THE ENTERPRISE: LARKIN BUSINESS VENTURES

arkin Business Ventures (LBV) operates one Ben and Jerrys Ice Cream Partnershop, with a second one coming on line in June of 1996. LBV holds the ice cream concession contract at 3Com Park (formerly Candlestick), in San Francisco. And LBV also runs an events catering enterprise, whose numbers are included with those of the Chestnut Street Store.

The Candlestick operation had Net Sales of $154,600, with Cost Of Goods Sold of $56,617, leaving a Gross Profit of $97,983. Operating Expenses of $40,978 made for a Net Income of $56,853, after depreciation charges were taken. LBVs All Enterprise Income for 1995 was $36,958. Total Program and Administrative costs were $222,921, including one-time start-up costs of $40,000 and $24,0008. Net Income Before Subsidy for 1995 was ($185,963). This deficit was covered through $387,508 in Enterprise Grants and $164,365 in Program Grants, leaving LBV with Total Net Income of $365,910 that includes the one-time costs. This closing position is, however, misleading in that it primarily represents those funds available for the start-up of the second store, as well as only the first of ten charges to be taken for one-time capital costs associated with the first store which will be booked against future years statements. The true closing position of LBV is break-even.

The Numbers
During 1995, LBV simultaneously launched the three enterprises described above. The numbers discussed are for only eight months of the fiscal year and simply give an indication of the increasing profitability of these enterprises. In 1995, the Chestnut Street Ben and Jerrys did $238,520 in Net Sales against Cost Of Goods Sold of $115,347, leaving a Gross Profit of $123,173. Operating Expenses were $122,323 which made for a Net Income of negative ($19,895). It should be noted, however, that this figure is after depreciation charges have been taken.

The Ratios
The Ben & Jerrys Store has a Current Ratio of 2.37 and a Quick Ratio of 1.69. These are both slightly above the industry average of 1.4 and 0.7, respectively. The Inventory Turnover of 18.33 is right at the industry average of 18.6. The Debt Ratio is 18% while the industry is at 28%. The stores Gross Margin is 51.6% and the industrys is at 65%. All these indicators show a store that is right in line with the industry, even after only a short time in business. The negative Net Income clearly results in negative profitability ratios although even with that negative Net Income, LBV enterprises are still within 10% of break-even. The

8 These figures are 10% of the total cost which will be carried over a ten year period into the future.

THE NUMBERS:TRUE COST ACCOUNTING

173

Candlestick operation, on the other hand, shows a healthy Gross Margin of 63.38%. The Consolidated Ratio for LBV also looks very strong. Current and Quick Ratios are 1.38 and 1.25, respectively. The combined Inventory Turnover of 27.19 shows a lower turnover than would be expected of a premium ice cream enterprise and could reflect factors related to the start-up of the Castro Street Store. A debt ratio of 39% indicates a capacity to carry additional debt, if needed. A 101.3% Return On Assets along with a Return on Equity of 165% both indicate the high investment charges taken

in this period and discussed above. Gross Margin for LBV is a respectable 56%, showing future capacity for financial health. Interestingly, the subsidy available to LBV by virtue of its non-profit standing is what keeps them in the game at this time. Profit Margin on Sales with Subsidy is 93%, while without the subsidy it drops to -47%, leaving LBV with paper losses. At this time, Percentage Enterprise Subsidy is 58%, which is reasonable given their position of having been in operation less than 12 months at this writing. Overall, the program as a whole shows a very healthy beginning.

LARKIN BUSINESS VENTURES

Income Statement, Balance Sheet and Ratio Analysis for Calendar Years 1995 1996

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT 174
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THE ROBERTS FOUNDATION: A PROGRESS REPORT

Larkin Business Ventures Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

175

Larkin Business Ventures Continued

8 These figures are 10% of the total cost which will be carried over a ten year period into the future.

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT 176
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THE ROBERTS FOUNDATION: A PROGRESS REPORT

Larkin Business Ventures Continued

*
*This surplus represents funds on hand for the start-up of the 2nd store, as well as excess, one time capital costs to be charged against future years. The actual closing position of LBV is closer to break-even.

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

177

Larkin Business Ventures Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT 178
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THE ROBERTS FOUNDATION: A PROGRESS REPORT

Larkin Business Ventures Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

179

THE ENTERPRISE: YOUTH INDUSTRY

n 1995, Youth Industry operated four micro-enterprises: a thrift store solicitation enterprise, a climbing wall manufacturing enterprise, a silk-screen shop, and a bicycle repair shop.

The Numbers
This past year the solicitation enterprise earned Sales of $260,600, with Cost Of Goods Sold of $109,452 and a Gross Profit of $151,148. Operating Expenses were $96,322, leaving Net Income of $54,826. This was fortunate in that the climbing wall manufacturing venture lost $51,635! The climbing wall effort was pursued when a volunteer welder offered to teach young people welding in the course of producing climbing walls. While sales of the first few walls boded well for the venture, the market is extremely tight (even the sports most ardent practitioners can only use so many climbing walls!) and sales dropped sharply after the initial success experienced early in the year. The decision was made to end the venture at the close of 1995. The silk-screen shop, ZeroLith, booked $122,110 in Sales against Cost Of Goods

Sold of $75,510, leaving a Gross Profit of $46,600. Total Operating expenses for the screen shop were $17,702, leaving a Net Income of $28,898. This figure represents significant movement from the prior years deficit of a negative ($10,705). The bicycle repair shop also closed the year just in the black, with Net Sales of $85,626 against Cost Of Goods Sold of $30,100, representing Gross Profit of $55,526. The reason for such a high margin is that the bike shop receives most of the bikes from the San Francisco Police Departments regular disposal of stolen and abandoned bicycles which are then broken down by the bike shop for parts, or renewed and sold. After subtracting operating costs, the bicycle repair shop had net income of $2,647, just enough to keep it in the black. Total All Enterprise Income for Youth Industries was $34,736 for 1995. Total program and administrative costs came to a total of $120,711 for the year, which, when All Enterprise Income is deducted, left an outstanding deficit of ($85,975) for the year. This deficit was covered through Corporate donations of $75,882, Individual donations of $14,652 and Foundation grants totaling $55,500. The final Net Income for the organization was $60,059.

