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Russell Hargrave: What have we learned about social enterprise, trading, and profit?

21 Oct 2021 Voices

The latest report from SEUK is fascinating, as much for the questions it provokes as the ones it answers

That big thump you heard last week? It was the sound of the latest hefty report from Social Enterprise UK (SEUK) landing in your inbox.

An SEUK report is a serious business. These documents are not for the faint-hearted. But if you like pages of graphs, heavy financial analysis, and a parade of colourful charts, these are the guys for you.

Its latest survey of the sector does not disappoint. The report No Going Back comes in at over 60 pages of highly-detailed wonkery, all in the service of understanding the current state of the social enterprise market. SEUK collects the data every two years, so here is a chance to compare the health of social enterprise with the pre-pandemic days of 2019.

Using markets to do good

The key findings are all very positive. New social enterprises have continued to spring up (a record-breaking 12,000 in 2020), bringing the value of the market to an estimated £60bn. Social enterprises also proved more financially resilient than small businesses during the crisis, SEUK said.

Another, more complex part of the jigsaw, however, is how well social enterprises are doing on their own financial terms.

Broadly defined, social enterprises are companies which aim to combine market success with doing social good. The whole point is to make money and invest the profits in achieving positive outcomes, showing that profit and impact are compatible. Along the way, the financial surplus they create should limit their dependence on grants and loans.

No Going Back has plenty to say about these two aspects of the market - the strength of trading and the move away from grants - and they merit more attention. 

Income from trading is down

The headline figures for social enterprises and trade aren’t that encouraging. Most still get the lion’s share of their income (75% or more) via trading, but the figure is down ten points from 2019. Very few enterprises have gone out of business so this would suggest, as SEUK notes, that social enterprises have become more, not less, reliant on grants.

The report suggests two reasons why this might be the case.

Firstly, Covid hit trading hard. This should not come as a surprise to anyone.

Secondly, the growing proportion of early-stage startups (34% are now less than five years old) may explain why more social enterprises are relying on grants and loan finance as they launch and establish their trading models. In this, new social enterprises are no different from any other new businesses. Early years are backed with outside investment, in the hope that they slowly move into profit and eventually sustainability.

Indeed, a positive spin – hinted at in the report – is that growing grant-reliance is a sign of a vibrant startup culture with an exciting future ahead. We shall see.

Profitability is flat, which is odd

One of the weirdest bits of data in the report – and who isn’t a sucker for weird-looking data? – is on profits. 

Some social enterprises may well have an edgy startup vibe about them, but their value isn’t decided by Silicon Valley investors. It is set by the mundane question of whether they bring in more money than they spend, and generate the profit (some social enterprises prefer the word surplus) on which their model depends. 

The report shows that 49% recorded a profit (48% in 2019) while 25% recorded a loss (exactly the same in 2019). In other words, the proportion of social enterprises turning a profit has not changed in the last two years, even as the proportion making lots of their income from trading has fallen. 

The least worrying conclusion is that here, too, we see the effect of all those young social enterprises, which are not profitable yet, and drag down the overall figure - or it could be a glitch in the way profits show up in accounts if they are immediately reinvested into the business to achieve social good.

Another possible conclusion, though, is that all this trading doesn’t actually generate much surplus, meaning a big drop in trading activity doesn’t affect profitability one way or another. Unless social enterprises have been operating at way too large a scale in the last two years – which is unlikely – this asks serious questions of whether social enterprises are making the market work for them. 

There are some major caveats, though. Social enterprises delivering public services (and there are lots of them) would likely have seen trading and profits carry on fairly unscathed, which would raise even more concerns about other forms of trading. Or social enterprises have adapted to access other income streams, in which case they have demonstrated precisely the agility the sector often boasts about. This may not show up as profit, but they would have firmed up their finances ready to emerge again after the pandemic. Maybe there is no need to worry.

Nonetheless, this is the bit of the report that social enterprise advocates and experts should look at most closely.  This isn’t a small issue. The question of profitability is an existential one.

The overall ecosystem is growing

Better news is that the social enterprise ecosystem is growing. Most trade is still done with the public and private sector, but the role of other trading partners is increasing.

For example, 41% of social enterprises now generate income by trading with other social enterprises (up from 36% two years ago), and 46% trade with charities (up from 40%). 

Plus, we can see what the report calls “a trend away from trading locally to one serving regional, national and international markets”. The proportion of social enterprises trading with countries overseas has grown from 12% to 19%; the proportion operating only in their local area has moved in the opposite direction, from 21% to 11%.

This is surprising. How did international trade – of all things – rise during a pandemic which had a disastrous impact on trading almost everywhere else? (You might think of domestic charity retail, for example, where the four largest shop networks lost £70m between them in 2020).

One answer may be that the number of social enterprises selling overseas has risen (from a pretty low base) even if the volume of sales was almost certainly down. The data doesn’t go into enough detail to say for sure.

If so, though, we can safely say that the social enterprise universe is expanding. More enterprises have found partners overseas with which to trade: they have identified global customers even during a global pandemic. This is no small achievement. There is plenty to build on if and when the long hangover from Covid-19 lifts. 

As for what that looks like, we probably won't know until 2023. Just two more years to wait until SEUK follows up with another thumping great report.

Editor's note (21 October): The section on profitability was updated, based on an idea raised by SEUK after the article's publication

Civil Society Voices is the place for informed opinion, and debate about the big issues affecting charities today. We’re always keen to hear from anyone, working or volunteering at a charity, who has something to say. Find out more about contributing and how to get in touch.

 

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