(5)New+Social+Entrepreneurs+ +Part+1+ +the+Numbers+(Continued)

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THENUMBERS:TRUECOST ACCOUNTING 3 173

Larkin Business Ventures (LBV) oper-

ates 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 ofthe Chestnut Street Store.

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 ChestnutStreet 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 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, includ-

ing one-time start-up costs of $40,000 and

$24,0008. Net Income Before Subsidy for

1995 was ($185,963). This deficit was cov-

ered 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 closingposition of LBV is break-even.

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 storesGross 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 nega-

tive profitability ratios although even with

that negative Net Income, LBV enterprises

are still within 10% of break-even. The

THE ENTERPRISE:

LARKIN BUSINESSVENTURES

8These figures are 10%of the total cost whichwill be carried over aten year period into thefuture.


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174 3 THEROBERTS FOUNDATION:A PROGRESSREPORT

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 com-

bined Inventory Turnover of 27.19 shows a

lower turnover than would be expected of apremium 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%, show-

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

UNAUDITED FINANCIALS.SOME FIGURES HAVE BEEN MODIFIED TO FIT THISFORMAT


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Larkin Business Ventures Continued


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*This surplus represents funds on hand for the start-up ofthe 2nd store, as well as excess, one time capital costs to be

charged against future years. The actual closing position ofLBV is closer to break-even.

*


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UNAUDITED FINANCIALS.SOME FIGURES HAVE BEEN MODIFIED TO FIT THIS FORMAT



7/36





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In 1995, Youth Industry operated four

micro-enterprises: a thrift store solicita-

tion enterprise, a climbing wall manu-

facturing 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 marketis 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 pro-

gram and administrative costs came to a

total of $120,711 for the year, which, whenAll 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 orga-

nization was $60,059.

The Ratios

As might be imagined, conducting a ratio

analysis of these extremely small enterpris-

es is very difficult. The solicitation enter-

priseessentially an operating contract

with an area thrift store to solicit contribu-

tions of clothing and other itemsis actu-

ally the early stage of Youth Industries own

effort to establish a thrift store. No indus-

THE ENTERPRISE:

YOUTH INDUSTRY


9/36


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 capitalrequirements and Cost of Goods Sold.

ZeroLith Printing, the silk-screen ven-

ture, 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, respective-

ly. 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 com-

pares 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 investmentcomparable to others in the field.

Analysis of the consolidated statement

shows that it is sponsorship with the non-

profit 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% with-

out the subsidy but rises to 11% when the

subsidy is included. Finally, the Percentage

Enterprise Subsidy is a modest 21%, show-

ing 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


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Youth Industry Continued


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The numbers speak for the experi-

ence 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 numer-

ous 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 analy-sis which now clog the field; however, it

cuts to the core of our evaluation of the cur-

rent success and challenge of non-profit

enterprise. Henderson found that what

made for profitability and success in the

field of aircraft manufacturing was increas-

ing 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 founda-

tion for their enterprise, are now cultivating

greater organizational experience and work-

ing to achieve increasing market share.

These two factors taken together make fortheir increasing success, just as the lack of

these two elements has made it extremely

difficult for most to succeed gloriously dur-

ing start-up.

In the practice of small business devel-

opment, the standard start-up timeframe is

commonly defined as three to five years.

Obviously, this timeframe varies depending

upon the industry, market, sales projec-

tions, 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 busi-

ness has not been given an adequate

opportunity to establish itself. If more than

five years have passed and there is no evi-

dence 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 cur-

rent status of the enterprises presented inthis chapter. Each enterprise has been in

operation for five years or less. The busi-

nesses 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

ispresentlyreceiving 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 rev-enue surplus. And target profitable is

defined as the date by which the enterprise

will, if it maintains present sales and projec-

tions for theimmediatefuture, 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.

CONCLUSION:

BREAK-EVEN,

PROFITABILITY ANDTHESELF-SUSTAININGENTERPRISE

9Lecture, AllenClelland, St. MarysCollege, May, 1996.


