Is a social enterprise project for you?

Increasingly, I am being asked to advise on the feasibility or otherwise of a social entersocialEntprise initiative.  These commercial ventures have the ability to either fund church activities, or to realise missional goals.  The key is knowing which initiative is right for you, and going into it with a business plan and realistic goals.

Feasibility for social enterprise projects

Many churches and not-for-profit organisations are developing ideas for commercial activities which make money either to contribute to their operational revenue, or to be cost neutral and achieve missional objectives.

This paper can help you with your investigation and planning.  It is based around a café social enterprise, but the principles readily translate to running a preschool, an opportunity shop, social housing and many other commonly voiced ideas.

The first thing you need to determine is “why” this idea?  You need to be clear what success will look like.  Are you undertaking it to raise money for other programmes and operational costs?  Or do you hope to just break even and achieve missional goals instead?  Clarity around purpose is fundamental, all stakeholders need to be “on the same page” or mis-understanding will threaten the viability of the enterprise.

Before you spend any time or money developing your business idea, you should first do a quick financial feasibility test to find out whether your social enterprise idea is viable.

A feasibility test helps you estimate whether your idea will provide the kind of return on investment (ROI) you need. The following is a quick look at the factors you need to consider when feasibility testing. Once you’ve compiled your figures, we recommend you talk to financial adviser to make sure your findings are as accurate as possible.

Before you dive in, look at the ROI you require to make all the hard work and risk of starting your social enterprise worthwhile and use that figure as a benchmark. And be honest; don’t lower your expectations to help your business idea cross the finish line. If the ROI is going to be cost recovery because the enterprise is a mission strategy, it is important to include all costs to ensure that the costs of the business are not being unwittingly subsidised by other revenue streams.

Why start with an ROI benchmark? Many first-time entrepreneurs let the appeal of their ideas bias them when it comes to testing feasibility. They calculate ROI without a benchmark and say ‘Hey, that’s a good enough start’ without objectively looking at whether all the hard work of starting their own business will be worth it.

Can you make a profit?

Can you make enough profit to reach your ROI benchmark? The way to find out is to look at the unit sales you’d need to reach to do that. This means that financial analysis must be carried out to determine the business overheads (plant set up, rent, utilities, cost of materials (e.g. food ingredients), staffing, marketing etc) so you can determine what prices need to be charged to cover costs and ROI.

Let’s say your ROI is $100,000 a year and your overheads are $200,000. That means you need to generate gross profit of $300,000 to break even and then provide you with the return you require.

Let’s also assume your average price per unit is $5. 300,000 divided by 5 is 60,000 – this is the number of units you have to shift each year to meet your ROI benchmark.

The question now is – can you sell 60,000 food items or cups of coffee in a year? In other words, is it feasible?

To help you answer that question, you need to look at your:

  • Target market.
  • Demand.
  • Competitors.

Do you have an identified target market?

It’s essential you establish the type of consumer your product or service will strike a chord with the most and how many of them there are.

You should also look at the health of the wider marketplace (whether it’s growing or declining, for example, and what opportunities there are in this stage of its lifecycle).

Find out:

  • Who might use the café.
  • Where they’re located.
  • How big the market is.
  • How much customers would pay.
  • How often they might buy.
  • When they purchase.

Ultimately, you need to be able to answer two key questions:

  • Who is my ideal customer?

Define age, gender, location, likes and dislikes, purchasing influences and so on.

  • How many of them are there in my reach?

Use government statistics to find out the population density of your target demographic. This information is freely available online.

Is there demand?

You can’t assume your product or service will register off the charts with your intended audience either, so you need to talk to them or, even better, show them what you plan to sell.

You could run a survey or hold a focus group to find what potential customers like about your offering, whether they’d pay for it and whether they’d buy it.

Surveys are great for quantitative data – facts and figures, like how often a customer visits a shop – while focus groups are good places to collect qualitative data. These are the opinions and emotional responses people might have to your product or service.

