $146,729
Total Gross Revenue $14,922
NET PROFIT/LOSS BEFORE SOCIAL COSTS ($82,395) = Financial Bottom Line
Less Social Costs ($49,412) = Social Bottom Line
NET PROFIT/LOSS AFTER SOCIAL COSTS ($131,807) = Double Bottom Line
TARTINA managers concluded that it costs an additional $49,412 in extra supervi-
sion, capacity-building, piece rate premium and loss in productivity due to ineffi-
ciency and illness to run TARTINA as a social enterprise rather than a for-profit busi-
ness in year 1. TARTINA’s operating deficit of $82,395 is considered normal for a
similar production business in its first year.
Balance Sheet
The balance sheet is a snapshot of a social enterprise’s financial position—what it
owns (assets) and what it owes (liabilities and net worth)—at a given point in time.
The liabilities and net worth on the balance sheet represent the business’ sources of
funds, whereas assets represent its use of funds. Liabilities and net worth derive
from creditors and donors (or investors) who have provided cash or its equivalent
to the enterprise or from earnings generated by the enterprise. As a source of funds,
they enable the enterprise to continue in business or expand operations. Assets
include all holdings of value that are owned or due to the business. Assets are either
purchased with assets on hand, such as cash, or financed by liabilities (debt) or net
worth (contributions or profit). Therefore, values represented in these categories
reveal how efficiently an enterprise manages resources and finances its operations
and, finally, the extent to which it is viable.
As the name implies, a balance sheet must balance. The relationship between
the three sections of a balance sheet are shown in the following equations:
Assets = liabilities + net worth
Assets – liabilities = net worth
Rationale:
Sound financial management of an enterprise involves matching the sources and
uses of cash so that obligations come due as assets mature into cash. The balance
sheet is a financial tool that monitors the enterprise’s ability to collect revenues and
manage inventory as well as assesses its ability to satisfy creditors, donors, and
investors. Although individual line items and category values change on a daily
basis, reflecting financial transactions and business activities, the balance captures
the financial picture at one moment in time, usually at the end of an accounting
period (exhibit 8V). Analyzing the changes in the balance sheet over several report-
ing periods informs enterprise trends.
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EXHIBIT 8U: BALANCE SHEET EXPLANATION
ASSETS Assets are shown at net book value rather than appreciated value.
Current Assets Assets that mature in less than one year.
Cash Cash on hand: checking, money-market and short-term savings
accounts.
Accounts receivable Money owed from customers who receive goods or services in
advance of payment. Inventory is sold and shipped, an invoice is sent
to the customer, and later cash is collected.
Inventory Finished goods for sale, work in progress, raw materials on hand
Prepaid expenses Goods, benefits, or services an enterprise buys or rents in advance of
use—i.e., office supplies and insurance premiums.
Other current assets Interest- or dividend-yielding holdings expected to be converted into
cash within a year—i.e., marketable securities, time deposits, etc.
Total Current Assets Self-explanatory.
Noncurrent Assets Assets that will not mature into cash within the next 12 months.
Fixed Assets Resources an enterprise owns or acquires for use in operations; not
intended for resale. Fixed assets represent the use of cash to pur-
chase physical assets whose life exceeds one year.
Land Listed at original purchase price with no allowance for appreciation or
depreciation.
Building Property owned and used by the enterprise.
Machinery & equipment Used by the enterprise; listed at original purchase price.
Furniture & fixtures Furniture used by the enterprise or permanent installations, remodel
ing, or refurbishing of the premises.
Vehicles Used by the business and listed at their original purchase price.
Less accumulated Total assets (except land) lose their value through age and wear and
depreciation tear. The enterprise claims this loss of value as an expense of doing
business and deducts it from total assets. Accumulated depreciation
is the cumulative sum of all the years’ worth of wearing out that have
occurred in the asset.
Net Fixed Assets Gross fixed assets (purchase price) – accumulated depreciation (not
including land) = net fixed assets (also known as book value).
Other assets Enterprise resources not listed in above asset categories—i.e., scrap
value of obsolete equipment or intangible assets such as trademarks,
patents, goodwill.
TOTAL ASSETS Net fixed assets + other assets (scrap value) – amortization (for
intangible assets) = TOTAL ASSETS.
LIABILITIES All monetary obligations of an enterprise and all claims creditors have
on its assets.
Current Liabilities All debts and obligations payable within one year.
Accounts payable Amount owed to suppliers.
Short-term notes Balance of principal on loans with terms of one year or less.
Interest payable Balance of interest due at period end but not yet paid on long-term
and short-term borrowing.
Accrued payroll Salaries and wages currently owed.
Taxes payable Amounts owed for real estate, Social Security, and income tax.
Total Current Liabilities Self-explanatory.
Long-Term Liabilities Debts such as mortgage and loan principal due in more than one year.
Book value—the value of an
asset whose historical cost has
been adjusted for depreciation
or amortization. Book value is
also referred to as net fixed
asset value and is reflected in
the balance sheet of an enter-
prise.
Amortization—costs of an
intangible asset are allocat-
ed over its useful life.
Goodwill—Excess value of asset
over market value (or book
value). Goodwill appears in finan-
cial statements when a business
is valued above it assets shown
on its books.
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Managing the Double Bottom Line:
300
Mortgage payable Balance owed on property.
Long-term notes Outstanding balance on loans payable in more than one year.
Total Long-Term Liabilities
TOTAL LIABILITIES Total current liabilities + total long-term liabilities.
NET WORTH Also called owners’ equity, net worth is equal to assets less liabilities.
It represents the value of the enterprise. Net worth includes subsidies,
investors’ or owners’ contributions, retained earnings, and revenue
surpluses.
14
Donor contributions Donor grants or private PO nonprofit partner funds used to subsidize
operations.
Owner contributions PO partner or individual resources allocated as an ownership stake.
Reserves for bad debt Provision against loss for uncollectible loans.
Shareholder equity Value of investor stakes for social enterprises that have formalized
into business entities.
Retained earnings Amount of income (or loss ) accumulated since the beginning of the
(Losses) prior years enterprise
15
and reinvested (for profit).
Net surplus/(deficit) Amount of income (or loss ) generated in the current year.
16
TOTAL NET WORTH Total value of the enterprise.
PO business advisor, business manager, qualified staff accountants and a
financial manager or director
Preparing a Social Enterprise Balance Sheet
? If yours is an existing social enterprise you may have already prepared balance
sheets from past years of operation. If not, use this exercise to help you prepare
both historic (previous year) and pro forma balance sheets.
? Use the balance sheet explanations in exhibit 8U for reference and additional
financial and accounting resources as required.
? Prepare a projected (pro forma) balance sheet for each year covered by the busi-
ness plan, and include empty columns to reconcile actual balance sheet assets,
liabilities, and net worth. Copy our example or use a the Balance Sheet
Worksheet, which can be found in The Workbook.