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This chart and the supporting financial

information already presented show that

while our revenue base is modest and the

sponsoring organizations are receiving sub-

sidies to cover their administrative and pro-

grammatic 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 presentlyprofitable, 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, cov-

ering their basic costs once they have been

started, and promise to support themselves

into the future. These are limited begin-

nings; 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 andaccess to appropriate venture capital, non-

profit, social service organizations can play

a key role in expanding economic opportu-

nity for formerly homeless people. And

they are doing so through the creation of

market-directed, social purpose enterpris-

es.

TARGETAGENCY/ENTERPRISE: SUBSIDIZED: BREAK-EVEN: PROFITABLE: PROFITABLE

RUBICON

Building/Grounds NO YES YES Currently

Bakery YES NO NO 3rd Quarter, 96

OAKSTREETHOUSE

Ashbury Images YES NO NO 1st Quarter, 97

SF City Store NO YES YES Currently

HOSPITALITYHOUSE

Art Start YES NO NO 1997

Retail Gallery YES NO NO 1997

LARKINBUSINESSVENTURES

Chestnut St. Store NO10 YES YES As of 5/1/96

3Com Park NO YES YES Currently

SOMA FOUNDATION

Steam Clean YES YES NO 4th Quarter, 96

YOUTHINDUSTRIES

Pedal Revolution NO YES YES Currently

ZeroLith Printing NO YES YES Currently

Thrift Solicitation NO YES YES Currently

CONARDHOUSE

Coffee Shop YES YES NO 4th Quarter, 96

Janitorial NO YES YES Currently

10After a depreciationcharge of $19,000, thestore is not in theblack, however on astraight cash basis itreceives no presentsubsidy.


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In addition to thepreceding financial and narrativeevaluations, given that onelong-termgoal for all theseenterprises is

independencefromfoundation and other support, it is also helpful to understand howthosein thecommercial banking

world might viewtheseventures. Acompletediscussion of whether thesesmall businesses would gain abankers

trust is beyond thescopeof our work, but thereader may beinterested to knowthat when evaluating small businesses,

loan officers in thebanking community do not useasingleset of financial criteriato assess risk, makedecisions regard-

ing theviability of any given enterprise, or calculatealoan applicants ability to serviceassumed debt. Whiletheactual

criteriaused by each bankvaries and is not usually madepublic, thefollowing checklist was provided to us by an

anonymous sourcelodged deep within thesmall business lending unit of anational commercial bank. Our mystery

bank evaluates small business loan applicants in thefollowing areas:

Has theenterprisebeen in operation for at least three

years?

Has it had thesamemanager for thelast two years?

Has is shown anet operating profit for thepast two

years?

Is thereapersonal guaranteeby theowner for at

least 51% of theenterprisedebt?

Would thebankmaintain first position on theloan?

Is theenterpriseoperating in apreferred or accept-

ableindustry?

Is thefirmprivately owned and managed?

Is it within thegeographictarget of thebank? (i.e.,.

aretherelocal branches?)

Is thereamain banking relationship between the

bankand theapplicant?

Areannual revenues between $200,000 and

$1,000,000?

Has theenterpriseestablished agood credit history?

Sufficient debt servicecoverage:

1.5 for Lines of Credit

1 for TermLoans

Is thecurrent ratio at least 1?

Is thedebt leverageratio no morethan 3:1?

Is any debt to outsideat least 2:1 of Guarantors net

worth?

Is thereconcentration of revenue? (i.e., does morethan 25% of thefirms revenuecomefromany one

customer?)

Is theguarantor of theloan worth aminimumof

$200,000?

Naturally, on many of thesepoints our enterprises arestill on theuphill curve. At thesametime, asurprising number of

themareon their way to being ableto affirmatively answer many of thesequestions. And that is an important goal for

many social entrepreneurs in search of truemarket viability and financial sustainability for their enterprises.

BANKERSTRUST?


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THENUMBERS:COST BENEFITANALYSIS3 191

Introduction

The previous chapter in this volumefocused on cost accounting for non-profit-run business ventures. That

approach can provide non-profit managerswith 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 pub-

lic policyan approach that can inform

both government and foundation decision-

makers.

