Choose, and get up to 6 quotes at the same time!

What is better: 5% of revenue or 100% of profits to charity?

What is better: 5% of revenue or 100% of profits to charity?

Article · By Jarkko Oksanen on October 6, 2016

 

Which is more ethical, or gives more to charity?

A business that runs with 50+ employees and great profit, and donates 5% of its revenue to charity. Or the same business that donates 100% of its profits to charity.

Lets consider these two points, how they sound to someone when talking about marketing and what’s the reality.

Which donation is larger?

The quick answer is, it depends.

The reality is that if a company donates its profits to charity, this means that in a bad year, no money is going towards the charity or cause. On a very good year, all money after paying all business expenses goes towards the cause.

For example a company where the CEO makes 250 000+ per annum, can be a company that on the books shows no profit.
Revenue share on the other hand is clear, easily traceable and gives every year a share of the revenue that flows through the company. However in a bad year, it might put your business into a bad position.
Large revenue based models might affect growth of the business in a bad way.

If the same business is giving away 10% of its revenue instead of 5%, it might be facing issues growing, employing new people and finding money for marketing. With the 5% model, the business can be making twice the revenue in a few years, and therefore donating double the amount as in the previous year.

In dozens of year this effect multiplies.

Effect on marketing

Issue with the revenue model is that the marketing aspect of revenue shares is much less easily understandable to people that buy your products.
So lets say a business makes 1 million in revenue. They would donate 50 000 to their cause.

Now lets assume another business makes another business makes the same amount of revenue, and they are in the IT industry. Generally in the IT industry a company’s profits is something around 10-15%.

This would mean that if the company gives a 15% of its profits, they would be donating 150 000. If you market that ‘100% of your profits goes to a cause’ compared to ‘5% of your revenue’, the studies show that people think that the first one is the more ethical business. This needs to be kept in mind when considering marketing.
This can however be a false assumption.

Issues on transparency

But the issue is traceability.  It’s very easy in modern corporate accounting to make your business show as zero profit. Therefore a percentage of profits are very hard to track.

For example Donald Trump has run his business for the last 20 years without a “taxable profit”. This means that he does legal accounting actions at the end of each business year to cover for the business profits, such as investing large sums at the end of the business year to grow the business.

This means that no money is shown as “profit” and therefore business pays no taxes. The same model could be used to cheat customers on the social enterprise model.

Overview

Whichever option we choose, the three goals of social enterprises are:

Transparency, so that people know what they are getting. Just clearly stating each year how much you’ve been able to share is a great way to do this. A few examples of this:

Marketetability, it needs to help you differentiate from non-social business. A few examples of this.

Sustainablility. If you are giving away too much in revenue, your business will not be able to compete, and it will simply die off. And that’s not what we want.

Meaning you need to be sustainable to give any profits to charity, and that needs to be marketable for you to deliver better results that can be tracked by implementing basic principles of transparency.

Profit is not the enemy of social business. Sustainability, transparency and marketability is the key whichever way you choose.

Depends on your business and your goals.

Article by:

Jarkko Oksanen
on October 6, 2016

Stay up to date on social entrepreneurship around the world