? Be sure to list the assumptions behind your balance sheet projections.
The historic and pro forma balance sheets are included in the Business
Plan appendix.
14
Adapted from SEEP Network Financial Servicew Working Group, 1995. Financial Ratio Analysis
of Microfinancial Institutions. New York: Pact Publications.
15
Ibid.
16
Ibid.
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EXHIBIT 8V: PRO FORMA BALANCE SHEET
TARTINA ENTERPRISE Projections
Projected Balance Sheet Year 1 Q1 Q2 Q3 Q4 Y-T-D
ASSETS
Current Assets
Cash on Hand 17,482
Savings Account
Accounts Receivable 15,742
Inventory
Raw Materials 1,950
Finished Products 9,276
Total Current Assets 44,450
Fixed Assets
Property, Plant, Equipment 33,524
Office Equipment 3,351
Land and Buildings 15,500
Vehicles 34,000
Less Accumulated Depreciation (526)
Total Fixed Assets 85,849
TOTAL ASSETS $130,299
LIABILITIES
Current Liabilities
Accounts Payable 15,114
Accrued Payroll 6,487
Short-Term Notes Payable 11,738
Noncurrent Liabilities 0
Long-Term Notes Payable 0
TOTAL LIABILITIES 33,339
NET WORTH
Reserves for Bad Debts 25,000
Donor Contributions 203,767
Retained Earnings (Losses) 0
Net Surplus/Loss (131,807)
TOTAL NET WORTH 96,960
TOTAL LIABILITIES $130,299
& NET WORTH
Explanation: TARTINA’s projections assume a net loss of $131,807 in its first year of
operations. Donor subsidies of $203,000 from ASSIST will be used to cover start-up
costs for fixed assets as well as bridge TARTINA’s operating deficit. TARTINA’s current
value is $90,299, roughly two-thirds of which is represented by fixed assets and the
other one-third by current assets, cash, and inventory. In this example it is easy to see
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Managing the Double Bottom Line:
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Cash Flow
Cash is money in the bank, plain and simple. It is not merchandise, inventory,
money owed to you from credit sales (accounts receivable), and it is certainly not
property or equipment. Although these assets may eventually be converted into
cash, they don’t take the place of cash—meaning that you can’t pay your rent with
a sewing machine or moped. Invariably social entrepreneurs and business people
alike must have cash to pay their suppliers, utilities, payroll, etc. Balancing expenses
against revenues is challenging and requires careful management as cash enters and
leaves the business.
Too often, financially viable businesses fail because of cash flow problems.
Managers are unable to manage receipts and payments of cash within a business,
causing critical cash shortages. In most enterprises, the inflow of cash revenue from
product or service sales lags behind the outflow of expenses needed to produce
those goods or run the business. A cash flow statement is a financial statement that
reconciles accrual revenue and expenses in the profit and loss statement to net cash
collected or paid. It tells social enterprise managers where the money went and
where it came from and gives a picture of the cash position—or amount of money
in the bank. Of course cash on hand does not equal profit if expenses are outstand-
ing but not yet paid. Accrual accounting was developed because profit is considered
a better measure of business performance than net cash received; nonetheless, pro-
jecting and recording cash flows is an essential part of good business operations.
A cash flow projection is a financial tool used for forecasting potential cash
shortages so that the social enterprise can make plans to address these shortages.
Likewise, it also indicates the happy case of excess cash, when the enterprise may
choose to invest this cash instead of leaving it idle. For a new or growing business,
the cash flow projection can mean the difference between success and failure. For
an ongoing business, it can mean the difference between growth and stagnation.
Social enterprise managers need to be diligent about projecting cash flow regular-
ly—at least monthly.
The cash flow projection enables you to predict and plan cash outlays in order
to:
? Ensure that you have enough cash to purchase sufficient inventory or raw materi-
als to weather seasonal cycles;
? Plan your purchases of new equipment or building;
? Benefit from special offers and discounts that require advance or bulk purchase;
? Arrange for financing and identify the type of financing and duration—i.e. bank
credit line to relieve short-term overruns and shortages; working capital to absorb
ebbs and flows of the business cycle, or capital asset or debt financing for major
purchase of equipment, land or facilities); and
? Establish a history of credit worthiness for future lenders and investors.
Savvy social enterprise managers develop both short-term cash flow projections
to help them manage daily cash and long-term cash flow projections to help them
develop the necessary financing strategies to meet their business needs.
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EXHIBIT 8W: USES FOR CASH FLOW PROJECTIONS
Time Period Use
Short term (monthly) Determine immediate and short-term cash balance.
Estimate working capital requirements to finance daily operations.
Plan current asset investments such as savings deposits, money market
accounts and CDs.
Annual Determine cash needs for business operations during the year.
Identify sources of cash, including revenue and financing.
Ascertain determine seasonal fluctuations and related impact on cash
flow.
Estimate annual financing needs and the ability to make repayments on
borrowed money.
Three to five years Augment strategic and business planning.
Determine long-term equity needs, including raising equity capital.
Estimate long-term borrowing requirements for capital investments relat-
ing to growth and capital asset purchase.
Preparing the Cash Flow Projections
Rationale
Liquidity can be a killer for a social enterprise—or any business. A lack of profits will
not put you out of business as fast as a lack of cash to pay your creditors. The irony
is that profits can be negative when cash flow is positive and vice versa. Cash, how-
ever, is what you must have to keep your social enterprise running while you are try-
ing to make a profit. This requires careful cash management. At times when no
money is in the till, the business needs an extra boost of cash. Or when your enter-
prise is flush, idle cash should be invested to make more money. Projecting cash
flow, somewhere between balancing a checkbook and preparing a budget, is an
excellent way to forecast cash shortages and surpluses and plan for them.
TARTINA found that commercial customers expected to either purchase prod-
ucts on credit or sell them on commission. Both instances demanded that TARTINA
finance costs for as much as a few months before receiving payment from its super-
market customers. TARTINA management used cash flow projections to estimate
when these credit sales would be converted into cash. In addition, the availability of
peanuts and fruits for TARTINA products is seasonal. TARTINA buys its raw materials
in bulk during growing seasons in January, March and December then stores them in
silos for processing throughout the year. These bulk purchases require large outlays
of cash up front, tying up this money until goods are finished and sold. Preparing a
cash flow projection helped TARTINA determine its cash needs to purchase raw
materials and secure sources of credit to finance them.
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Managing the Double Bottom Line:
304
The template for a cash flow projection looks similar to a profit and loss state-
ment, yet certain changes can be captured in a cash flow that are not reflected well
in a profit and loss statement, such as:
?
Large inventory purchases;
?An increase in accounts receivable;
?A decrease in credit by suppliers;
?Liquidation of obsolete inventory;
?Grant closure or loan recall;
?Receipt of large payment of debt.
EXHIBIT: 8X: CASH FLOW PROJECTION EXPLAINED
CASH FLOWS IN MONTHLY RECEIPTS FROM:
1. Beginning Cash Balance Cash on hand at the beginning of the month
Cash receipts:
2. Cash from sales All cash from sales only; omit credit sales receipts
3. Accounts receivable & collected Cash collected for credit sales
4. Subsidy and loans injections from grants, PO subsidies, lenders, etc.
5. Investment and interest Cash earned on investment
6. (2+3+4+5) Total Cash In Total amount of cash received in month
7. (1+6) Total Cash Available Total cash on hand
CASH FLOWS OUT MONTHLY PAYMENTS FOR:
8. Purchases Raw materials, production inputs, or merchandise for
resale
9. Salaries Permanent management and staff
10. Wages Base pay plus overtime and bonuses for labor
11. Payroll expenses Vacation and leave, health insurance, 13th month,
employment taxes, etc.
12. Sales commission Commissions and bonuses awarded to sales staff
13. Sales tax Tax paid on sales, exercise tax, etc.
14. Rent Real estate rent only (factory, storage, and administra-
tion)
15. Repairs & maintenance Property and facilities (factory and administration)
16. Equipment rental Equipment leasing (for production and administration)
17. Furniture and equipment purchase Furniture leasing (for production and administration)
18. Vehicle(s) Purchase of vehicle (moped, truck, car, etc.) + mileage
19. Vehicle maintenance & repairs Service and repair vehicles.
20. Insurance Liability, vehicle, theft, fire, equipment, etc. (coverage
on factory and administration)
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21. Interest expense Interest payments on borrowed capital (loans)
22. Utilities Water, heat, power, light used in production and admin-
istration
23. Telephone Phone, fax, electronic communications
24. Office supplies Business supplies (pens, staplers, paper, white boards,
etc.) as opposed to production inputs
25. Dues, subscriptions, licenses Membership dues for affiliations or trade associations;
fees for operating/product licenses, trademarks, or
patents
26. Training materials + services Supplies and materials; contracted technical assistance
27. Postage and freight Self-explanatory
28. Marketing and promotion Advertising, design, premiums, samples, displays,
trade fairs fees, brochures, etc.
29. Legal and professional services Any nontraining outside services (attorneys, consult-
ants, auditors, accountants, technical specialists, etc.)
30. Travel Business travel
31. Miscellaneous Additional category pertinent to enterprise, but not cap-
tured in itemized list
32. Other
33. (Add 8 through 32) Cash Out Total Cash Out
34. Loan principal Amount of principal payments on all loans
35. Owners withdrawal Payments made in lieu of salary to cover owner’s
expenses (generally only in sole proprietorships and
partnerships) include insurance
36. (33 + 34 + 35) Cash Paid Total Cash Paid Out
37. (7 - 36) Total cash at the end of the month
ENDING CASH BALANCE
PO business advisor, business manager, accounting and finance staff
Cash Flow Projections
The first part of the cash flow projection forecasts cash coming into the enterprise;
the second part projects cash going out. When used for internal management pur-
poses cash flows should be projected on a monthly basis; however, as a financial
statement for donor-investors cash flows are generally consolidated and projected
by quarter or over a year.
? Locate the blank table Cash Flow Projections Worksheet provided in The
Workbook, or create your own template.
? Add line items where necessary to accurately reflect the cash flows in your busi-
ness. The level of detail needed in your cash flow projection will vary depending
on the complexity of your business. In our example TARTINA combines the rent,
utility, equipment leasing, repairs and insurance expenses for both its production
and administrative facilities in its cash flow projection.
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Managing the Double Bottom Line:
306
? Always start with “Beginning Balance” (the first line item); this is your cash on
hand at the start of the month.
? Fill in the worksheet using historic records (if you have been in business for a
while), market research and price quotes to project monthly income and
expenses.
? Use the cash flow projection explanation in exhibit 8X for reference and supple-
mentary financial and accounting resources if necessary.
? Follow directions, adding and subtracting columns to derive ending cash bal-
ance. Remember this figure is the beginning balance for the following
month.
? Prepare quarterly cash flow projections (four months or one worksheet) for one
year.
? Be sure to list the assumptions behind your cash flow projections.
? Eventually you should set up your cash flow projections using a PC spreadsheet.
After the initial setup, this will make the process much faster. You can enter for-
mulas for the subtotals and totals to eliminate addition/subtraction errors.
? Similar to methods used for preparing other financial tools, this one can be
applied first to projectingyour cash flow, which is then reconciled against actual
cash expenses in a cash flow statement at the end of the period.
The cash flow projections are included in the appendix section of your
Business Plan.
Explanation of TARTINA example: On the following page is a cash flow statement
for a 12-month period for the TARTINA social enterprise. This particular cash flow
statement highlights two other benefits of this financial tool. First, it highlights the
variability of TARTINA’s cash needs due to the seasonality of the business. Second,
because TARTINA planned its cash flow requirements in advance, it was able to deter-
mine when it could outlay cash for bulk purchases of key production materials, such
as peanuts, fruits, containers and labels. This translated into cost savings for TARTINA.
