# SOCIAL ENTERPRISE AND COSTS

The development of a social enterprise requires an investment, which implies some costs. The costs will be fixed and variable.

## Fixed Costs

These are costs that must be paid on a regular basis or over a period of time regardless of the volume of activity of an organization.

Examples:

- Rent (paid monthly)

- Monthly salaries

- Yearly salaries

- Property tax

## Variable Costs

These are costs that vary in proportion to the level of activity of an organization. Examples:

- Postage and shipping

- Hourly wages

# CONTRIBUTION MARGIN

Excess of total revenue or income (R) generated from a unit of product or service over the variable costs (VC) per unit. The contribution margin (CM) is calculated by subtracting the variable costs per unit from the total revenue (R) per unit.

CM = R-VC

Andrew Foundation is a nonprofit organization that is planning to provide a fee-based service counseling program. The total weekly cost for one counseling session is \$25. They plan to charge \$40.00 per week for one session. What is the contribution margin?

The total revenue per child is \$40.00.

=> R = \$40.00.

The total variable cost is: \$25.00.

=> VC = \$25.00 CM = R-VC CM = \$40.00 - \$25.00 CM = \$15.00

Interpretation:

Each time a client pays \$40.00 for one counseling session, the organization will have \$15.00 left.

# BREAK-EVEN ANALYSIS

Break-even analysis is a formula used to determine how much income or revenue or sale volume a project, program, or an activity has to generate in order to start making a profit. A break-even point indicates whether a self-generated income program will be sustainable. The break-even point is calculated by dividing the total fixed costs by the contribution margin.

Break even (BE) = Fixed costs (FC)/Contribution margin (CM)

Andrew Foundation is a nonprofit organization that is planning to provide a fee-based service counseling program. The total weekly cost for one counseling session is \$25. They plan to charge \$40.00 per week for one session. The total weekly fixed costs for salaries, rent, utilities and insurance is \$2,000.

How many sessions does the program need to have to start making a profit? Suppose that the demographic trends in the area where the day care is located indicate that the program can expect between 120 and 150 counseling sessions per month. Will the counseling program be financially sustainable? Explain

Response 1

- BE = FC/CM

We must calculate the contribution margin first. The contribution margin was calculated earlier. It was: \$15.00

- Total fixed costs: \$1,500.00

- BE = \$1,500/\$15.00 BE = 100

Interpretation:

Andrew Foundation will need to have more than 100 sessions per month to start making a profit.

Response 2

If Andrew Foundation starts the counseling program, it will be sustainable. It must have more than 100 sessions per month to start making a profit; they expect to have between 120 and 150 sessions monthly.

# SOCIAL ENTERPRISE AND FINANCIAL SUSTAINABILITY

Social enterprise can contribute to the financial sustainability of nonprofit organizations in various ways. As social entrepreneurship, a social enterprise can develop products or services that change people's lives in the same way some for-profit business do. I am referring to the way Microsoft changed people's lives with personal computers, or Apple with the iPhone, or Yahoo! and Google with the Internet search engine, just to name a few examples. The same can be said about fair-trade businesses that open markets to disadvantaged farmers, or the Grameen Bank in Bangladesh that provides socioeconomic opportunities to help people lift themselves out of poverty through their own trade activities. By offering transformative products or services, a social enterprise will continue to prosper and generate income to support the activities related to its social purpose.

A social enterprise generates unrestricted income for a nonprofit organization. With unrestricted funds, nonprofit organizations can develop policies within the context of applicable local, state, and federal laws, to design options to use their income in activities that are not supported by grant money, in a contingency fund, or in investments that can bring regular income while the capital remains secure for long-term needs.

Further, starting a social enterprise requires capital investment. The capital investment may automatically contribute to increasing the total assets of a nonprofit organization. This increase in total assets will in turn positively influence the solvency of a nonprofit organization. It is important to underline that investment to start a social enterprise can be funded by a loan. In that case, there will not be the same positive effect on solvency, because the increase in assets will be relatively neutralized by an increase in total liabilities. However, the return on investment in equipment, materials, or information technology infrastructure, as well as the profitability of a social enterprise, can offset an increase in liability and provides the positive influence of solvency.