On Strategy: Profitability of Non-Profits!

The first few weeks of the new year has been very interesting for me personally. I had multiple occasions Profits_Farm_-_geograph_org_uk_-_264426to interact with fresh and energetic groups of people through my business modeling workshops and other engagements. The discussions during and post the workshops are by themselves loaded with learning.  Last week in one such instance I found myself amidst an interesting and intense conversation on what differentiates social enterprises from profit oriented firms.   The premise of discussion rather debate was when a young aspiring social entrepreneur questioned the appropriateness of a business model that looks at price-cost (Demand /Supply) equilibrium for social enterprises.

Why should social entrepreneurs think of profits? Oops! Did I use the banned word – profits; as we discuss social enterprise?

Our confusion between voluntary social service and a social enterprise has led to many worthy social enterprises struggle and shut down unnecessarily. When you create an enterprise even if it is to address a challenge or need in the social context and intent, it becomes imperative that you do it in a manner, where the beneficiaries are able to derive value from your (firm’s) existence uninterrupted for a large period of time. This means it is important that your social enterprise requires to be in existence and grow to be able to cater to the challenge better in the coming time. For this, your firm also requires oxygen for growth – cash! And you need a business model to tell you from where the required amount of cash is going to make itself into the system and how you are going to construct your internal engine to optimally use cash to deliver larger value to your customers (society) in a sustainable manner.

Most people get offended when social ventures use the term profits – so may be the better term for them is: surplus. Why should social entrepreneurs think about surplus instead of deficit? For the simple reason it is this surplus that is going to be ploughed back into the system for creating greater value. What differentiates a non-profit from a for-profit is not the profitability of operations, but how the generated profits get used!

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