Over the last four posts, we have discussed the challenges of feeding the unsheltered homeless and have devised means of addressing those challenges through a proposed social enterprise. This social enterprise follows a systematic financial model that is very similar to one that could be used by entrepreneurs in establishing a start-up for-profit business. We can now go deeper into the workings the Financial Model though this will not be an attempt to capture all of the details of the course. For that, I strongly recommend taking the course which being free can be expected to be a good return on investment.
The external customer or beneficiary for our enterprise is the unsheltered homeless who require a different delivery or business model than those living in shelters or those who are low and very low income but not homeless.
Among some of the constraints to serving the targeted beneficiaries are how much food can be carried and delivered within a defined distance and period of time-based on the equipment and available personnel. It also needs to be recognized that the homeless still have choices they can or have to make, like any client, which could impact the success of the venture.
The financial model, according to the course, also represents an internal customer.
The financial model is the voice of your “internal customer” whose needs need to be met just the same as your external customers.
It is this “internal customer,” or donors who use the model for decision making, that must be convinced of the project’s financial sustainability and sometimes potential scalability to fund the entirety or substantial portion of a nonprofit enterprise. While there is potentially strong external demand for our proposed enterprise no expectation can be had of the enterprise being grown or even maintained based on a future revenue stream because it does not exist.
However, even if we cannot depend upon a future revenue stream, we will undoubtedly be facing future operational costs. After some experimenting and sticker shock as to the costs of running such an operation, we came up with admittedly rough estimates. We were not preparing for an audit, simply making some sense of the parameters of our enterprise. It was fully recognized that all of the numbers would have to be tested in the real world and adjusted accordingly, perhaps even to the point at which the model would break down.
The costs reflected were for human resources, equipment, leases and operations. Constraints brought on through such costs had us reconsider our transactions per month based on the estimate of what one bus with three people could accomplish based on a set criteria. That criteria could range from quickly passing packages out to those in nearest proximity to endeavoring to make some form of connection to establish relationships for future interventions. The criteria I chose leaned closer to the later.
I calculated 3 salespersons (with one being supervisor/driver) for each Operational Unit, running scenarios for one, two and three buses. The human personnel costs were based on 2016 Oregon minimum wage plus 25% benefits. A premium for a supervisor for each truck was provided at 10% higher.
We operationalized the cost of the buses mentioned in the third post by depreciating their cost. We then calculated costs related to running a Home Office. Whether this would be necessary could be a question but for purposes of the course, we went ahead. It might seem to make little sense with just one bus but there could still be a need for a place of operations, e.g., to park the bus when not in use, and for coordination.
A Territory Manager was set 40% higher than the main workers. We placed the general operating costs under this category. The cost of buses and refrigerators and their depreciation was researched from the web as was the lease for commercial property in Portland, Oregon. Other costs were based on rough estimates or percentage factors.
The need for a head office became greater with a greater number of buses but we were also able to lower the cost per Operational Unit or cost per meal package while increasing the number of transactions. Scaling up from one operational unit with three people to three operational units and nine people and proportional support staff did make a difference. The estimated cost per meal was $3.88 for 3 trucks, $4.63 for 2 trucks and $8.29 for one truck. It was still presumed that the food was free and we inevitably missed costs so this was still an abstract model. It was felt to be a good beginning.
The next step involved going even further into abstract and speculative calculations. An entrepreneur who creates a new business that has the capacity to grow into multiple outlets must not only generate enough demand for their product or service so as to maintain the current level of operations but also generate enough to invest for future growth. Some growth might come from new investors or loans but there will still be new revenue to demonstrate internally generated growth to justify it. External sources are likely to be doled out based on performance.
The nonprofit has to ask for such investment in advance and then prove that it is a worthwhile risk for future investment. This may not seem logical as how does one determine the level of risk the enterprise entails? While concerns of profit may not come into play, any money lost or wasted could have been used for other beneficial purposes. The risk premium for our enterprise was set at a total of 95% reflecting a Required Rate of Return/Rate of Investment that was, in reality, being covered by the donors. How this risk could be spread out could be determined by the length of the investment period, 36 months or 60 months or time before sought after results were obtained and the type of bus that was to be purchased, long or short. We ran scenarios using all of the combined criteria.
The final calculation was to determine a price point for our product, the meal package. We did not make a final decision on what the meal package would be or what it would consist of. Jo leaned towards providing healthy burritos as it could be carried, easy to distribute and minimal need for clean up. I stayed with free food from the pantries though did not fully consider what that might involve. Whichever, there would though be associated costs we had not added in yet.
Financial modeling is again done iteratively, finding the sweet spot matching up product and price with consumers needs at a cost allowing the venture to be financially sustainable. This is true even when the product is being provided for free because of other life costs are borne by recipients such as the homeless. If they don’t believe that they can depend upon delivery of the product or feel diminished by it for some reason then they will not use it. Also if the monetary cost is too high then donors may look for lower hanging fruit to put their money towards.
This means non-profits often encounter a large gap between the price required for profitability, or in the case of non-profits the level of supportable financing required to sustain and scale up a social enterprise, and the price they believe consumers (the course says or, I am going to say and) donors will pay for the product. This is a natural tension inherent within the challenges that social issues present.
Ask yourself what you think would be the absolute maximum a customer would pay for the product or service you have in mind, and what would be the ideal price (i.e., the lowest) that you think would easily attract customers. Then pick a few prices that fall within this range.
Social entrepreneurs inevitably have to experiment then with different models or scenarios making tradeoffs to bring the equation into balance.
Transactions at steady were lowered to that used in the other modules to reflect limited capacity and desire to focus help rather than maximize output. So the only change in variables is the type of buses being used and the loan period.
The lowest price point chosen for each scenario was that which covered Single Transaction Costs and Operational Unit Whole Costs. There was not practical reason to go higher than this as clients are not making reimbursements and donors want the greatest efficiencies.
Next Part 6
Next Part 6
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