Social Entrepreneurs Risk (accidentally) Committing a Crime

Social Entrepreneurs are motivated by the desire to positively change society.
So it seems odd that this impulse could put them at risk of committing a serious crime. But i have experienced some otherwise fabulous Social Entrepreneurs come dangerously close to committing fraud – without even realising that they are doing it. And I have seen it often enough now to believe it may be an industry issue.

The cause lies in the culture of how planning & financial projections are used in much of the charity sector. The system encourages and incentivises ‘bold’ projections. Big plans and the promise of big results attract funding. But the very nature of a grant means that there are no consequences if projections are missed. Accountability and transparency are low in a sector where outcomes have not traditionally been measurable, and where finances are about managing cost budgets. There is no accountability dynamic once the funding has been placed.

Enterprises, of course, are viable and scale-able only in so far as the sales or income lines are achieved.

The problem comes when the projection culture of the charity sector is directly translated to the Social Enterprise plans and projections.

When the social entrepreneur goes out and raises anything other than grant funds based on those projections, they may – without being consciously aware that they are doing it – be committing fraud.

Projections presented by management are necessarily taken by funders in good faith. The purpose of the due diligence process is to test those assumptions.

Too often, we are finding that sales assumptions in social enterprises seeking funding do not bear scrutiny. They seem to have been put together more in hope than in expectation.
We have witnessed the impossibility of achieving sales projections dawn on the management of social enterprises before our very eyes during the due diligence process. Even worse, we have also seen management who cling to projections which are manifestly not going to be met.

This is good, if sometimes painful. As management of social enterprises choose to embrace the positive social enterprise culture, the process of learning some hard lessons – whilst retaining what is so culturally wonderful in the charity sector – is a positive one that can only make them more effective as they work to change society for the better. But they need to careful not to inadvertently commit fraud whilst they’re about it!

  1. 09th Sep 2010

    Absolutely correct.

    The truth always sets you free. The best (and worst) service a prospective investor can provide to the prospect is their intellectually honest evaluation of the revenue/self-support that the young enterprise thinks it can produce.

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