Third sector needs more business-like approach

Change is on the horizon as squeezed funding and a new generation of entrepreneurs pave the way for more commercial structures, finds Emma Newlands.

Social Bite, which has expanded its operations to include restaurant Home and aims to create a village for the homeless, is a flourishing social enterprise. Picture: Ian Georgeson

It has prompted headlines for its high-profile Hollywood visitors, but mushrooming social enterprise Social Bite was originally inspired by the philosophy of a Nobel Peace Prize winning economist.

Co-founder Josh Littlejohn visited Professor Muhammad Yunus in Bangladesh after reading Creating a World Without Poverty: Social Business and the Future of Capitalism, and saw first-hand that the economist’s efforts “were literally changing the lives of tens of millions of people”.

This “life-changing” experience prompted the creation of Social Bite, with the social enterprise’s expanding network of ventures cited by Kenny McDowell, a partner at accountancy firm Saffery Champness, who has spent 25 years working with the charity, not-for-profit and profit-for-good sectors, providing professional services covering the likes of audit, strategic advisory and governance review to a broad spectrum of organisations.

He said social enterprise is growing as a new breed of organisation emerges, driven by a younger generation with a more entrepreneurial mindset than the older demographic, which tends to be far more family trust-orientated, and grant-giving and philanthropic. McDowell also believes it is not just a trend but an increasing necessity as good causes look for new ways to bolster revenues amid a storm of hurdles including tightening funding from traditional routes and the Brexit vote.

“The charity sector now needs to become much more business-focused,” said McDowell, who is also a trustee on three boards, and a member of the UK SORP committee, the financial reporting standard-setting body for the charity sector.

He has also been appointed to the audit and risk committee of Social Investment Scotland, which defines a social enterprise as aiming to make a profit like any private-sector business, but with all of its profits or surpluses ploughed back into its social and/or environmental purpose.

McDowell cites a “younger generation who have perhaps worked through a different experience in their early years of work or the entrepreneur who has made significant money and wants to do charitable good”.

“They will have an element of charitable giving but they will also have a desire to check and balance outcomes, so they can be more structured in terms of their giving and some of them will look for enterprise rather than core charity.”

He added that enterprise “sometimes can address the issue before it happens… whereas charity tends to be the medicine at the end of the problem.

“I think the challenge for some of the traditional frontline charities that are involved in activities that enterprise are now moving into is to join forces and seek a common outcome, because I think enterprise will be a much bigger feature in the sector.”

According to the Scottish Charity Regulator (OSCR), there are more than 24,000 total charities registered, with the sector handling more than £10 billion a year.

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In terms of what 2017 has in store, McDowell says there is clearly pressure on government funding, but he is also adamant that the sector is resilient and most charities will “find a way”.

Doing so may see some joining forces, resulting in some merger and acquisition activity, and while there will be such “marriages of convenience” some entities may fail as charities are like any business, needing key factors to survive, he added.

“Because of the macro forces affecting the sector, it’s inevitable that some charities will struggle as a consequence and it’s inevitable there will be some pressure to consolidate the sector.

“I would imagine if the funding becomes tighter and the costs become greater, then economies of scale will be sought,” he said, with such measures potentially including collaborative purchasing arrangements.”

An added pressure McDowell notes is the perception that there are too many charities on the register, with the integration of health and social care potentially making it an area seeing consolidation.

For a charity with a squeeze on its funding, “they might need to either be collaborative with complementary organisations or consider fundraising or other income generating activities including trading, in an appropriate structure that will increase the revenue for my their charitable objects”.

He expects more changes in company structure, and explains how such arrangements work, saying: “Charities can’t trade unless its primary purpose but what you can do is you can put a trading subsidiary below the main charity, which trades like a normal company and Gift Aids up all its profits to its charitable parent.”

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