It doesn’t make any sense to think about social investment before you’ve thought about how your organisation generates its income and how that revenue model could evolve. Yet far too often the tool of social investment is talked about in isolation from a meaningful discussion about which revenue models work best and how they can grow.
This is why last year Access pivoted its strategy to focus much more on supporting organisations to build resilient revenue models through the Enterprise Development Programme. The EDP takes a sector-focused approach, and over the past year we have been working in partnership with Homeless Link, UK Youth and the Centre for Youth Impact to pilot this approach in the homelessness and youth sectors.
In addition to providing grants and peer-learning opportunities, the programme has sought to build a better knowledge base around the revenue models across each sector and their characteristics. Although charities and social enterprises are well versed in some of the broader trends in grants, contracts, trading and fundraising, we tend not to go into that next level of detail to consider at a sector level what works, at what scale and with what sort of profitability.
Over the past year the EDP partnership has begun to classify these revenue models in the homelessness sector. We identified 18 across six broad categories. First, three models were identified as being core to the homelessness sector: rent, advice services and housing first. Second, we have found that maintenance, renovation and construction, clearing and facilities, and space hire are all related to buildings in some way. Third, we have established that recycling, upcycling and making are examples of production-based models. Fourth, horticulture and produce have been identified as a particular model relating to agriculture. Fifth, services have been found to be the most common category, which encompasses seven common models: food and drink, childcare, wellbeing, financial inclusion, training and consultancy, employment agency models and social lettings agency models. Sixth, shops and e-commerce models fit into a retail category.
This categorisation is very much a work in progress, and feedback is very welcome. In reality, of course, organisations combine these models in a complex variety of ways, with one often subsidising another. However, thinking about them in isolation can help you to understand the financial drivers within the organisation and the opportunities for growth.
Across 73 organisations reviewed, the most common models that organisations sought support to develop were service-based, followed by production, then core housing services. Of the service models, food and drink was the most common for which support was requested, so we chose to look at those models in more detail. We found some key trends within this sample.
First, food and drink models are rather polarised by size of organisation. They are found in relatively small organisations – turning over £250,000 or less – where income earned from food and drink forms a large proportion, or all, of the organisation’s revenue. These models are also found in larger organisations, but where that income is a small part of the revenue mix, sometimes much smaller than the organisation’s external profile would suggest. But they are less common in the middle-sized organisations.
Second, homelessness organisations have a wide range of profitability, with the majority marginally profitable and about a quarter making a loss overall. Those organisations that have a food and drink element to their revenue model tend to be profitable overall, regardless of total turnover and whether food and drink is a large or small element of overall income.
However, in none of the 17 examples where we went into more detail on the numbers did the trading income earned from the food and drink offer meet the full costs of running the service.
So why do it? Organisations in the homelessness sector who have food and drink offers will not only see it through a financial lens, but also through an impact lens. Food-and-drink-based services provide good employment and training opportunities for service users. Enterprise models based around food and drink might help to attract grant subsidy that would not be available without that enterprise model being there in the first place. Such an offer can increase the visibility and profile of the organisation, from funders to passers-by. It might also be a first step into other trading models, given that food-and-drink enterprises have a relatively low cost of entry.
The suitability of a particular trading model for an organisation cannot be looked at in purely financial terms. Balancing the ability to generate revenue with the delivery of impact to beneficiaries is the key challenge. Over the past few years the sector has focused on building tools and practice around impact management. It is time that was matched by our understanding of how that impact is financed through the sector’s myriad revenue models.
Seb Elsworth is the chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises