Social Enterprises Misunderstood - Financial Resilience Report

Narrow definitions of social enterprise and a limited knowledge of the emerging sector among financiers and the wider public have been identified as key resourcing challenges.

The “Resourcing Social Enterprises: Approaches and Challenges” report, the second in the Social Impact Series, investigated the financial resilience of social enterprises in Western Australia, encompassing the way they are resourced and their ability to respond to financial shock. 

Professor Jo Barraket, Director of CSI at Swinburne University and lead author of the report, said a common challenge is information asymmetry – a lack of external understanding of the business’ operations and purpose.

“Social enterprises are a hybrid form of business. It’s still a relatively new concept to the market, and mainstream financial providers don’t necessarily understand it,” Barraket said.

“Because they are hybrid organisations with both mixed purpose and mixed resource, they often don’t have clear and understandable books.

“We don’t have any consistent standard for social-financial accounts in Australia. So the tools that social enterprises have to communicate their business operations to external financiers are still underdeveloped and that makes it challenging.”

However, Barraket said that the FASES (Finding Australia’s Social Enterprise Sector) 2009-10 Study found that most social enterprises are not actively seeking external finance.

“Like many small and medium businesses, they’ll always look to their internal resource capabilities first,” she said.

“Social enterprises are typically looking to grow their earned income revenue. That’s usually a primary focus with regard to accessing more financial resources – to make more money through their trading activity.”

The report said social enterprises that are seeking external finance are held back at a Government level in Western Australia, which doesn’t acknowledge the breadth that different models span.

“Depending on their legal form, they may not be able to access external equity, so that might constrain their opportunities to get access to external finance,” Barraket said.

“The definition of social enterprise, which focuses almost exclusively on Not for Profit forms, is excluding those profit-for-purpose hybrid businesses, and they’re probably the ones most interested in accessing external capital.”

Barraket identified governance structure as a further challenge, with financial resilience not always a top priority “particularly in those social enterprises that operate within larger Not for Profit structures”.

“The boards in those contexts are quite rightly having to juggle requirements of larger charitable concerns, and therefore not always able to respond in the same sorts of ways that a small business that’s not governed by such a large governance structure would do,” she said.

The report, funded through a partnership between Bankwest and the UWA Centre for Social Impact, uncovered these findings from interviews with 15 social enterprises and seven social financiers that are in Western Australia or work in to the state.

While exact data on the WA social enterprise sector is still being collected, Barraket said the qualitative findings should interest, and can be applied to, social enterprises across Australia.

“It’s clear that there is a very dynamic thinking going on in Western Australia,” she said.

“The National Social Enterprise Innovation Award and the National Social Procurement Award were both awarded to social enterprises in WA this year.

“There’s some very interesting work and models coming out in relation to finding innovative community solutions to unmet need, both in metropolitan and regional areas.”

The five-year project is still in its early stages and solutions are yet to be identified, but Barraket has preliminary ideas.

“I don’t think there’s a quick fix tool or solution, but if we look specifically at the issue of finance and social enterprise in this country, and similarly in the UK, the conversation to a large degree has been supplier led by those who are, for very good reasons, interested in stimulating forms of social finance and impact investing,” she said.

“What we really need is a conversation where demand and supply are talking with each other, where those who are in the business of providing social finance really understand the needs of social enterprises, and that social enterprises have the tools that they need to effectively communicate with social financiers.

“The other major observation is change will take time. It in fact requires culture change, and thinking differently, both within social enterprises and within specialist and mainstream organisations that support social enterprise development.”

Download the report HERE