Community Businesses and the Poverty Trap

We are familiar with idea of the working poor as individuals and being stuck in a poverty trap of poor education and reduced opportunities. We are also familiar with the idea that the lives of families in the working poor are fragile houses of cards and if, for example, one carefully constructed set of child care arrangements falls apart, the family unit risks joblessness and homelessness within in a very short period of time – all for want of cash-flow or access to resources. As a result of working with a number of small community businesses we are wondering if a similar poverty trap exists amongst one particular slice of non-profits?

 “Drawing on her considerable expertise, Sarah poses hard questions for organisations like Power to Change.  Are we getting the balance right between risk and reward in the community business marketplace?  Are we helping community businesses to break out of the poverty trap?” 

Richard Harries, Director of the Power to Change Research Institute.

Our theory is this: small (lets say under £500k annual turnover) community businesses, especially those based in areas of high deprivation can be just as precarious as a low-income family; and whilst it may not be a washing machine breaking down unexpectedly or child care arrangements going pear shaped that cause a crisis, it could be an unexpected need to replace a boiler and the lack of any reserves let alone a spare £20k that pushes them close to the edge. By contrast a small charity in a relatively affluent area is often much more resilient. This is in no small part because it has been built by a set of Trustees who already have the skills in building business models that harness both grant funding and trading income without being held hostage by either and a combination of networks which access high-net-worth individuals and a regular trading income. In addition, professional networks which they can leverage to make big development asks, requests which they can back up with the confidence and the planning to credibly meet the criteria by which their ideas and standing in a professional network are assessed. And, as a last resort, the organisation can ask those in its network to write cheques for unexpected costs if the only alternative was to shut the doors. It’s the difference between a community business serving the working poor and one supported by the upper middle classes. There is an inequality of access to finance, access to experience and to the other soft skills that grant funding programmes on their own aren’t enough to address.

Our other hunch is that the community businesses based in areas of greatest deprivation tend to be smaller in turnover, pay lower wages as well as be more fragile. Without considering how they would manage the process and the cash-flow to implement change from a fund and grant model to a sustainable earned income model, we risk making the earnings and opportunity gap between the haves and the have-nots worse rather than better if we only focus on making funds available to those who have already moved towards self-sustaining trading income.

As a grant funder develops its programmes of activity over a decade or more there is an interesting point about 4-5 years in when the organisation has to choose between reinforcing its early successes by reducing its risk and doing more of the same but better; and building on the successes by addressing tougher challenges and taking more risk.

This is not to say that funders should be girding their loins to take more risk in larger chunks but instead is asking the question as to whether there are particular pockets of activity which it would be well positioned to be able to take more risk without upsetting the overall balance between risk & innovation vs. certainty of returns.

We suggest this approach because one of the challenges for organisations moving into trading activities when they are used to bidding for grant funds to deliver services is that they are unlikely to budget to go round the delivery loop more than once, yet it is not a single step from the development and market testing of a new idea straight to self-sustaining trading. It is highly likely that there will be a need to tweak the offer and re-run the service/ production/programme before it gathers sufficient momentum (or delivers sufficient profit) to make a net contribution to the organisation as a whole, a process which in any business often takes over a year. So, whilst a grant funder doesn’t want to continue to fund ideas that don’t look like they are going anywhere,  there might well be value in finding ways to follow-on fund the best of the bunch. There might also be ways to evaluate the extent to which a bid is over-promising or under budgeting and earmark funds to help bridge the gap if it looks like the gap is likely to be worth bridging.

“There is definitely poverty in community businesses. We believe ‘Slow to Grow’ is better in that it establishes long term sustainability. It is hard though when we lack the professional network and can’t leverage the connections in contract awarding bodies that the larger organisations have via their Trustees.” 

Lynn Summerside, Managing Director, B’ActiveN’B’Fit

One example of how the skills issue is addressed is in the Design Council’s Spark Programme – successful participants get a combination of £15k in cash and a 12-week intensive development programme to rapid prototype their business and develop their physical product. The delivery team is sufficiently hands-on that they are able, in partnership with the funding panel, to work out which of the participants are far enough down the line to be worth backing at the next stage; the next stage being a cash investment of up to £200k (more likely £50-100k) in return for 5% of sales for 10 years. Importantly, one part of this evaluation of ‘next stage’ proposals is a review of whether the individual or team have the necessary soft skills to achieve a successful implementation and cross what we describe as the ‘valley of death’ or cashflow abyss between producing a first batch of product and selling enough units to pay for the next production run (repeat until actually profitable). This abyss has an equivalent in the building of trading incomes in community businesses as a delivery programme moves from first (funded) pilot to asking service users or commissioners to pay for subsequent delivery from their own pockets or annual public sector budgets.

So, this thought train is not exactly a set of firmly-coupled carriages but our question is whether there are things in here that chime with your experience and whether there are parts of this that might be worth exploring further? If there is a poverty trap in Community Businesses, does it matter and should we try to fix it? If we have significant inequality based not on remit or quality of delivery but on networks and location what can we do about it?

Sarah Thelwall will be speaking at the Locality 2018 event from 7th to 9th November.  Locality Convention 2018

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