The Ratios
As might be imagined, conducting a ratio analysis of these extremely small enterprises is very difficult. The solicitation enterpriseessentially an operating contract with an area thrift store to solicit contributions of clothing and other itemsis actually the early stage of Youth Industries own effort to establish a thrift store. No indus-

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

try standards are available for comparison. With regard to the climbing wall enterprise, we can see that with a Return On Assets of -281% and a Return On Equity of -99%, it was not a raging success as a profitable venture. These figures reflect the fact that the climbing wall endeavor had high capital requirements and Cost of Goods Sold. ZeroLith Printing, the silk-screen venture, came out reasonably well, with both Current and Quick Ratios of 7.06. An industry standard for commercial and other printing trade services lists average Current and Quick Ratios of 3.5 and 1.0, respectively. Return on Equity is 234% for this unit, compared to the industry standard of 19.2%. The bicycle repair shop was compared with miscellaneous repair services with the following results. With Current and Quick Ratios of 5.25, Youth Industries compares well with the industry standard of 1.6

and .9. Return on Assets for the bike shop is 3%, however, compared to an industry level of 4.7%. Furthermore, the bike shop has a Return on Equity of 3%, compared with an industry level of 5.1%, which reflects that while it covers its costs, the bike shop is still not competitive as an investment comparable to others in the field. Analysis of the consolidated statement shows that it is sponsorship with the nonprofit parent corporation that makes these enterprises truly viable. Return on Assets climbs to 32% and Return on Equity moves to 39%. Profit Margin on Sales is -16% without the subsidy but rises to 11% when the subsidy is included. Finally, the Percentage Enterprise Subsidy is a modest 21%, showing that self-sufficiency is within reach for this organization. Overall, with the figures for the climbing wall eliminated, these ventures operate in a healthy financial state.

YOUTH INDUSTRY
Income Statement, Balance Sheet and Ratio Analysis for Calendar Years 19951996

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

181

Youth Industry Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT 182
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THE ROBERTS FOUNDATION: A PROGRESS REPORT

Youth Industry Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

183

Youth Industry Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT 184
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THE ROBERTS FOUNDATION: A PROGRESS REPORT

Youth Industry Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

185

Youth Industry Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT 186
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Youth Industry Continued

UNAUDITED FINANCIALS. SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT THE NUMBERS:TRUE COST ACCOUNTING
3

187

CONCLUSION: BREAK-EVEN, PROFITABILITY AND THE SELF-SUSTAINING ENTERPRISE

9 Lecture, Allen Clelland, St. Marys College, May, 1996.

he numbers speak for the experience of these organizations. Some are doing well and moving toward increased earnings. Some are having problems, but are improving their positions each month. And some are fighting to move into the black. It is appropriate at this point to address the questions: What constitutes break-even and profitability? And how have these social purpose ventures fared as non-profit enterprises? In recent years, the market has been flooded with books assessing, from numerous perspectives, corporate profitability and factors for success. Some initial research in this area was done in the early 1970s, by Bruce Henderson of the Boston Consulting Group. For his evaluation pool he selected aircraft manufacturers which had been initially founded or evolved to provide the United States with its fleet of planes during World War II. His analysis may seem fairly basic when viewed through the haze of complex frameworks and analysis which now clog the field; however, it cuts to the core of our evaluation of the current success and challenge of non-profit enterprise. Henderson found that what made for profitability and success in the field of aircraft manufacturing was increasing market share and experiencethats all.9 And yet that is everything.

When we assess the experience of the New Social Entrepreneurs, we see that most of them, having established a foundation for their enterprise, are now cultivating greater organizational experience and working to achieve increasing market share. These two factors taken together make for their increasing success, just as the lack of these two elements has made it extremely difficult for most to succeed gloriously during start-up. In the practice of small business development, the standard start-up timeframe is commonly defined as three to five years. Obviously, this timeframe varies depending upon the industry, market, sales projections, and any number of other factors. Regardless, the process of growth for a small business may usually be viewed as falling somewhere within this period. In less than three years, one may say a business has not been given an adequate opportunity to establish itself. If more than five years have passed and there is no evidence of significantly improving returns, its time to re-evaluate the business and the assumptions upon which it was founded. And, yes, serious consideration should be given to closing the enterprise at that time, if not before. The following chart summarizes the current status of the enterprises presented in this chapter. Each enterprise has been in operation for five years or less. The businesses are rated according to whether they are primarily subsidized, near break-even, or profitable; if not currently profitable, the target for profitability is rated. Primarily subsidized refers to whether the enterprise is presently receiving subsidy. Break-even is defined as at or within 10% of covering its total enterprise costs from total enterprise sales. Profitable refers to whether the business is covering total enterprise costs with total gross sales and generating a revenue surplus. And target profitable is defined as the date by which the enterprise will, if it maintains present sales and projections for the immediate future, achieve better than break-even. Again, this assessment is made not upon hoped for or inflated sales figures, but rather upon realistic projections based upon sales as of this date.

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

AGENCY/ENTERPRISE:
RUBICON Building/Grounds Bakery OAK STREET HOUSE Ashbury Images SF City Store HOSPITALITY HOUSE Art Start Retail Gallery LARKIN BUSINESS VENTURES Chestnut St. Store 3Com Park SOMA FOUNDATION Steam Clean YOUTH INDUSTRIES Pedal Revolution ZeroLith Printing Thrift Solicitation CONARD HOUSE Coffee Shop Janitorial

SUBSIDIZED:
NO YES

BREAK-EVEN:
YES NO

PROFITABLE:
YES NO

TARGET PROFITABLE
Currently 3rd Quarter, 96

YES NO

NO YES

NO YES

1st Quarter, 97 Currently

YES YES

NO NO

NO NO

1997 1997

NO10 NO

YES YES

YES YES

As of 5/1/96 Currently

YES

YES

NO

4th Quarter, 96

NO NO NO

YES YES YES

YES YES YES

Currently Currently Currently

YES NO

YES YES

NO YES

4th Quarter, 96 Currently

10 After a depreciation charge of $19,000, the store is not in the black, however on a straight cash basis it receives no present subsidy.