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A Business Planning Reference Guide for Social Enterprises
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Production agent with four client-producers
TARTINA display in
supermarket
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TARTINA CASH FLOW STATEMENT
APRIL MAY JUNE JULY AUGUST SEPT OCT
1999 1999 1999 1999 1999 1999 1999
REVENUE
OPENING BALANCE 43,765 58,530 54,767 10,365 42,869 16,438
CASH SALES 27,200 35,600 22,325 26,875 28,000 38,475 38,800
ACCOUNTS RECEIVABLE 9,067 20,933 28,375 28,267 25,733 31,117 35,092
CASH NOT AVAILABLE UNTIL END OF MONTH (36,267) (20,267) 5,833 (4,442) 1,408 (15,858) (4,300)
TOTAL REVENUE IN LOCAL CRRCY - 80,032 115,063 105,467 65,507 96,602 86,030
TOTAL REVENUE IN U.S.$ - $ 4,850 $ 6,974 $ 6,392 $ 3,970 $ 5,855 $ 5,214 $
SUBSIDY 11,279 $ 18,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $
TOTAL FUNDS AVAILABLE BEGINNING OF MTH 11,279 $ 23,559 $ 15,683 $ 15,101 $ 12,679 $ 14,564 $ 13,923 $
EXPENSES
PRODUCTION COSTS
Mamba (Peanut) : Peanuts 36,605 49,267
Spices 660 660 587 587 587 697 697
Labor 5,280 5,280 4,692 4,692 4,692 5,572 5,572
Other 1,452 1,452 1,290 1,290 1,290 1,532 1,532
Confitures (Jam): Chadeque & Spices 1,380 1,380
Sugar 2,820 2,820
Labor 1,020 1,020
Other 840 840
Grenadia & Lemon 1,440 2,520 3,888 4,248
Sugar 1,880 3,290 5,076 5,546
Labor 520 910 1,404 1,534
Other 200 350 540 590
Apricot & Lemon 1,600 1,600 1,600
Sugar 1,880 1,880 1,880
Labor 360 360 360
Other 200 200 200
Gelee (Jelly ) : Sour Fruit & Lemon 360 360 360
Sugar 2,520 2,520 2,520
Labor 200 200 200
Other 600 600 600
Karapinia : Peanuts 9,880 10,660
Spices 280 280 200 200 220 200 200
Sugar 3,360 3,360 2,400 2,400 2,640 2,400 2,400
Labor 560 560 400 400 440 400 400
Other 840 840 600 600 660 600 600
Containers : Mamba (Peanut Butter) 33,000 27,390
Confitures (Jam) 64,890 64,890
Gelee (Jelly) 13,440
Karapinia 2,400 2,400 2,400
Labels : Mamba (Peanut Butter) 10,000 8,300
Confitures (Jam) 6,300 6,300
Gelee (Jelly) 1,200
Karapinia 800 800 800
TOTAL PRODUCTION COSTS IN LCL CRRCY 190,947 20,152 17,889 85,056 17,599 135,249 32,579
TOTAL PRODUCTION COSTS IN US$ 11,573 $ 1,221 $ 1,084 $ 5,155 $ 1,067 $ 8,197 $ 1,974 $
M.E. Profit (6.70% of Production Costs)
( (3.165% of Sales) 775 $ 82 $ 73 $ 345 $ 71 $ 549 $ 132 $
TOTAL PROD. COSTS & M.E. PROFITIN US CRRCY 12,348 $ 1,303 $ 1,157 $ 5,500 $ 1,138 $ 8,746 $ 2,107 $
APV OPERATIONAL COSTS IN U.S.$
AID Funded Costs 11,279 $ 18,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $ 8,709 $
APV Fees (21.5818% of Production Costs)
( (10.196% of Sales) 2,498 $ 264 $ 234 $ 1,113 $ 230 $
TOTAL APV OPERATIONAL COSTS IN U.S.$ 11,279 18,709 11,207 8,973 8,943 9,822 8,939
TOTAL EXPENSES 23,627 $ 20,012 $ 12,363 $ 14,473 $ 10,081 $ 18,567 $ 11,046 $
END OF MONTH SURPLUS/DFICIT IN U.S.$ (12,348) 3,547 3,319 628 2,598 (4,004) 2,877
CREDIT 15,000 $ 5,000 $
END OF MONTH NET BALANCE IN U.S.$ 2,652 3,547 3,319 628 2,598 996 2,877
END OF MONTH NET BALANCE IN LCL CRRCY 43,765 58,530 54,767 10,365 42,869 16,438 47,471
Managing the Double Bottom Line:
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NOV DEC JAN FEB MARCH APRIL TOTAL MAY JUNE GRAND
1999 1999 2000 2000 2000 2000 2000 2000 TOTAL
47,471 22,787 24,408 13,496 54,504 98,179 24,020 156,669
39,925 40,600 40,600 42,350 52,900 52,900 486,550 486,550
39,067 39,775 40,375 41,183 45,283 49,383 433,650 35,267 17,633 486,550
(5,100) (1,383) (600) (2,558) (14,650) (4,100) (94,917) 102,283 7,366
121,363 101,779 104,783 94,471 138,038 196,363 825,283 161,570 174,302 980,466
7,355 $ 6,168 $ 6,351 $ 5,725 $ 8,366 $ 11,901 $ 50,017 $ 9,792 $ 10,564 $ 59,422 $
8,709 $ 14,723 $ 8,709 $ 8,709 $ 13,715 $ 8,709 $ 136,807 $ 136,807 $
16,064 $ 20,891 $ 15,060 $ 14,434 $ 22,081 $ 20,610 $ 186,824 $ 9,792 $ 10,564 $ 196,229 $
29,933 29,933 29,942 175,680 175,680
697 899 899 899 989 297 9,150 9,150
5,572 7,188 7,188 7,188 7,908 2,376 73,200 73,200
1,532 1,977 1,977 1,977 2,175 653 20,130 20,130
1,380 1,380 2,300 2,300 1,380 11,500 11,500
2,820 2,820 4,700 4,700 2,820 23,500 23,500
1,020 1,020 1,700 1,700 1,020 8,500 8,500
840 840 1,400 1,400 840 7,000 7,000
3,888 3,528 3,528 23,040 23,040
5,076 4,606 4,606 30,080 30,080
1,404 1,274 1,274 8,320 8,320
540 490 490 3,200 3,200
4,800 4,800
5,640 5,640
1,080 1,080
600 600
1,080 1,080
7,560 7,560
600 600
1,800 1,800
6,370 6,370 6,240 39,520 39,520
220 200 200 220 310 310 3,040 3,040
2,640 2,400 2,400 2,640 3,720 3,720 36,480 36,480
440 400 400 440 620 620 6,080 6,080
660 600 600 660 930 930 9,120 9,120
60,390 60,390
129,780 129,780
13,440 13,440
1,920 9,120 9,120
18,300 18,300
12,600 12,600
1,200 1,200
640 3,040 3,040
65,032 65,924 72,404 24,123 22,711 8,906 758,570 - - 758,570
3,941 $ 3,995 $ 4,388 $ 1,462 $ 1,376 $ 540 $ 45,974 $ - $ - $ 45,974 $
264 $ 268 $ 294 $ 98 $ 92 $ 36 $ 3,079 $ - $ - $ 3,079 $
4,205 $ 4,263 $ 4,682 $ 1,560 $ 1,469 $ 576 $ 49,053 $ - $ - $ 49,053 $
-
-
8,709 $ 14,723 $ 8,709 $ 8,709 $ 13,715 $ 8,709 $ 136,807 $ 136,807 $
1,769 $ 426 $ 851 $ 862 $ 947 $ 316 $ 9,508 297 $ 116 $ 9,922
10,478 15,149 9,560 9,571 14,662 9,025 146,315 297 116 146,729
14,683 $ 19,412 $ 14,242 $ 11,131 $ 16,131 $ 9,600 $ 195,368 $ 297 $ 116 $ 195,782 $
-
1,381 1,479 818 3,303 5,950 11,009 (8,544) 9,495 10,447 447
(10,000) $ 10,000 $ (10,000) $ - $
1,381 1,479 818 3,303 5,950 1,009 1,456 9,495 447 447
22,787 24,408 13,496 54,504 98,179 16,654 24,020 156,669 7,380 7,380
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Managing the Double Bottom Line:
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Preparing the Cash Flow Statement
Rationale
Cash flow statements made a relatively late appearance in the world of required
financial statements. The widespread recognition that cash flow problems often
result in the premature death of a business is the reason why more and more
lenders, donors and stakeholders are requiring social enterprises and business to
remit cash flow statements along with balance sheets and profit and loss statements.
