Strategies for Profit Redistribution
How to use your business to give away money.
This is Part 2 on Giving & Redistribution, I'm going to dig into the nitty gritty of how to structure a strategy (without harming your business).
To read Part 1, how to think about redistribution and giving within your business, click here.
In Part 1 I wrote about the opportunity in stewarding business resources to create more resilient ecosystems. Since businesses are set up to generate more resources than individuals, we can also use them to channel those resources into community care.
In this second part I’m going to get into the actual how-to: the how much, how often of giving and redistribution strategies.
How to Calculate?
In my first post, I wrote about two “buckets” of giving: giving as marketing expense and giving to support an ecosystem of care (I’ll call that Ecosystem Giving form here on), since these two buckets operate differently in your business, how they fit into your financial story is also going to be different.
For events, ads, annual giving and other sorts of direct ask type giving that falls in the bucket of Marketing Expense, figure out a quarterly or annual budget relative to your expense and marketing strategy. There’s no right answer, as it will depend on your current goals, what your partnership strategy looks like, and your overall operating budget.
For Ecosystem Giving, the most important rule of thumb is to set giving as a percentage of either revenues or profits. For most businesses, resource distribution works best as a percentage of net profits after taxes to take into account the overall business context. The strategy here is to take care of all the needs of the business and the people within the business before redistributing, so we’re not giving necessary funds away. Benchmarking against net profits also ties giving to the overall success of the business: when your company creates more excess value, you’re able to give away more.
Best Practices:
If you’re not first taking care of yourself and your people, you shouldn’t be giving any money away, period. No one benefits if you run your business into the ground.
In most cases I don’t recommend defining your giving as a percentage of top line revenue. Particularly if you have a COGS-heavy business, or fluctuating revenues, there’s a likely chance of your cash flow getting wonky unless you have planned for giving to be a part of your overall pricing strategy. (Finance Nerd moment: if you’re calculating based on top line, then consider functionally treating giving as a Cost of Goods or Service, so that you’re keeping an eye on your gross profit margin. )
If you’re a pass-through entity (a sole-prop or an LLC), don’t forget about your own salary and tax distributions: these are expenses of the business even if they don’t show up on your profit and loss. I’ve seen a lot of folks take the net profit line on their P&L and use that as their “profit to give away” number, and then wonder why they run out of money in their bank account.
How Often?
I recommend building a giving practice in alongside other regular profit distributions. If you’re already distributing profits to owners or employees, calculate and redistribute on the same schedule — quarterly, biannually, or annually — adding an additional piece to your profit distribution pie.
If you’re new to regularly structured distributions, commit to a schedule that works best for you. Solo or partnership business without employees or employee profit sharing usually distribute profit at the close of every quarter. For businesses with employee profit distributions, annual is most common. The advantage to annual distributions is that you’ll be clearest on your tax obligations.
For the Profit First folks with monthly allocations, monthly or sustainer-structured giving can make sense — your giving percentage will be a portion of your profit allocation.
How Much?
For how much, there’s no set rule here, and it will depend on what your “whole pie” looks like. Most companies with employee profit distribution structures set aside 5%-15% of the distribution pool for giving. Other folks may want to redistribute more.
Accounting for your businesses context, your personal values and social positioning. Maybe you have enough and most or all of your profits can be redistributed!
Remember, you can change percentages and schedules depending on the needs of the business over time, so don’t feel like whatever you do at first becomes set in stone!
A Few Examples
A solo service provider ends Q3 with $10,000 in their profit account. They keep 1/2 or $5000 in the account for savings; the other half they divide 50% or $2500 as a distribution to themselves, and the remaining $2500 goes to community tithing. At the end of Q4 they have $5,000 in their profit account, and this quarter decide to redistribute $4000 of it.
In a two partner-owner agency with 8 employees, the company distributes profits annually after tax returns are complete. For 2021, they had net profits after taxes of $80,000. They reserve $40,000 for savings, and the remaining $40,000 is their profit distribution pot.
40%, or $16,000 is divided evenly between the partners.
50%, or $20000 is divided between employees
10% or $4000 is distributed to a community org voted on by the full team.
A chocolate maker decides to redistribute part of Valentine’s day sales, one of her busiest sales periods of the year. She calculates that 5% of her income from the holiday can be redistributed without harming her bottom line.
In an example of a member-based organization creating a funding pool, the cooperative Zebra’s Unite created the Zebra Solidarity Fund (inspired by the principles of Zakat, a morally obligated Islamic practice to dissuade hoarding and redistribute wealth). 2.5% of all gross revenues are set aside for the fund and co-op members will decide how to circulate back out to the community.
In which I speculate on B2B redistribution
Businesses aren’t built to generate resources evenly. A design agency working with large corporate budgets and an artisanal bakery will have wildly different margins. What then are the opportunities for creating resilient webs amongst businesses themselves?
Some years ago my I was hanging out with my friend Pete, owner of the now-shuttered Little Baby’s Ice Cream, the conversation turned to business and the capital he was working to raise at the time for a new location. He needed a relatively small amount of capital on a short timeline. We had enough cushion that I offered a small loan up, with a twist: what if we converted the small amount of interest on the loan in to a micro grant, to give out into our community? [You can read more about the experiment, which we called Shared Interest, here.]
We had leverage as a higher-margin service business to support a burgeoning (and capital intensive) lower-margin ice cream business, and could have easily just given the loan at 0% as well. There’s plenty of ways to create shared pools of capital amongst networked businesses, that can be easier to access (including for populations who have historically, and are still, being excluded from traditional sources of funding).
Building & Supporting Infrastructure
Shared Interest was an experimental gesture, however there are organizations already working in support of just economies with much greater impact.
While there’s nothing wrong with giving to individual orgs, philanthropic or charitable giving exists within the economy as we know it. We’re not changing the foundations.
There’s an opportunity for deeper and greater impact in either creating a sustained relationship of solidarity, or by supporting the building of infrastructure for building a different economy.
Runway is an organization which supports and funds Black entrepreneurship and business ownership, initiated with the idea of creating “friends and family” style seed funding to Black entrepreneurs.
The New Economy Coalition created the Black Solidarity Fund to redistribute funding to Black-led projects and organizations within the solidarity economy. (Wanderwell’s annual profit redistribution in 2021 went to this fund).
These funds are are building relationships and broader support and creating a pipes for resources to flow through and away from the systems oppression that direct our economy.
I would love to see more companies thinking about their redistribution and giving in more systemic ways, and beyond traditional donation-based giving to individual non-profits.
Let’s recap, shall we?
Set a margin based on your net profits after taxes. If you’re unsure, commit to a smaller percentage to start, you can always increase it!
Decide on the cadence for calculating and giving. Annually after taxes are done? Monthly when you do your Profit First allocations?
👉 If you enjoyed reading this post, feel free to share it with a friend!