This chart and the supporting financial information already presented show that while our revenue base is modest and the sponsoring organizations are receiving subsidies to cover their administrative and programmatic costs, of the 14 enterprises presented above, eight no longer receive subsidies from the HEDF or other sources, 10 have achieved break-even or are within 10% of doing so, and eight are presently profitable, with only two questionable in terms of long-term profitability. Yes, the enterprises balance sheets are relatively weak. And, yes, the organizations themselves are still receiving significant subsidies from the Homeless Economic Development Fund and other supporters. Regardless, the fact remains that these

groups have launched and are successfully managing social purpose ventures that are employing formerly homeless people, covering their basic costs once they have been started, and promise to support themselves into the future. These are limited beginnings; it is too soon to claim victory or lay any claims to massive success. However, these organizations prove that with the proper financial and technical support and access to appropriate venture capital, nonprofit, social service organizations can play a key role in expanding economic opportunity for formerly homeless people. And they are doing so through the creation of market-directed, social purpose enterprises.

THE NUMBERS:TRUE COST ACCOUNTING

189

BANKERS TRUST?
In addition to the preceding financial and narrative evaluations, given that one long-term goal for all these enterprises is independence from foundation and other support, it is also helpful to understand how those in the commercial banking world might view these ventures. A complete discussion of whether these small businesses would gain a bankers trust is beyond the scope of our work, but the reader may be interested to know that when evaluating small businesses, loan officers in the banking community do not use a single set of financial criteria to assess risk, make decisions regarding the viability of any given enterprise, or calculate a loan applicants ability to service assumed debt. While the actual criteria used by each bank varies and is not usually made public, the following check list was provided to us by an anonymous source lodged deep within the small business lending unit of a national commercial bank. Our mystery bank evaluates small business loan applicants in the following areas:
Has the enterprise been in operation for at least three years? Has it had the same manager for the last two years? Has is shown a net operating profit for the past two years? Is there a personal guarantee by the owner for at least 51% of the enterprise debt? Would the bank maintain first position on the loan? Is the enterprise operating in a preferred or acceptable industry? Is the firm privately owned and managed? Is it within the geographic target of the bank? (i.e.,. are there local branches?) Is there a main banking relationship between the bank and the applicant? Are annual revenues between $200,000 and $1,000,000? Has the enterprise established a good credit history? Sufficient debt service coverage: 1.5 for Lines of Credit 1 for Term Loans Is the current ratio at least 1? Is the debt leverage ratio no more than 3:1? Is any debt to outside at least 2:1 of Guarantors net worth? Is there concentration of revenue? (i.e., does more than 25% of the firms revenue come from any one customer?) Is the guarantor of the loan worth a minimum of $200,000?

Naturally, on many of these points our enterprises are still on the uphill curve. At the same time, a surprising number of them are on their way to being able to affirmatively answer many of these questions. And that is an important goal for many social entrepreneurs in search of true market viability and financial sustainability for their enterprises.

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

A COST BENEFIT ANALYSIS OF ENTERPRISE CREATION FUNDING: NET PRESENT VALUE AND PROJECTED RETURNS

Cost-Benefit Analysis
his chapter describes an approach to evaluating prospective non-profit business ventures using cost-benefit analysis. The basic features of cost-benefit analysis are: 1. Determining estimated monetary values for both costs and benefits; 2. Discounting the estimated values of future costs and benefits to their present value; and 3. Comparing the present value of costs with that of benefits, generally in the form of a ratio of benefits to costs. On the surface, these steps seem both straightforward and objective. In practice, their implementation is generally complex and frequently quite subjective. Normally, even identifying all the relevant costs and benefits requires considerable creativity e.g., in understanding opportunity costs and external effects. Along the way, many intangible costs and benefits are often identified but most frequently set aside as being not amenable to quantitative analysis. Also, estimating and setting monetary values for both future costs and benefits often involves a myriad of assumptions about factors including market behavior, business cycles, technological changes, and changes in the makeup of human services. Next, the process of discounting costs and benefits to their present value equivalents requires selecting a discount rate; and if the future streams of costs and benefits flow most heavily at different timesas is almost always the casethat very selection can have a profound effect on how various projects compare with one another. Selecting a high discount rate will tend to emphasize costs or benefits that occur in

Introduction
he previous chapter in this volume focused on cost accounting for nonprofit-run business ventures. That approach can provide non-profit managers with useful insights and guidance. In this chapter, we describe a quite different way of looking at both the costs and benefits of the same businesss venturesthis time looking at them from the viewpoint of public policyan approach that can inform both government and foundation decisionmakers.

THE NUMBERS: COST BENEFIT ANALYSIS 3 191

the early years of a project and will minimize the importance of what happens several years later. In contrast, selecting a low discount rate will put greater emphasis on more distant costs and benefits and ascribe somewhat less importance to what happens at the beginning of a project. For example, a proposed project that requires a $100,000 first-year investment and yields total annual benefits of $5,000 might appear to be an acceptable investment using a three percent discount rate, but would be seen as merely break-even using a five percent rate, and quickly rejected when costs and benefits are discounted at seven percent. Because of these various limitations, cost-benefit analysis generally is most useful for ranking alternative projects rather than for making single, yes-no decisions. By applying the same (or at least similar) assumptions and subjective decisions more or less uniformly across the evaluations of several competing projects, the analyst can at least put all the competing applicants on a level field. Yet even in this context, it is entirely possible that the relative rankings of several projects can be altered by seemingly innocent decisions, such as setting a slightly higher discount rate that devalues those projects with front-loaded costs and much later benefits. The application of cost-benefit analysis explored in this chapter is to the proposed business ventures by non-profit organiza-

tions and, in particular, those businesses operated by Rubicon Programs. In the remainder of this section, we describe the analytic framework by which our subsequent analyses are guided. The sections that follow provide more detailed discussions of costs and benefits respectively. In the last section, we bring these two strands together for a final comparison.