Qualitative data is great if you have a prototype or service concept to show focus groups, but just keep in mind people often say one thing and do another – so don’t rely solely on emotional responses.

What will my competitors do?

The next element to establish is your competition. You need to find out:

  • How many there are.
  • Who you will most directly be competing with.
  • Their respective strengths and weaknesses.
  • What they might do once you launch.

Research your competitors online and add questions about who your potential customers currently shop with and why, when you survey your target market so you can get the information straight from the horse’s mouth. Remember that competitors are not just traders in the same community, but others further afield.

Once you have an ordered list of your competitors, you can test them to find their strengths, weaknesses and any unknown factors that could influence your business idea.

Consider:

  • Developing a checklist first, so you can note down your findings in an organised way.
  • Buying from a competitor to test product/service quality and customer service.
  • Hiring a mystery shopper or getting a friend to go in your place if you think you’ll be recognised in your competitors’ premises.

Do you have a unique selling point (USP)?

A USP sets you apart from the competition. It might be a unique combination of food, or a playground for customers’ children, or a pleasant outdoor environment.  What type of environment are you trying to present – e.g. casual, relaxed, calming, exciting or innovative?  The fit-out, furnishings, selection of offerings and marketing will reflect the desired environment.

You may have built your USPs into your business idea from day one. However, after you’ve talked to the target market and assessed the competition, you should reassess your USPs and refine them so they really stand out and push the right buttons with your intended customers.

Location

Where is the best location for the café?  The more visible it is, the more it is likely to attract passing customers as well as those who are seeking it out.  In this respect signage, initial façade appearance, access, parking and so forth are to be considered.  Ideally advertising will be word-of-mouth, but substantial investment in marketing needs to be factored in, in the establishment phase as that is when patronage patterns will be set.

The locations with the best probability of success are, in order:

  1. Next to colleges and universities, on a commercial walking street
  2. Downtown business district, in a large office building
  3. Neighbourhood commercial walking streets
  4. Heavy foot traffic tourist areas, with great visibility
  5. Airports and large medical facilities (for carts and kiosks)
  6. Strip malls
  7. Inside shopping malls

SWOT

Analysing the Strengths, Weaknesses, Opportunities and Threats to the business is essential to help develop a risk profile and plan a strategy for success.

Legal and local government regulations

The New Zealand Government http://www.business.govt.nz website was written by a start-up business expert and is well worth a look. The site has free resources, tools and information to help people start, manage and grow their business.

The “Starting up” section has information about:

  1. Business structures;
  2. Writing a business plan;
  3. Managing cashflow;
  4. Raising capital;
  5. Building a promotional plan; and
  6. Getting online.

The Dunedin City Council through its Economic Development Unit is very helpful in guiding prospective business owners through the maze of regulations.  (Other local bodies have equivalent units). Some of the things you will need to consider are:

Resource consent: The District Plan describes what you can do on your property. If you wish to deviate from the rules set out in the plan, you will need a resource consent.

Building consent: The building consent process ensures your project meets the criteria of the Building Act 2004.

Registered premises: Some businesses need a licence or certificate of registration to operate. These include food premises, hairdressers, camping grounds and funeral homes.

Commercial food premises: Guided by the Food Hygiene Regulations Act 1974, businesses offering food for sale must operate to specific standards, so food is properly handled and prepared.

Food safety training: Food offered for sale needs to prepared in line with established rules and guidelines. These apply to food prepared on commercial premises, street stalls and other situations.

Trade waste discharges: Discharges to the wastewater network from trade premises are controlled through the Trade Waste Bylaw, and certain discharges (including from cafes, restaurants and takeaways) will require a consent.

Next steps

Once you’ve established your target market, the potential demand for your product and service, and the competitors you’ll be going up against, you can start to understand how feasible it will be for you to sell your target number of units each year and reach your ROI benchmark.

However, it always pays to have your figures and findings checked by an accountant with experience in your industry.

