The Recession Brings Tough Challenges and Opportunities, Say Experts on Socially Run Businesses

The tumultuous economy will test the leaders of charity-run businesses in a way they have never been tested before, Kevin Lynch and Julius Walls, Jr., authors of Mission, Inc., told participants at the Social Enterprise Summit. But at the same time, they said, the downturn offers exciting opportunities.

Staying on top of the business’s cash flow is critical.

“If you run out of cash, you’re done,” said Mr. Walls, who is chief executive of Greyston Bakery, a charity-run business in Yonkers, N.Y., that provides employment to people who are recovering from addiction, returning from prison, or have other problems that make it difficult to get a job.

Six weeks ago, Rebuild Resources, a screen-printing business in St. Paul that employs people who are recovering from substance abuse, instituted pay cuts to cut expenses during a tight period.

But the pay cuts were driven by the organization’s values, said Mr. Lynch, the charity’s president.

The cuts started with Mr. Lynch, who took a voluntary pay cut of more than 30 percent.

“That’s where the money is, in the higher salaries,” said Mr. Lynch. “So if you want to actually affect something, you have to go to the people who are paid the most.”

Other charity staff members took pay cuts that were tied to their salaries, with employees who made the least money taking a 5-percent decrease. But the hourly workers in the charity’s business were not asked to take a cut.

“Economically, they simply couldn’t sustain it,” said Mr. Lynch. “But more importantly, that is where the rubber hit the road for us on mission, and what we wouldn’t compromise on.”

At Greyston Bakery, cash flow is tightest during the first three months of the year. So, before the quarter started, Mr. Walls brought the business’s major vendors together, and explained that during that period, the business would pays its bills within 45 days, rather than its regular 30-day term.

“Not one of them said, No,” Mr. Walls told the audience. “Not one of them even gave me a hard time, but that’s because we talked to them about what we were doing.”

Balancing a charity-run business’s financial goals and its social mission becomes even more difficult in tough times, said Mr. Lynch.

“We’re learning to live with the fact that, for a period of time, we’re making more decisions that are 70/30 on financial survival, because we know we have to be there for the long run,” he said.

The danger, he said, is that over time that ratio will move further and further away from mission.

“So the way to avoid that happening is to get clear right now on what you will compromise and what you will not compromise on, and to know what that is before the decision that puts you into that zero-sum realm arises,” he said.

As difficult as the challenges facing nonprofit business ventures are, there are also new opportunities, Mr. Lynch and Mr. Walls told the audience.

“Now this sounds really cold-hearted and cold-blooded, but during tough times, there is a culling of the herd,” said Mr. Lynch. “It happens in nature, and it happens in business.”

When weak businesses go under, stronger ones need to go after the customers and market share that are up for grabs, he said.

The recession, he joked, is a good time for social enterprises to go shopping.

“Be on the lookout for deals for equipment, for raw materials, for inventory, for people, even entire businesses,” said Mr. Lynch. “There’s going to be fire sales.”

To be successful, charity-run businesses have to provide a high-quality product or service, he told conference participants. It’s not enough just to have a worthy social goal.

But with the current “backlash against traditional business,” the value of a nonprofit venture’s mission and story in attracting customers has increased, said Mr. Lynch.

“And that is something that should be milked for all it is worth in your marketing efforts,” he said.

The extraordinary challenges of the recession will stretch the leaders of charity-run businesses in unprecedented ways, said Mr. Walls.

To best help their ventures weather the storm, he said, leaders need to make sure that they take care of themselves and their personal relationships and not let the business become all-consuming.

“Give sweat and tears,” Mr. Walls told the audience, “not blood.”