An Analytic Framework for Costs and Benefits

o evaluate proposed non-profit business ventures, we will adopt a broad public policy point of view. In effect, we will view the entire human service delivery system together with its primary funding sources both government and foundationsas if it were a single organization. Even the parent non-profit organization (parent of the business venture under consideration) will be viewed as part of that huge organization. However, we will view the proposed nonprofit business venture as a separate organization. And the focus of our analysis will be on the interactions between the two organizationsthat is, between the proposed business venture and the entirety of the human service delivery system. Following this approach, we will treat as costs all support for the business venture regardless of the source, including both government and foundation support, as well as any direct or indirect subsidies received from the non-profit entity itself. Each of these possible sources of support might have been directed elsewhere (i.e., to other human service endeavors), and, in the absence of information to the contrary, their opportunity costs should be treated equally. Similarly, we will treat as benefits both the direct financial gains (if any) derived by the parent non-profity entity as well as any cost savings subsequently enjoyed by either government agncies and/or non-profit human service providers (including as well any cost savings experi-

FIGURE 1: TRADITIONAL SYSTEM

Foundations

Private Sector

Government Agencies

Non-Profit Organization

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

FIGURE 2: NEW COSTS

Foundations

Private Sector

Government Agencies

Non-Profit Organization

Business Venture

enced by the proposed non-profit parent of the new business venture). Figure 1 shows a general model for the direct flow of funds in the non-profit sector. Under this traditional model, government agencies (through contracts and grants), foundations (through grants), and the private sector (through donations and volunteerism) have supported non-profit organizations in their expanding role as human service providers. Creating a nonprofit business venture will add several new components to the traditional model.

These grants are shown by the arrow from foundations directly to the non-profit business venture. Second, additional support, both direct and indirect, almost always comes from the parent non-profit organization itself. Typically, the non-profits executive director and other members of the management team directly subsidize the business venture by devoting a large part of their time to its supervision and administration. Similarly, the parent non-profit often indirectly subsidizes the business by providing both formal and informal access to facilities, supplies, equipment, payroll services, insurance, legal support, etc. All of this subsidy (both direct and indirect) is shown in Figure 2 by the arrow from the parent non-profit to the business venture. Third, because the non-profit businesses that we will consider here are staffed in part with clients of the parent non-profit, the non-profit will generally provide various support services to those clients, even after they have been employed. This is especially the case for clients who are participating in on-the-job training but who are not yet employed on a full-time basis. While it is not unreasonable to suggest that the costs of these services would be borne by the parent non-profit even in the absence of the proposed business venture, we will adopt a more conservative approach here and treat these costs as another form of subsidy from the parent organization to the business.

2. NEW BENEFITS 1. NEW COSTS

Introducing a subsidiary business venture (whether legally a subsidiary corporation or not) creates new costs that must be borne by a combination of the two sources shown in Figure 2. First, financial support for the new business almost never comes from traditional, private-sector financial sources (e.g., banks, venture capitalists, etc.). Instead, foundations have stepped in, through initiatives such as the HEDF, to provide necessary start-up funding and even continued support through a combination of short-term and ongoing grants. Introducing a subsidiary business venture also creates new streams of benefits that are shown in Figure 3. First, the business may in fact be successful and return a profit to its non-profit parent organization. As a rule, most business ventures are not profitable in their early years, and businesses mounted by non-profit organizations are not likely to be exceptions to this rule. Moreover, even if the new business venture becomes (sooner or later) profitable, it may be wise to retain some or even all of the profits in the business itself rather than paying a dividend to the parent organiza-

THE NUMBERS: COST BENEFIT ANALYSIS 3 193

FIGURE 3: NEW BENEFITS

Foundations

Private Sector

Government Agencies

Non-Profit Organization

Business Venture

Formerly Homeless Employees

1 See the chapter in this volume on Legal Structure Issues.

tion. Nonetheless, the yearly changes in owners equity represent an ongoing stream of benefits that ultimately augments the non-profit parents ability to deliver services. This new benefit is shown in Figure 3 by the arrow from the business

venture to the non-profit parent. Second, and perhaps most importantly, non-profit business ventures are generally set up to accomplish social as well as economic purposes. They can provide a training ground and even permanent employment opportunities for people who may be indigent, homeless, and/or disabled. While we do not pretend to measure the personal benefits derived by these individuals, we can estimate the economic benefit in terms of the reduction in costs to human service providersincluding cost savings for government agencies, other non-profit service providers, and even the non-profit parent organization. These cost savings are shown in Figure 3 as an arrow from the marketplace for labor to government and other service providers. Third, by creating new workers, nonprofit businesses also create new taxpayers. Their personal income taxes augment the stream of funds that flow to government and are thereby available to support public services. From our public policy point of view, these new taxes consititute additional benefits. In Figure 3, these benefits are included in the arrow from labor to government and other service providers. By contrast we have not included changes in business income taxes in this new framework. Depending upon how the business venture is legally organized and upon its relationship to the parent organizations charitable mission,1 the non-profit parent may be required to pay unrelated

TABLE 1: GRANT SUPPORT FOR RUBICONS NON-PROFIT ENTERPRISES

FIVE-YEAR TOTALS $535,000 $207,874 $742,874

1991 Grants Made ROBERTS FOUNDATION OTHER SOURCES TOTALS $85,000 $83,968 $168,968

1992 $95,000 $11,906 $106,906

1993 $85,000 $75,107 $160,107

1994 $141,090 $(8,910) $141,090

1995 $120,000 $45,803 $165,803

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

TABLE 2: PRESENT VALUE CALCULATIONS FOR FOUNDATION GRANTS

1991 Years to Cost Grants Made
3% 9% 0 $168,968 $168,968 $168,968

1992
1 $106,906 $103,792 $ 98,079

1993
2 $160,107 $150,916 $134,759

1994
3 $141,090 $129,117 $108,947

1995
4 $165,803 $147,314 $117,459

FIVE-YEAR TOTALS
$742,874 $ 700,108 $ 628,212

1996 Years to Cost Grants Projected

3% 9% 5 $92,612 $79,888 $60,191

1997
6 $12,022 $10,068 $7,168

1998
7 $ $ $

1999
8 $ $ $

2000
9 $ $ $

TEN-YEAR TOTALS
$847,508 $790,064 $695,572

business income taxes (UBIT) to the Internal Revenue Service. From our public policy viewpoint, this effect is neither a cost nor a benefit, but merely a transfer of funds from one public service entity to another. Alternatively, we can look at it as a cost to

the non-profit organization and a benefit to the federal government, with the net effect being zero. Accordingly, we have not included the payment of UBIT as part of Figure 3 nor is it included in the analyses that follow.