Cash flow statements classify cash receipts and payments into three categories:
operating, investing and financing.
?Operating cash flow—is sometimes called working capital; it flows from cash
internally generated from operations such as sales—and to expenses that sustain
operations such as salaries, rent materials and supplies.
?Investing cash flow—flows from internally generated nonoperating activities,
such as sales of long-term investments—and to investments such as purchase of
property or equipment.
?Financing cash flow—flows from and to external sources, such as donors,
lenders, investors, and shareholders in the form of a disbursement or payment of
a grant or loan.
EXHIBIT 8Y: CLASSIFICATION OF CASH INFLOWS AND OUTFLOWS
CASH INFLOWS ACTIVITY CASH OUTFLOWS
Marketable securities—short-
term investments with well-
defined dollar value such as
bonds, treasury bills, or stocks
that are easily convertible into
cash.
Equity—monetary value that
represents an ownership stake or
net worth in an enterprise.
Issuing stock or selling equity
stakes raises capital for a busi-
ness. For example if a PO takes
equity in its social enterprise it
purchased partial ownership of
the enterprise. In publicly traded
companies, issuance of stock
signifies selling very small pieces
of the company.
From sales of products and
services
From interest or dividends on
loans or investments
From sale of plant, property,
equipment or other capital asset
From sale of long- or short-
term marketable securities
From collection of loans
From grant or subsidy
From borrowed capital (loan)
From the sale of stock/equity
OPERATING
INVESTING
FINANCING
To employee salaries and wages
To suppliers for inventory
To creditors for interest
To other operating expenses (rent,
utilities, equipment, etc.)
To purchase new plant, property,
equipment or capital asset
To purchase long or short term
marketable securities
To make loans
To repay loans
To pay dividends
To purchase stock
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A Business Planning Reference Guide for Social Enterprises
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There are two methods for preparing a cash flow statement. The first, the direct
method, involves making adjustments to convert income and expense items from
accrual to cash basis. The indirect method starts with net income (or loss) before
non-cash expenses, then makes adjustments for inflows and outflows of cash that
were not included in the net income/loss calculation. This method is simpler
because 90% of the cash flow calculation is completed in the net income calcula-
tion, which is in fact an estimate of your cash flow. This book teaches the indirect
method for preparing a cash flow statement; if you are interested in learning the
direct method ask your accountant, or check other accounting resources.
Exhibit 8Z is a conceptual example of a consolidated cash flow statement using
the indirect method. It illustrates the three basic steps required to complete a cash
flow statement: 1) Begin with net income; 2) add in non-cash expenses (this is
because your net income can be reduced by expenses such as depreciation that
were never disbursed); and 3) adjust for inflows and outflows of cash for investing
and financing activities not recorded in the net income calculation (but reflected in
the balance sheet).
EXHIBIT 8Z: EXAMPLE OF INDIRECT CASH FLOW METHOD
NET INCOME BEFORE NON-CASH EXPENSES
Begin with Net Income (loss) $800,000
Add in Depreciation 100,000
$900,000
ADJUSTMENTS TO CASH FROM OPERATING ACTIVITIES
Flows in (add) Decrease in accounts payable $200,000
Flows out (subtract) Increase in accounts receivable (300,000)
Increase in inventory (150,000)
Increase operating expenses (250,000)
Net Cash from Operating activities $400,000
ADJUSTMENT TO CASH FLOW FROM INVESTING ACTIVITIES
Flows in (add) Decrease in notes receivable $100,000
Flows out (subtract) Purchases: equipment, land, plant (250,000)
ADJUSTMENT TO CASH FLOW FROM FINANCING ACTIVITIES
Flows in (add) Grants and subsidy received 200,000
Flows out (subtract) Repayment on loan (long-term debt) (100,000)
Net Cash provided (used) $350,000
Cash Flow Statement
? Locate the blank Cash Flow Statement in worksheet in The Workbook, or cre-
ate your own.
? !!! It is important to note that the cash flow statement begins with net
income as if all expenses were paid in cash and all income was received in
cash. The formula then makes adjustments to reconcile net income to net cash
flow from operating, investing and financing activities.
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Managing the Double Bottom Line:
312
? Calculate net income before non-cash expenses.
? Add back non-cash expenses that did not result in inflows or outflows of cash.
Depreciation is the most common non-cash expense.
? Identity operating cash flows. Refer to exhibit 8Y: Classification of Cash Inflows
and Outflows for help identifying receipts and payments classified as operating
activities.
? Subtract out flows and add inflows. Be careful not to confuse inflows with out-
flows; receipts (added) and payments (subtracted). Follow the example in exhibit
8Z: Example of Indirect Cash Flow Method.
? Repeat steps for investing cash flow and financing cash flow.
The cash flow statement is included in the appendix section of your
Business Plan.
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A Business Planning Reference Guide for Social Enterprises
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the balance sheet equation at work.
Risk/Sensitivity Analysis and Contingency Planning
It is essential to know the financially vulnerable points of your social enterprise
(which are often in the categories where the largest expenditures occur). What hap-
pens to social enterprise profitability if raw material costs increase by 10 percent? If
inflation goes up to 15 percent or 20 percent? What if the sales forecast is realized
only at 80 percent? What happens to cash flow if a major piece of equipment conks
out before its projected usable life?
Projecting financial statements and budgets requires troubleshooting different
potential scenarios that can impact your bottom line. Playing out “what if” scenarios
enables you to see that financial impact and allows for contingency planning, so
that you are ready with plan B if necessary. Most changes in the operating environ-
ment do not drop from the sky but can be predicted to some degree if enterprise
managers continually appraise the strategic environment, and the enterprise’s
strengths and weaknesses (chapter 4). For example, TARTINA’s peanut butter and
jam production is mainly a variable-cost business highly susceptible to changes in
the price of raw materials. Bad weather affects crop yields, causing peanut prices to
go up. Seasonality is another factor; when peanuts or fruits are out of season, their
prices increase. Therefore, TARTINA management makes its financial projections at
different peanut costs, beginning as low as 10 gourdes per marmite and going up to
as much as 16 gourdes, to see how price fluctuations impact the bottom line and
think through decisions it will need to make based on different peanut price levels.
PO business advisor, business manager, financial manager, accountant, pro-
gram manager, other relevant functional managers
Preparing a Sensitivity Analysis and Contingency Plans
? Use a PC spreadsheet or other software program that generates your financial
statements. After the initial formulas are set up, computer programs make sensi-
tivity analysis much faster and more reliable.
? Isolate the largest expenditures of your social enterprise, and use these as the
variables in your sensitivity analysis to develop two or three “what if” scenarios
by changing variable values, and then review the impact of these changes on
financial statements.