Business Planning

To start a successful coffee shop business, it is advisable that you develop a business plan that can help you run the business effectively. If you also have the intention to seek external funding or grow bigger, then you definitely need a business plan.

Include also your market strategy and key factors that you believe will make your coffee shop unique and differentiate from every other coffee shop in the area. Though it sounds easier than it is but like in any other business, if you fail to plan, you plan to fail.

A formal business plan is just as important for an established business, whether small or big, as it is for a start-up. And it serves the following critical purposes:

  • It helps you clarify, focus, and research the prospects of your proposed start-up or expansion idea.
  • It provides a considered and logical framework within which your business can develop and pursue business strategies over the next few years.
  • It offers a benchmark against which you can measure and review the actual performance of your business.
  • It serves as the basis for discussion with third parties such as creditors, investors, shareholders, agencies, etc.

Just as no two businesses are alike, so also are business plans; some aspects of a plan will be more relevant to some businesses than to others. So, it is very important to tailor the contents of a business plan to suit individual circumstances. Nonetheless, most business plans follow a well-tried and tested structure, and general advice on preparing a business plan is universally applicable.

However, your business plan should be a realistic view of your expectations and long-term objectives for your start-up or small business. It provides the framework within which it must operate and, ultimately, succeed or fail.

For you and other entrepreneurs seeking third-party support, the business plan is the most important sales document that you will need to raise finance for your start-up or small business. Although preparing a solid, comprehensive business plan will not guarantee success in raising funds or mobilizing support for your business, lacking one will always result in failure.

Contents of a Business Plan

The structure of your business plan will look like the following:

  1. Title Page
  2. Table of Contents
  3. Executive Summary
  4. Company Profile
  5. Industry Research
  6. Sales and Marketing
  7. Operations
  8. Financials

A note on Financials

There are two key analysed spread-sheeted budgets that need to be included in a business plan.  You will have made a start of these when you investigated the feasibility of the concept and the ability to make ROI.

  1. Capital and set-up costs

The following link gives a good indication of the set up costs:

http://mindfuldesignconsulting.com/cafe-design/Coffee-Shop-Start-Up-Free-Estimate.pdf

  1. Operational income and expenditure

Operational income is driven by Sales.  Profit can be improved by increasing

  • the number of customers
  • the volume of goods or services existing customers buy
  • the sales price.

If you have a good marketing strategy in place it will help you increase the number of customers or the amount they buy.

To increase your sales, objectives should include:

  • ensuring as many potential customers know about your business and what you have to offer
  • existing customers are happy with your product or service and want to buy more of it.

A marketing plan lists your key marketing strategies, explains how each one will work, how much they will cost and how the strategies support each other.

Conducting market research will help you identify and define marketing

Separating expenses into categories will help you to calculate your costs. It also helps you to see where they are rising or can be reduced. Expense categories include:

  • cost of goods sold. These are expenses relating directly to sales such as buying stock or components, freight costs if goods are shipped to your business or wages if a staff member works directly on producing an item for sale
  • fixed expenses. These are expenses that stay the same when your sales increase such as rent, insurance, licensee fees, utilities etc
  • variable expenses. These are expenses that go up or down based on the sales you make such as advertising, delivery charges and electricity if you’re manufacturing.

Business structure

What is the best business structure to use for your social enterprise?  You have a number of choices, but getting it right before you start trading is essential.

You can run it though your organization as a trading arm, with designated line entries and even a designated bank account – this is best if the financial transactions are not numerous.

It could be run as a separate Incorporated Society, Charitable Trust, or Charitable Company and a separate governance body will be responsible for all aspects of the business.

See this link for the difference between the difference governance structures:  http://www.societies.govt.nz/cms/customer-support/faqs/what-are-the-differences-between-incorporated-societies-and-charitable-trusts.

If you would like to discuss any of the matters raised here, please feel free to contact the PressGo Catalyst, Lisa Wells, telephone 027 4455 723 or lisaw@presbyterian.org.nz.

Compiled by Lisa Wells,

11 September 2017

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