TABLE 3: PRESENT VALUE CALCULATIONS FOR BUSINESS SUBSIDY

1991 Years to Cost Subsidies Made
3% 9% 0 $84,093 $84,093 $84,093

1992
1 $267,506 $259,715 $245,418

1993
2 $363,270 $342,417 $305,757

1994
3 $475,472 $435,124 $367,152

1995
4 $482,273 $428,493 $341,654

FIVE-YEAR TOTALS
$1,672,614 $1,549,842 $1,344,074

1996 Years to Cost Subsidies Projected

3% 9% 5 $488,031 $420,980 $317,187

1997
6 $503,079 $421,321 $299,970

1998
7 $518,789 $421,823 $283,795

1999
8 $535,204 $422,495 $268,601

2000
9 $552,374 $423,349 $254,328

TEN-YEAR TOTALS
$4,270,091 $3,659,809 $2,767,955

THE NUMBERS: COST BENEFIT ANALYSIS 3 195

Overview

n the next two sections, we explore each of these new costs and benefits in greater detail. While we will draw upon examples from a variety of projects funded by HEDF over the past six years, the main thread of our analysis will be a series of grants made to Rubicon Programs, Inc. to operate two businesses that serve as training and employment opportunities for homeless and disabled clients. These analyses include three simplifying assumptions. First, cost-benefit analysis is generally used prospectivelythat is, as a tool for selecting among competing claims for scarce resources. In contrast, our analysis will combine retrospective and prospective analysesthat is, it will include estimates of historic costs and benefits over the past five years as well as projections of these factors for the next five years. However, we will conduct our analysis as it might have been conducted five years ago, when initial funding decisions were actually made. Second, while those funding decisions were made and remade each year, we will consider the costs and benefits over a peri-

od of 10 years as if these resulted from a single decision made at the beginning of that period. And third, for simplicity of calculation, our analyses will treat all costs and benefits as if they occur at the beginning of each year, rather than as if they are spread throughout the year.

Analyses Using HEDF Cost Data

FOUNDATION SUPPORT
The requests by non-profit organizations for foundation support of a new business venture are as diverse as are non-profits themselves. Some seek only one-time, start-up funding, while others recognize a need for several years of support. Some request a smaller initial grant to cover the costs of developing a business plan; others are looking for a major infusion of capital to start their business fully funded. And within each of these alternatives there is considerable diversity based upon the nature

TABLE 4: PRESENT VALUE CALCULATIONS FOR SERVICE SUBSIDY

1991 Years to Cost Subsidies Made
3% 9% 0 $208,616 $208,616 $208,616

1992
1 $264,025 $256,335 $242,225

1993
2 $329,011 $310,124 $276,922

1994
3 $338,464 $309,743 $261,356

1995
4 $333,910 $296,675 $236,550

FIVE-YEAR TOTALS
$1,474,026 $1,381,493 $1,225,669

1996 Years to Cost Subsidies Projected

3% 9% 5 $342,140 $295,133 $222,367

1997
6 $350,693 $293,700 $209,107

1998
7 $359,461 $292,274 $196,637

1999
8 $368,447 $290,856 $184,911

2000
9 $377,658 $289,444 $173,884

TEN-YEAR TOTALS
$3,272,426 $2,842,899 $2,212,577

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

TABLE 5: PRESENT VALUE CALCULATIONS FOR BUSINESS PROFIT

1991 Years to Benefit Profit (loss) Reported
3% 9% 0 $128,171 $128,171 $128,171

1992
1 $170,217 $165,259 $156,162

1993
2 $453,557 $427,521 $381,750

1994
3 $359,037 $328,570 $277,242

1995
4 $545,134 $484,344 $386,187

FIVE-YEAR TOTALS
$1,656,116 $1,533,865 $1,329,512

1996 Years to Benefit Profit (loss) Projected

3% 9% 5 $618,325 $533,372 $401,869

1997
6 $698,915 $585,330 $416,740

1998
7 $787,982 $640,702 $431,053

1999
8 $886,809 $700,055 $445,060

2000
9 $996,923 $764,059 $459,011

TEN-YEAR TOTALS
$5,645,070 $4,757,383 $3,483,245

2 Projections shown in Table 2 for 1996 and beyond are based on the assumption that grant funds will decrease as business profitability increases.

of the proposed business venture: Some proposed businesses require considerable capital for plant and/or equipment, while others are far more labor-intensive and require much less in capital investment. Some applicants anticipate periodic problems with liquidity, while others project a much more stable cash flow. As shown elsewhere in this volume, the grants actually made over the past several years by HEDF have varied as well. Table 1 shows the actual year-to-year grants made to support business ventures operated by one of HEDFs larger applicants, Rubicon Programs. (As noted in the previous section, in the analyses that follow we treat these grants, as well as other historic costs and benefits, as if they were projections that might have been made more than five years ago rather than as retrospective data.) As Table 1 also shows, Rubicons business operations also received various other grants (and contracts) from other foundations and from government agencies. Once one has projected a stream of costs (or benefits), the next analytic step is to discount these to their present value. Present value can be thought of as the

amount of money that one must put into a savings account today in order to withdraw the future costs (or benefits) at the appropriate future dates and have nothing left over at the end. The problem, of course, is deciding just what interest rate (referred to in cost-benefit analyses as the discount rate) that hypothetical savings account should be thought of as paying. As shown in Table 2,2 we have selected two alternative discount rates: a low rate that approximates the marginal cost of capital to foundations, and a high rate that approximates the cost of a business loan to non-profit, community-based organizations three percent and nine percent respectively. (As noted earlier, the lower rate will put somewhat greater weight on costs and benefits in the more distant future, while the higher rate will put more emphasis on the immediate, start-up costs and early benefits.) The result of these calculations is a pair of discounted present values. The discounted cost of the $847,508 in grants to Rubicons businesses had a present value at the beginning of 1991 of $695,572 using a nine percent discount rate, and $790,064 using a three percent rate.