? Now select key variables reflected in anticipated or likely changes to the operat-
ing environment based on your market research (i.e., inflation); plug these num-
bers into your sensitivity analysis and repeat the previous step.
? Analysis: What decisions will you make based on the sensitivity analysis results?
How will these decisions affect business operations? For example, will you have
to lay people off, enter a market more rapidly than expected, forsake a fixed-
asset purchase for several months, invest in new-product development to remain
competitive, take a short-term loan for operations to bridge income lags, etc.?
? Contingency plans explaining how management plans to respond to certain risk
exposure in a given industry, market, or strategic environment strengthen a busi-
ness plan by increasing the perception of the social enterprise management’s
credibility and capacity.
Contingency plans are included in Business Plan.
Contingency planning—Pre-
paring alternative strategies and
plans that correspond to a liable
risk occurring, which threatens
the plausibility of the chosen
plan.
Sensitivity analysis—a tool
used to project expense and
income levels by manipulating
cost and revenue variables in a
company, such as changes to
production level, costs of inputs
(fixed or variable), or prices.
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Managing the Double Bottom Line:
314
Resource Acquisition
Rationale:
Several elements shape the resource acquisition strategy: investor-donor landscape,
reputation of the parent organization, management competence and development
stage of the enterprise. Most donors and investors have specific criteria that must be
met by applicants in order to receive their money (exhibit 8DD: Donor-Investor
Criteria and Applications). Another important aspect is captured in the adage "peo-
ple give money to people"; leveraging the brand equity of the parent organization or
the expertise of your management team can attract investment funds. The maturity
of the enterprise, the strength of its financial position, and its ability to generate rev-
enue will also dictate the type of funds required and most suitable source for them
(see box: Enterprise Development Stage).
Just as savvy financial investing involves balancing risk by diversifying the invest-
ment portfolio, in resource acquisition it is unwise to depend solely on a single
donor or investor for all the financial needs of the enterprise. During startup it is dif-
ficult to find investors willing to assume risk for the novice. In this case, small, short-
term (i.e. one year or less) funding is cobbled together from various sources includ-
ing the parent organization and grants until the enterprise pilot can demonstrate
some success. Once a track record is establish and the enterprise program enters
growth stage, mezzanine level funds, which are easier to obtain, are sought. The
startup funding is usually awarded as an investor vote of confidence based on the
reputation of the parent organization. On the other hand, if the social enterprise is
mature, at or near break-even and has significant assets reflected in its balance
sheet, the enterprise may be able to leverage borrowed funds. As a social enterprise
develops it needs to professionalize and diversify its funding base from typical non-
profit donors to seeking money from quasi-formal and formal sources that will intro-
duce financial rigor and accountability. Once the enterprise has reached a certain
scale, working capital and fixed asset requirements exceed the reserves of the parent
organization and fall outside the parameters of traditional donor funding.
Commercial banks in general are dubious about lending to social enterprises, yet
venture philanthropists, development banks, community development funds, munic-
ipal governments and progressive donors are increasingly making soft loans to social
enterprises. These may be either interest-free loans or subsidized loans at below
market interest rates. Nonetheless, for bank borrowing low debt to equity ratios and
break-even are usually requirements. Banks also scrutinize cash flow statements to
ensure that the social enterprise has the capacity to repay the loan on a regular
schedule. Capital assets such as building and land can also serve as collateral to
secure a loan or line of credit at market rates. Traditional nonprofit donors on the
other hand, may cover capital assets for equipment, operating costs, parent organi-
zation overhead related to the enterprise program and technical assistance costs dur-
ing startup and growth stages. And though many will not directly support the operat-
ing costs of a business beyond early phases, they will often contribute to social costs,
either for capacity building or social programming. (exhibit 8I: Quantifying Social
Costs). Enterprise revenue is an internal fundraising mechanism and must be allocat-
ed to costs of business operations and social costs not covered by grants.
Understanding these intricacies in the funding landscape requires a considerable
amount of research.
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A Business Planning Reference Guide for Social Enterprises
315
Enterprise Development Stages
Like product life cycles (chapter 5), a social enterprise passes through discrete stages of develop-
ment from startup to profitable business. The stage of development is characterized by enterprise
sophistication and ability to cover its costs. Conversely, it determines the type of financing the enterprise
is able to secure. The table below shows this relationship.
DEVELOPMENT
STAGE
Timeline
?
Characteristics
Funding Needs
Funders
STARTUP
0 - 1 year
Small-scale enter-
prise pilot; testing
business concept/
products in market;
little or no revenue;
dependence on PO
for technical sup-
port; low capacity.
PO overhead &
salaries related to
program; sunk costs
for equipment, facili-
ties, raw materials,
cash, etc.; enter-
prise operations; TA;
social programs;
inefficiencies and
loss.
PO, risk taking non-
profit donors with
exiting PO or man-
agement relation-
ship; grants are
generally small and
short term.
GROWTH
1- 3 years
Success in limited
market, demon-
strates potential via-
bility, research and
expansion into new
markets, operating
loss, heavy techni-
cal support needs
for capacity building
and TA; PO depend-
ence.
PO overhead &
salaries related to
program; TA and
capacity building;
operating deficit;
investment $ for:
market research
R&D, product devel-
opment; social pro-
gram costs and
inefficiencies and
loss.
Foundations or gov-
ernment agencies
larger size grants for
multiple years.
Some VPs.
BREAK-EVEN
?
OPERATING
COSTS
3-5 years
Established track
record; proven busi-
ness model; oper-
ates in several mar-
kets-still growing;
income covers cost
of business opera-
tions including inef-
ficiencies and loss;
social costs subsi-
dized; PO role
diminished; TA for
specific constraints;
capacity fairly solid.
Limited PO indirect
costs; social pro-
gram costs; capital
assets (technology,
equipment) pur-
chases for expan-
sion; working capital
credit needs; specif-
ic TA and targeted
capacity building.
Small- to mid-size
foundation and gov-
ernment grants for
social programs; in-
kind TA; quasi-for-
mal sources of soft
money; VPs.
BREAK-EVEN ?
OPERATING +
SOCIAL COSTS
5-7 years
Solid social enter-
prise model, suffi-
cient income to
cover operating and
social costs, diversi-
fied and sophisticat-
ed, competitive
business, may spin
off from PO, compe-
tent staff, contracts
expert TA for specif-
ic needs.
Working capital
(especially for capi-
tal intensive busi-
ness-i.e. financial
services); capital
assets (technology,
equipment) pur-
chase for expan-
sion; investment
capital (new facili-
ties or technology
innovations).
Limited social costs.
Investors, banks,
quasi-formal and
financial institutions,
professional in-kind
TA. Foundation/PO
small grants for
social programs not
expected to cover
costs.
PROFITABLE
Over 7 years
Able to cover oper-
ating and social
costs plus realize a
profit with internally
generated revenue;
professional staff
and management.