Cost-Benefit Analysis

This chapter describes an approach toevaluating prospective non-profit busi-ness 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 pre-

sent 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 creativitye.g., in understanding opportunity costs and

external effects. Along the way, many intan-

gible 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 fac-

tors 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 equiva-lents 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

A COST BENEFIT

A NA LYSIS OF

ENTERPRISE

CREATION

FUNDING:

NET PRESENT VALUEAND PROJECTEDRETURNS


20/36

the early years of a project and will mini-

mize the importance of what happens sev-

eral 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 hap-

pens at the beginning of a project. Forexample, 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 use-

ful 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 seem-

ingly 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 subse-

quent analyses are guided. The sections

that follow provide more detailed discus-

sions of costs and benefits respectively. Inthe last section, we bring these two strands

together for a final comparison.

An Analytic Frameworkfor Costs and Benefits

To 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 busi-

ness venture under consideration) will be

viewed as part of that huge organization.

However, we will view the proposed non-

profit business venture as a separate organi-

zation. And the focus of our analysis will be

on the interactions between the two organi-zationsthat 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-


FIGURE1: TRADITIONALSYSTEM

FoundationsPrivateSector

GovernmentAgencies

Non-ProfitOrganization


21/36

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 pri-

vate sector (through donations and volun-

teerism) have supported non-profitorganizations in their expanding role as

human service providers. Creating a non-

profit business venture will add several new

components to the traditional model.

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 thenew business almost never comes from tra-

ditional, 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 combi-

nation of short-term and ongoing grants.

These grants are shown by the arrow from

foundations directly to the non-profit busi-

ness venture.

Second, additional support, both direct

and indirect, almost always comes from the

parent non-profit organization itself.

Typically, the non-profits executive directorand other members of the management

team directly subsidize the business ven-

ture by devoting a large part of their time to

its supervision and administration.

Similarly, the parent non-profit often indi-

rectly subsidizes the business by providing

both formal and informal access to facili-

ties, 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 business-

es 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 especial-

ly 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 par-

ent non-profit even in the absence of the

proposed business venture, we will adopt amore conservative approach here and treat

these costs as another form of subsidy from

the parent organization to the business.

2. NEW BENEFITS

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 prof-itable 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-

FIGURE2: NEWCOSTS

Foundations PrivateSector GovernmentAgencies


BusinessVenture



22/36


tion. Nonetheless, the yearly changes in

owners equity represent an ongoingstream of benefits that ultimately aug-

ments 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 eco-

nomic purposes. They can provide a train-

ing ground and even permanent

employment opportunities for people whomay be indigent, homeless, and/or dis-

abled. While we do not pretend to measure

the personal benefits derived by these indi-

viduals, we can estimate the economic ben-

efit 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 govern-

ment and other service providers.

Third, by creating new workers, non-

profit 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 govern-

ment and other service providers.

By contrast we have not included

changes in business income taxes in this

new framework. Depending upon how thebusiness venture is legally organized and

upon its relationship to the parent organiza-

tions charitable mission,1 the non-profit

parent may be required to pay unrelated

FIGURE3: NEWBENEFITS

Foundations

Private

Sector

Government

Agencies


BusinessVenture

FormerlyHomelessEmployees

1See the chapter inthis volume on LegalStructure Issues.

TABLE1: GRANTSUPPORTFORRUBICONSNON-PROFITENTERPRISES

FIVE-YEAR1991 1992 1993 1994 1995 TOTALS

Grants Made

ROBERTSFOUNDATION $85,000 $95,000 $85,000 $141,090 $120,000 $535,000

OTHERSOURCES $83,968 $11,906 $75,107 $(8,910) $45,803 $207,874

TOTALS $168,968 $106,906 $160,107 $141,090 $165,803 $742,874


23/36

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 includ-

ed the payment of UBIT as part of Figure 3

nor is it included in the analyses that follow.