THE NUMBERS: COST BENEFIT ANALYSIS 3 197

BUSINESS SUBSIDY BY THE PARENT NON-PROFIT

Just as foundation support varies considerably, the ways in which non-profits subsidize the start-up and ongoing operations of their business ventures are also quite diverse. For most, the need for subsidy is most acute during the start-up phase of the new business, and many non-profits devote considerable management time to this planning and start-up, allow free use of idle facilities and/or equipment, and incur additional burdens to their bookkeeping, payroll, legal, and insurance budgetsmuch of which had been unanticipated prior to starting the new business venture, and all of which have been generally unrecognized in

3 Projections shown in Table 3 for 1996 are taken from Rubicon Programs current-year estimates. Projections for subsequent years are based on an assumed 10% annual growth rate in costs for the Bakery and a 2.5% growth rate in costs for the Building and Grounds business.

accounting for the new business operation. The earlier chapter on True Cost Accounting provides an initial attempt to quantify some of this start-up and ongoing subsidy. Under Rubicons enterprise accounts, three line items represent business costs actually borne by the parent non-profitthe two Administrative Salaries lines and the Other Operating Expenses line included for the Buildings and Grounds business. While a much more detailed study is necessary to determine how the non-profits indirect expenses actually behave when a new business venture is created, the total of these three items provides a reasonable approximation of the extent of the business subsidy. Table 33 shows the estimated annual business subsidies for Rubicon Programs

TABLE 6: SERVICE COSTS OF CLIENTS PRIOR TO EMPLOYMENT

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as well as the calculation of the total present value (as of the beginning of 1991) of these costs. The present value of the subsidy is $2,767,955 at a nine percent discount rate and $3,659,809 at a three percent discount rate.

4 Projections shown in Table 4 for 1996 and beyond are based on an assumed 2.5% annual growth rate.

SERVICE SUBSIDY BY PARENT NONPROFIT

Another way in which the parent non-profit organization can subsidize its business venture is by continuing to provide various program services to the programs clients

who become business employees. Table 44 shows the extent to which such services are indeed necessary to help many clients make the transition to self-supporting and independent lives. To construct this table, we used the reported Organizational/ Program Expenses data provided by Rubicon, excluding the enterprise salary lines and the debt payments. This table shows that the 1991 present value of Rubicons service subsidy over the ensuing 10 years was just over $2.2 million using a nine percent discount rate and more than $2.8 million using a three percent rate.

TABLE 7: SERVICE COSTS OF CLIENTS WHILE EMPLOYED

THE NUMBERS: COST BENEFIT ANALYSIS 3 199

OTHER COST FACTORS

There are, indeed, other cost factors which are not included in these analyses. For example, sometimes a portion of the parent non-profits private-sector support is also diverted to the business venture. This may come in the form of direct support from volunteers (for example, those with special skills related to the business), or even in the form of discounts and other trade considerations formerly extended only to the parent entity. (Also, this private-sector support may not appear as a mere diversion of support from the parent non-profit, but may instead represent a true augmentation of previous levels of support.) This privatesector support should be included in a more detailed analysis. Also, the external effects that non-profit business ventures have on their competi-

torsand on their competitors employeesare not considered explicitly in the economic analyses presented in this chapter. Nonetheless, public and philanthropic decision makers should be aware that establishing such ventures comes with some potential for social costs. Most HEDF business ventures are aimed at expanding economic development, at increasing the size of the economic pie. However, to the extent that our new business ventures successfully compete with existing private-sector businesses, they may be creating jobs at the expense of jobs that might otherwise have been created by the natural process of the marketplace (albeit for other, perhaps less marginalized, employees) Some of the issues regarding competition with private sector enterprises are discussed in detail in the chapter on The Competitive (Dis)Advantage of CommunityBased Enterprise.

TABLE 8: PRESENT VALUE OF SAVINGS TO HUMAN SERVICES DELIVERY SYSTEM

1991 Years to Benefit Costs of Unemployed Costs of Employed Total Costs Saved
3% 9% 0 $102,640 $5,580 $97,060 $97,060 $97,060

1992
1 $256,601 $13,950 $242,651 $235,583 $222,615

1993
2 $461,881 $25,110 $436,771 $411,698 $367,621

1994
3 $496,094 $26,970 $469,124 $429,315 $362,250

1995
4 $667,161 $36,270 $630,891 $560,539 $446,939

FIVE-YEAR TOTALS
$1,984,377 $107,880 $1,876,497 $1,734,196 $1,496,486

1996 Years to Benefit Costs of Unemployed Costs of Employed Total Costs Saved
3% 9% 5 $718,481 $39,060 $679,421 $586,075 $441,577

1997
6 $769,802 $41,850 $727,952 $609,648 $434,054

1998
7 $821,122 $44,640 $776,482 $631,351 $424,762

1999
8 $872,442 $47,430 $825,012 $651,272 $414,046

2000
9 $940,869 $51,150 $889,719 $681,895 $409,651

TEN-YEAR TOTALS
$6,107,092 $332,010 $5,775,082 $4,894,436 $3,620,576

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5Projections shown in Table 5 for 1996 and beyond are based on an assumed 20% annual growth rate in Bakery sales and costs of goods sold and an assumed 5% annual growth rate for Building and Grounds sales and costs of goods sold. We further assumed that annual increases in operating costs could be held to approximately half these growth rates.

Analyses Using HEDF Benefit Data

FINANCIAL CONTRIBUTION TO PARENT NON-PROFIT
One of the long-standing motivations for non-profits to enter the business arena has been the belief that new business ventures operated by nonprofits could contribute to providing a stable funding base for their parent

organizations. In the private sector, most small businesses do not fare well, and most fail during the first five years. However, the data shown in Table 55 show that it is possible for non-profit businesses to make a contribution to their parent organization. Over the past five years, the bottom line in Rubicon Programs income statement has fluctuated substantially, but the growth trend is quite clear. The total contribution over these five years has amounted to $1,656,134 (undiscounted). Over a 10-year period, the total projected

TABLE 9: COST SAVINGS TO RUBICON SERVICES

1991 Years to Benefit Costs of Serving Trainees TRAINEES TRAINEE SLOTS Service Costs/Trainee Slot EMPLOYED AT RUBICON # WHO WOULD BE DISPLACED Estimated Costs Saved
3% 9% 0 $208,616 160 53.3 $3,912 6 3 $11,735 $11,735 $11,735