Often separate entity
with PO members
on board.
Working capital;
capital assets pur-
chase for expan-
sion; possible
investment financ-
ing.
Investors, banks,
financial institutions.
?
The timeline is given as a guide based upon averages from financial service businesses; country context and type of business may
determine how quickly a given social enterprise passes through development stages.
?
Enterprise covers business operating costs with revenue.
?
Enterprise covers business operating costs (including financial costs of borrowed capital) and social cost (or specified social costs) with
revenue.
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Managing the Double Bottom Line:
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Taking this "big picture" investment approach to social enterprise financing can
be a huge departure in thinking for nonprofit professionals. Most are accustomed to
tapering organizational needs to donor priorities or thinking in "grant-size" boxes-
meaning that the social enterprise's financial needs are dictated by specified grant
amounts rather than actual costs. SC refers to this as being donor-driven rather than
market-driven. Social enterprise managers need to learn to think like for-profit man-
agers who analyze their businesses' financial needs by using actual and realistic pro-
jected cost and then seek resources accordingly.
Securing funding is a time consuming venture requiring a significant amount of
research and planning. The following three-part exercise will guide you through this
process by: 1) determining the mix of funding sources in your enterprise and the
uses of those funds; 2) identifying future funding sources; and 3) developing a
resource acquisition plan.
Same for all three parts of Resource Acquisition section: business manager,
accountants and finance professionals, PO business advisor and development
director (and/or PO or implementing organization executive director).
Financing Mix
The first step to developing your resource acquisition strategy is to identify your uses
of funds (financial needs) and their sources to determine your financing mix.
? Using historic donor records and financial statements determine the sources and
uses of enterprise funds. Begin by indicating in which category funds were spent
in the previous year as well as the sources of those funds (by category rather than
by donor). If your venture is a startup you will have no historic records.
? Prepare a “Financing Mix Table,” like the one in our example (exhibit AA) or
use the template provided in The Workbook. Financing Mix Table should
include all years covered in your business plan. !!! Hint: If your plan is only for
one to two years, it is prudent to include an additional year or two in projec-
tions.
? From the projected, or pro forma, budget and profit and loss statements, you
should have a good sense of what funds will be needed and how you will use
these funds.
? Fill out the “Uses” section of the table.
? Total the amount of funds needed identified in the "uses" categories.
? Next, discern sources that are obligated for the current period (in our example
funding is committed for business plan year 1 and how you plan to use these
funds. Depending on your current funding situation non-obligated sources other
than projected income sources (from pro forma and profit and loss statement)
may be less obvious than uses.
? Fill out the “sources” section of the table as completely as you can. Gaps will
indicate what you will need to find money for, and how much you need.
Additionally, it will help you identify potential funding sources.
? Total the funding gaps. Once you have completed the following exercise,
Identifying Funding Sources, you will return to the table.
Sources and uses of funds information is included in the Business Plan.
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EXHIBIT 8AA: TARTINA ENTERPRISE'S FINANCING MIX
Sources/Uses of Funds Historic Year 1 Year 2
(Previous Year) (Business Plan) (Post B-Plan Period)
Uses:
HQ/Parent Overhead (+ internal TA-salaries)
Technical Assistance (external contractual)
SE Operating Costs (+ salaries; w/out TA)
Capital Equipment
Working Capital
Financial Costs (borrowed capital)
Capacity Building
Social Program Costs & Loss Compensation
?
Total Resources Needed $342,164 $328,757 $359,972
Sources:
Income
Grants
PO Match
In-Kind
?
Soft Loans
Investment Funds
Commercial Loans
Total Sources Identified $342,164 $328,757 $338,678
Funding Gap -0- -0- $29,794
$102,390
15,828
40,639
116,000
-0-
-0-
6,037
61,270
$155,184
41,766
62,809
10,970
25,000
-0-
8,616
49,412
$80,560
57,800
88,652
15,600
70,000
-0-
11,320
36,040
(obligated)
-0-
$280,000
62,164
-0-
-0-
-0-
-0-
(obligated)
$15,922
220,000
47,835
20,000
25,000
-0-
-0-
(non-obligated)
$48,678
116,500
-0-
40,000
50,000
75,000
-0-
?
In TARTINA's example loss compensation and social program costs are combined. Normally these
costs should be segregated.
?
Estimated value for in-kind contributions for services or assets.
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Managing the Double Bottom Line:
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DONOR-INVESTOR RESEARCH
Nonprofit organization development professionals are generally competent in
identifying traditional funding sources within the donor community, such as
private and corporate foundations, government agencies and multilateral
organizations. They are, however, largely ignorant of nontraditional sources
of funds.
Some examples include: community banks (or those with a portion of
their portfolios dedicated to community reinvestment), venture philanthro-
pists (VPs), development banks, economic development funds, HUD loans,
Small Business Administration (SBA) loans, municipal government programs,
donor venture or social investment funds, universities and corporations
(often fund or donate in-kind support for R&D, market research, product
development, technical assistance), etc. Appropriateness of these different
sources depends upon enterprise location, type of business and develop-
ment stage. The research period may take several weeks. Information can be
gathered through networking with other social entrepreneurs, annual reports
of similar programs; libraries, foundation centers and donor directories;
attending industry conferences; contacting lenders, venture philanthropists
and foundations regarding their funding or other sources they know. The
development department of the parent organization along with board mem-
bers should supply entrees to individual donors. Small business services
(SCORE, Women's Business Development Centers, etc.), provide information
on how and where to seek enterprise financing. Review social fund prospec-
tuses (Calvert, New Profit, development banks, etc.) for sources of soft
funds. Contact nonprofit organizations and universities that provide assis-
tance (in-kind). And of course don't forget the Internet, which has become a
valuable and efficient research tool available in many countries.
Same as previous exercise
Identify Funding Sources
In the previous exercise you determined how much money you will need and what
you will need it for to finance your enterprise for the period covered by your busi-
ness plan. In this exercise you will identify potential funding sources to meet these
financial needs.
!!! Hint: If your business plan is less than five years it helps to look beyond the busi-
ness plan period when identifying future donor and investors. Remember "money
begets money." Donors and investors want to know that their funding will terminate.
Donors especially feel more confident giving money when they know other funding
prospects exist beyond their grant period and that the enterprise is graduating to
more formal sources.
? Mostly, this is a research exercise into particular funding sources. Refer to exhibit
DD: Donor - Investor Criteria and Applications to guide your research agenda.
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? For each potential source find out the funding criteria, the approximate financial
size of the support, the purpose or specified use of the funds they provide, the
type of funds (grant, in-kind, loans, etc.), the potential (your chances) for receiv-
ing funds through this source. Be realistic!
? Keep notes on the preferences and interests of your prospective donors. This
information has important strategic relevance for planning future resource acqui-
sition.
