A guide to third sector trading - WCVA

It’s an idea, but is it business? A guide to third sector trading
1: Getting
started
2: First steps 3: Business
planning
4: Legal and
governance
5: Funding
and
resourcing
6: Financial
controls
7: Managing
growth
8: Management
and
governance
9: Social
enterprise
10: Sources
of support
• donating all its profit to charity: Any organisation which
gives all its surpluses away will have nothing to reinvest in its
own business activities. It will not be able to grow, and it may
stagnate and fail.
• providing quick solutions to immediate funding problems:
Although there certainly are ways in which business can help
to sustain existing social and community projects, you should
be extremely cautious about predicting when you will see the
benefit. It can take many months to get a venture started and
it is likely to be several years before there are significant trading
surpluses. (In fact, if you need help in a hurry, it’s probably
already too late for a new business to save you.)
How hard is it to support social jobs? A rough calculation should
demonstrate how difficult it can be to use the profits from trading
activities to support jobs in social and community projects.
Let’s say a successful community organisation wants to use its
profits to replace grants for one job with a salary of £20,000. The
actual cost of the post, with overheads, is likely to be in the region
of £25,000. The business can’t give away all of its profits – it
may need to retain £10,000 or more of its annual profits to cover
future investment in the business, staff redundancies and possible
emergencies. So it needs a profit of at least £35,000. If the healthy
and somewhat unlikely profit margin (which is calculated by the
cost of operating the business minus the value of sales, divided by
the value of sales multiplied by 100) is as high as 30%, it would
be necessary to have sales of £117,000 or more. With a profit
margin of 20%, sales of £175,000 are needed.
That can be a significant amount of trading for a small enterprise.
But the real world tends to make things even more difficult:
If any corporation tax is payable on this the required level of
sales naturally goes up.
• Then add in the human factor: what are the staff in the
business saying about their own wage levels if the profits they
are producing are used to employ a non-income generating
worker? Hopefully they can appreciate the social benefits. But
what if the new job pays more than they are getting?
• Bear in mind too that, although it is absolutely vital to aim to
make a profit, most third sector trading organisations in the
real world are happy to break even initially, and would not
expect to make much profit at all in their early years.
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