1992
1 $264,025 108 36.0 $7,334 15 7.5 $55,005 $53,403 $50,463

1993
2 $329,011 68 22.7 $8,549 27 13.5 $115,408 $108,783 $97,136

1994
3 $338,464 104 34.7 $9,763 29 14.5 $141,569 $129,556 $109,317

1995
4 $333,910 84 28.0 $11,925 39 19.5 $232,544 $206,613 $164,740

FIVE-YEAR TOTALS
$1,474,026

$ 556,261 $ 510,089 $433,392

1996 Years to Benefit Costs of Serving Trainees TRAINEES TRAINEE SLOTS Service Costs/Trainee Slot EMPLOYED AT RUBICON # WHO WOULD BE DISPLACED Estimated Costs Saved
3% 9% 5 $350,606 190 30.0 $11,687 42 21 $245,424 $211,705 $159,509

1997
6 $368,136 90 30.0 $12,271 45 22.5 $276,102 $231,231 $164,631

1998
7 $386,543 90 30.0 $12,885 48 24 $309,234 $251,436 $169,162

1999
8 $405,870 90 30.0 $13,529 51 25.5 $344,989 $272,338 $173,138

2000
9 $426,163 90 30.0 $14,205 55 27.5 $390,650 $299,400 $179,866

TEN-YEAR TOTALS
$3,411,343

$2,122,659 $1,776,198 $1,279,697

THE NUMBERS: COST BENEFIT ANALYSIS 3 201

TABLE 10: COST SAVINGS TO RUBICONS PLACEMENT SERVICES

1991 Years to Benefit Cost Per Placement PLACEMENTS AT RUBICON # WHO WOULD BE DISPLACED Estimated Costs Saved
3% 9% 0 $1,479 6 3.0 $4,438 $ 4,438 $ 4,438

1992
1 $1,517 9 4.5 $6,828 $6,629 $6,264

1993
2 $1,556 12 6.0 $9,337 $8,801 $7,859

1994
3 $1,596 2 1.0 $1,596 $1,461 $1,232

1995
4 $1,637 10 5.0 $8,185 $7,272 $5,798

FIVE-YEAR TOTALS
39 $0,384 $28,601 $25,592

1996 Years to Benefit Cost Per Placement PLACEMENTS AT RUBICON # WHO WOULD BE DISPLACED Estimated Costs Saved
3% 9% 5 $1,678 3 1.5 $2,517 $2,171 $1,636

1997
6 $1,720 3 1.5 $2,580 $2,161 $1,538

1998
7 $1,763 3 1.5 $2,644 $2,150 $1,447

1999
8 $1,807 3 1.5 $2,710 $2,140 $1,360

2000
9 $1,852 4 2.0 $3,704 $2,839 $1,706

TEN-YEAR TOTALS
55 $44,539 $40,061 $33,278

6 Projections of employment levels shown in Table 6 for 1996 and beyond are based on the sales growth rates cited in the previous note. Cost data are based on a 1995 cost study and client survey conducted on behalf of Rubicon Programs by the authors. 7The cost estimates shown in Table 7 are based on several assumptions. We assumed that Rubicons new full-time employees would be ineligible for further benefit payments. We also assumed that they would be expected to pay for their own housing (although Rubicon housing is available Footnotes continued on page 208

contribution is more than $5.6 million. Using a nine percent discount rate, this is equivalent to a 1991 present value of almost $3.5 million; using a three percent discount rate, it is equivalent to just over $4.75 million.

REDUCTIONS IN COSTS TO HUMAN SERVICES SYSTEM

The largest single category of benefits potentially arising from business ventures operated by non-profit organizations is the economic and social value added by helping disabled, homeless, and indigent individuals achieve a transition to at least partial economic and personal self-sufficiency. In Table 6,6 we show estimates of the costs of

public services delivered to clients at Rubicon Programs after they have been stabilized by the programs services. These estimates can serve as a rough approximation of the level of service utilization by participants in the programs vocational training unit. Table 77 shows estimates of the costs of these same services by disabled and formerly homeless employees in Rubicons business ventures. Finally, in Table 8,8 we subtract post-employment cost estimates from pre-employment cost estimates to get approximations of the overall reduction in service system costs that can be attributed to clients employment at Rubicon. Over a 10-year period, this reduction amounts to more than $6.1 million (undiscounted). Using a nine

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percent discount rate, the savings is just over $3.6 million; discounting at three percent results in a 1991 present value of almost $4.9 million.

REDUCTIONS IN COSTS TO PARENT NON-PROFIT

Next, we must consider the savings experienced by Rubicon itself as a provider of services. For example, before and during the time that they participate in vocational training, many clients also receive mental health and other counseling services and participate in Rubicons money management services. While they are eligible for some supportive services after their fulltime employment, their actual use of that support is reported as negligible. Table 99 shows these estimated savings to Rubicon as a service provider. Over our 10-year period, these savings amount to more than $3.4 million (undiscounted), nearly $1.3 million (using a nine percent discount rate) and

$1.8 million (using a three percent rate). Finally, the operation of its own businesses generates some cost savings for Rubicons vocational training program. Specifically, job search costs are reduced by having a ready market for the newly trained labor. We summarize these benefits in Table 10,10 which shows that the 10-year savings in placement costs amounts to $33,278 (using a nine percent discount rate) or $40,061 (using a three year discount rate).

PERSONAL INCOME TAXES GENERATED

One final source of economic benefits is the personal taxes paid by the permanent employees of Rubicons businesses. (Specifically, only those who were former Rubicon clients are included in the calculation.) Table 1111 shows the estimated state and federal personal taxes that these businesses have generated by employing formerly non-taxpaying homeless and disabled clients, as well as the calculations