? Prepare a "Funding Source List," like the one in our example (exhibit BB) or use
the template provided in The Workbook.
? When you have prepared your resource list, return to the non-obligated sources
section of your Financing Mix Table and complete the exercise based on your
projections.
Be sure you are clear about investor funding preferences and terms. Most donor-investors
expect the social enterprise to generate sufficient revenue to cover its social costs. They regard
their investment as a limited and efficient use of funds. On the other hand, some donor-investors
may award grants to subsidize social costs over the long term, accepting double bottom line profit
and loss statements as a standard part of reporting. Thorough research on the funding landscape
informs business planning and can help shape the design of your social enterprise. For example,
Save the Children does not integrate its business programs with nonbusiness social services, in
part because funding is more difficult to obtain. If SC wants to render both types of services to the
same target population it runs parallel programs, seeking funding for each.
Source
ASSIST
International cur-
rent funder
ASSIST/Haiti
Continuation grant
Criteria
Provided current
funding to TARTI-
NA; no continua-
tion funds beyond
next year.
Evidence progres-
sion toward
break-even and
sustainable busi-
ness model; 25%
match.
Approx. Size
$220,000; total
grant $500,000 for 2
years.
Up to 150,000 for
three years; discre-
tionary money
30,000.
Purpose
Increase impact;
capacity of social
enterprise to be sus-
tainable.
Operating cost deficit;
capacity of social
enterprise to be sus-
tainable.
Potential
None; will not give
repeat funding.
High for $150,000;
low for $30,000 dis-
cretionary (competi-
tive).
Type of Funds
Grants
EXHIBIT 8BB: FUNDING SOURCE LIST
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Managing the Double Bottom Line:
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Type of Funds
Investors
In-kind
donations
Source
French Embassy
Dutch Aid
HELP2U
Foundation
SC
TARTINA Board
Farmer to Farmer
U of NM
Criteria
Intention to export
to France/EU.
Locally operated
business, evi-
dence of positive
business trends.
TARTINA is regis-
tered as Haitian
business; exis-
tence of local
board.
49% equity stake
in TARTINA; must
be registered as a
separate busi-
ness; moving
toward self-suffi-
ciency.
Board member
with financial
capability to
donate.
Product develop-
ment of Mamba.
Development of
sustainable envi-
ronment program
for agricultural
cultivation
Approx. Size
$15,000.
$150,000; $50,000
per year for three
years.
Up to $100,000 over
three years.
Up to $75,000 inter-
est free, repayment
schedule after
break-even.
$16,500, not includ-
ing SC.
$15,000
$25K
Purpose
Market research for
exportation of prod-
ucts to France.
Training and capacity
building of indigenous
staff.
Support development
of local Haitian econ-
omy through local
business creation.
Operating cost deficit;
capacity building.
Unspecified. Can be
used for operations.
Cover professional
consulting fees/travel
to train staff on emul-
sification process.
Cover professional
consulting fees/travel
to train peanut and
fruit farmers in envi-
ronmentally sound
cultivation.
Potential
Medium; unlikely will
export products in
near term.
High.
Low-disorganized;
slow moving; possibil-
ity for next year.
Medium-requires
approval by SC legal
department.
High, committed
High.
High, but deviates
from program focus;
adds to mission
creep.
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Type of Funds
Soft Loans
Commercial
sources
Source
Tyler Graduate
School of
Management UM
BFI Social Fund
Carib Development
Bank
SC/Haiti
First International
Bank
Criteria
Must be locally
operated (but does
not need to be
separate legal enti-
ty form PO); good
experience for
MBA students.
Loan guaranteed
by PO assets.
Break-even; solid
cash flow projec-
tion of revenue
Cash flow con-
straints
Borrowed against
SC assets in Haiti.
Approx. Size
Up to $25,000.
Up to $150,000
interest free for three
years.
Up to $200,000 at
3% interest for three
years.
$50,000 interest free.
$200,000 at 27%.
Purpose
Cover professional
consulting fees for 3
graduate management
students to assist with
any business needs
(must be predefined).
Working capital and
fixed asset loans.
Working capital, busi-
ness expansion can
be used for capacity
building.
Working capital credit
line only.
Business expansion
and fixed asset loans.
Potential
High. Excellent
source.
High, legal approval
for SC to assume risk
(difficult).
Low, insufficient rev-
enue; high risk.
High; HQ must
approve
Low; too risky for
SC/Haiti.
Same as previous exercise
Resource Acquisition Plan
In this exercise you will plan your fundraising, drawing on information from the two
previous exercises: how much money you need to run your social enterprise and
confirmed and potential sources to meet those financial obligations.
? Follow TARTINA's example (exhibit 8CC: TARTINA Resource Acquisition Plan).
? Use research findings to support your resource acquisition plan and to convince
business plan readers that you can raise the necessary funds.
Resource Acquisition Plan is included in the Business Plan.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
Managing the Double Bottom Line:
322
EXHIBIT 8CC: TARTINA RESOURCE ACQUISITION PLAN
YEAR 1
TARTINA Enterprise needs a total of $328,757 in Year 1. $312,835 of these
funds are obligated through a comprehensive central grant from
ASSIST/International. Under the terms of this grant, Save the Children has
committed a 30% match for $72,835, split between operations ($47,835) and
a working capital soft loan ($25,000). In-kind support from Farmer to Farmer
program for peanut processing and storage technology is equivalent to
$20,000. The remainder will be met by projected sales revenues of $15,922.
YEAR 2
TARTINA Enterprise needs a total of $359,972 in Year 2. TARTINA anticipates
$50,000 funding from ASSIST/Haiti for a three-year continuation grant totaling
$150,000. ASSIST/International will have invested $500,000 in TARTINA and
therefore continuation from its Haiti branch is probable. Dutch Aid, which has
viewed SC's work favorably, is expected to fund TARTINA's capacity building
and technical assistance needs, $50,000 a year for three years ($150,000).
Consistent with Save the Children's social enterprise program strategy,
SC/HQ will become a minority shareholder in TARTINA and provide $75,000
investment funding. Other TARTINA board members have committed a total
of $16,500 for operating expenses. SC/Haiti will also plans to open an inter-
est free $50,000 credit line to ease TARTINA's cash flow constraints. In-kind
technical assistance valued at $40,000 is expected from Farmer to Farmer
($15,000) and Tyler Graduate Management School ($25,000). TARTINA has
an established relationship with these service providers and is confident
about securing their continued support. Moderate growth targets project
TARTINA sales revenues of $48,678.
A funding gap of $29,794 remains. TARTINA plans to pursue secondary
grant sources such as HELP2U, seek discretionary monies, borrow soft
funds, or trim planned activities in year 2 to bridge financial needs with avail-
able funds.
Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
V
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Copyright ©2000 Sutia Kim Alter. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 License (http://creativecommons.org/licenses/by-sa/3.0/)
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doc_184176371.pdf