TABLE 11: PERSONAL INCOME TAXES GENERATED

1991 Years to Benefit Taxes Per Employee EMPLOYEES Estimated New Taxes
3% 9% 0 $3,564 6 $10,692 $10,692 $10,692

1992
1 $3,564 15 $26,730 $25,951 $24,523

1993
2 $3,564 27 $48,114 $45,352 $40,497

1994
3 $3,564 29 $51,678 $47,293 $39,905

1995
4 $3,564 39 $69,498 $61,748 $49,234

FIVE-YEAR TOTALS

$ 206,712 $ 191,036 $ 164,851

1996 Years to Benefit Taxes Per Employee EMPLOYEES Estimated New Taxes
3% 9% 5 $3,564 42 $74,844 $64,561 $48,643

1997
6 $3,564 45 $80,190 $67,158 $47,815

1998
7 $3,564 48 $85,536 $69,549 $46,791

1999
8 $3,564 51 $90,882 $71,743 $45,611

2000
9 $3,564 55 $98,010 $75,117 $45,127

TEN-YEAR TOTALS

$ 636,174 $ 539,163 $ 398,837

THE NUMBERS: COST BENEFIT ANALYSIS 3 203

TABLE 12: SUMMARY OF DISCOUNTED COSTS AND BENEFITS

Continued

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TABLE 12 CONTINUED SUMMARY OF DISCOUNTED COSTS AND BENEFITS

It is reasonable to generalize here that these savings in service delivery costs are likely to be the most important contribution of business ventures mounted by non-profit organizations, and these are precisely the kinds of contributions that for-profit, private sector organizations are generally unable to make. While many nonprofit businesses are likely to fail, just as most for-profit enterprises fail, the data that we have examined at Rubicon suggest that regardless of how such business ventures fare financially, they are likely to more than justify their existence by the consequent savings in service delivery costs that they create.

THE NUMBERS: COST BENEFIT ANALYSIS 3 205

Figure 4: Total Benefits

$2,500,000 $2,250,000 $2,000,000

Undiscounted Benefits

$1,750,000 $1,500,000 $1,250,000 $1,000,000 Business Profits $750,000 System Savings $500,000 $250,000 $0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Program Savings Placement Savings New Taxes

Figure 5: Cumulative Costs and Benefits

$16,000,000

$14,000,000

Undiscounted Benefits

$12,000,000

$10,000,000

$8,000,000

$6,000,000

$4,000,000

$2,000,000

$0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Costs

Benefits

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THE ROBERTS FOUNDATION: A PROGRESS REPORT

Figure 6: Total Costs

$1,000,000 $900,000 $800,000

Undiscounted Costs

$700,000 $600,000 $500,000 $400,000 $300,000 $200,000 Grants $100,000 $0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Business Subsidy Service Subsidy

to discount these to their 1991 present value. At a nine percent rate, their 1991 value is almost $400,000, and at three percent their value comes to approximately $540,000.

OTHER BENEFITS
Unlike personal income taxes, we exclude the potential stream of unrelated business income tax payments from our overall calculations because its net effect is zero. That is, while it represents a benefit received by government, it is merely another costpaid either by the new business

venture or by the non-profit parent organization. In sum, the total funding available for public services does not change, whether UBIT is required or not. There are also several additional benefits the quantification of which is beyond the scope of this preliminary study. These include economic effects of putting earned income in the hands of people who were previously destitute. They also include the personal satisfaction derived by these beneficiaries of Rubicons employment practices. Finally, they include the social justice of some small redistribution of wealth to people who have proven more than willing to work for their share of the economic pie.

THE NUMBERS: COST BENEFIT ANALYSIS 3 207

Summary and Conclusions

n Table 12, we summarize the various costs and benefits described in this chapter. Over the entire 10-year period, the total costs of Rubicons businesses are projected to be nearly $8.4 million. During the same time period, the businesses are projected to generate benefits amounting to more than $14.2 million. Only during the first two years do the total costs outweigh the total benefits, resulting in net costs of approximately $209,600 and $137,000 respectively. Thereafter, the benefits increase each year while the costs remain relatively constant. As a result of these trends, the project breaks even during the fifth year, achieving a cumulative net benefit of about $436,500 over the first five-year period, and amasses almost $5.4 million in net benefits during the next five years. Discounting the future costs and benefits reduces the size of the net benefit, because so much of that benefit is ascribed to future years and is, therefore, more heavily discounted. Nonetheless, even at a nine percent discount rate, the businesses still achieve a positive cumulative net benefit of

more than $200,000 by their fifth year, and a total net benefit over 10 years of more than $3 million. These results are equivalent to a net internal rate of return of just over 70% per year. Throughout all these calculations, the reader should note that the total of the various savings to the human services delivery system, to Rubicon itself, and to Rubicons job placement services amounts to approximately 50% more than the total financial contribution of the businesses to the parent non-profit corporation. It is reasonable to generalize here that these savings in service delivery costs are likely to be the most important contribution of business ventures mounted by non-profit organizations, and these are precisely the kinds of contributions that forprofit, private sector organizations are generally unable to make. While many nonprofit businesses are likely to fail, just as most for-profit enterprises fail, the data that we have examined at Rubicon suggest that regardless of how such business ventures fare financially, they are likely to more than justify their existence by the consequent savings in service delivery costs that they create.

Footnotes continued from page 202

to them as a safety net). We conservatively estimated that their use of mental health, substance abuse, and criminal justice services would be approximately 50% of their pre-employment use. Finally, we noted that all Rubicon employees have health insurance, thereby eliminating their use of publicly-funded hospital and emergency room services. 8 We assumed that approximately half of the employees would find work elsewhere in the absence of their employment at Rubicon, and that half would continue to receive public services. 9 We used the reported Organizational/ Program Expenses

(excluding enterprise staff and debt reduction) to formulate our estimates of the costs shown in Table 9. We further assumed that trainees spend approximately four months at this level, and that the number of trainee slots was, therefore, approximately one-third the number of trainees shown for each year. Since the number of trainees dropped precipitously during 1993, we smoothed our estimates of costs per slot by averaging the two adjacent years cost rates. We also assumed that approximately half of the client-employees would be find other jobs in the absence of the Rubicon businesses, and that the remaining 50% would continue to be served. Finally, we relied upon Rubicons forward plan of 90 trainees per year for our projections beyond 1995.

10 The placement costs shown in Table 10 were derived by applying a 2.5% inflation factor to the 1995 cost estimate developed by Rubicon. Again, we assumed that approximately half of the placements would be made at other employers in the absence of the opportunities created by Rubicons own businesses. 11 The taxes included in Table 11 are federal and State personal income tax (estimated at 7.66%), social security (15.3%, including both employees and employers contributions since the latter has already been subtracted from revenues), and California State disability insurance (.8%). As above, we assumed that approximately half of the new employees would have found work elsewhere in the absence of the Rubicon businesses.

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