TABLE2: PRESENTVALUECALCULATIONSFORFOUNDATIONGRANTS

1991 1992 1993 1994 1995 FIVE-YEAR

Years to Cost 0 1 2 3 4 TOTALSGrants Made $168,968 $106,906 $160,107 $141,090 $165,803 $742,874

3% $168,968 $103,792 $150,916 $129,117 $147,314 $ 700,108

9% $168,968 $ 98,079 $134,759 $108,947 $117,459 $ 628,212

1996 1997 1998 1999 2000 TEN-YEAR

Years to Cost 5 6 7 8 9 TOTALS

Grants Projected $92,612 $12,022 $ $ $ $847,508

3% $79,888 $10,068 $ $ $ $790,064

9% $60,191 $7,168 $ $ $ $695,572

TABLE3: PRESENTVALUECALCULATIONSFORBUSINESSSUBSIDY

1991 1992 1993 1994 1995 FIVE-YEAR


Subsidies Made $84,093 $267,506 $363,270 $475,472 $482,273 $1,672,614

3% $84,093 $259,715 $342,417 $435,124 $428,493 $1,549,842

9% $84,093 $245,418 $305,757 $367,152 $341,654 $1,344,074

1996 1997 1998 1999 2000 TEN-YEAR


Subsidies Projected $488,031 $503,079 $518,789 $535,204 $552,374 $4,270,091

3% $420,980 $421,321 $421,823 $422,495 $423,349 $3,659,809

9% $317,187 $299,970 $283,795 $268,601 $254,328 $2,767,955


24/36


Overview

In the next two sections, we explore eachof these new costs and benefits in greaterdetail. While we will draw upon examplesfrom 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 select-

ing 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 cal-

culation, our analyses will treat all costs

and benefits as if they occur at the begin-

ning of each year, rather than as if they are

spread throughout the year.

Analyses Using HEDFCost 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 with-

in each of these alternatives there is con-

siderable diversity based upon the nature

TABLE4: PRESENTVALUECALCULATIONSFORSERVICESUBSIDY

1991 1992 1993 1994 1995 FIVE-YEAR


Subsidies Made $208,616 $264,025 $329,011 $338,464 $333,910 $1,474,026

3% $208,616 $256,335 $310,124 $309,743 $296,675 $1,381,493

9% $208,616 $242,225 $276,922 $261,356 $236,550 $1,225,669

1996 1997 1998 1999 2000 TEN-YEAR


Subsidies Projected $342,140 $350,693 $359,461 $368,447 $377,658 $3,272,426

3% $295,133 $293,700 $292,274 $290,856 $289,444 $2,842,899

9% $222,367 $209,107 $196,637 $184,911 $173,884 $2,212,577


25/36


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 prob-

lems with liquidity, while others project amuch 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 sec-

tion, 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 founda-

tions 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 appro-

priate 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 discountrate) that hypothetical savings account

should be thought of as paying. As shown

in Table 2,2we 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, communi-

ty-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-upcosts and early benefits.)

The result of these calculations is a pair

of discounted present values. The dis-

counted 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.

TABLE5: PRESENTVALUECALCULATIONSFORBUSINESSPROFIT

1991 1992 1993 1994 1995 FIVE-YEAR

Years to Benefit 0 1 2 3 4 TOTALS

Profit (loss) Reported $128,171 $170,217 $453,557 $359,037 $545,134 $1,656,116

3% $128,171 $165,259 $427,521 $328,570 $484,344 $1,533,865

9% $128,171 $156,162 $381,750 $277,242 $386,187 $1,329,512

1996 1997 1998 1999 2000 TEN-YEAR


Profit (loss) Projected $618,325 $698,915 $787,982 $886,809 $996,923 $5,645,070

3% $533,372 $585,330 $640,702 $700,055 $764,059 $4,757,383

9% $401,869 $416,740 $431,053 $445,060 $459,011 $3,483,245

2Projections shown inTable 2 for 1996 andbeyond are based onthe assumption thatgrant funds willdecrease as businessprofitability increases.


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BUSINESSSUBSIDY BY THE PARENTNON-PROFIT

Just as foundation support varies consider-

ably, the ways in which non-profits subsi-

dize the start-up and ongoing operations of

their business ventures are also quitediverse. 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 addi-

tional burdens to their bookkeeping, pay-

roll, legal, and insurance budgetsmuch of

which had been unanticipated prior to start-

ing the new business venture, and all of

which have been generally unrecognized in

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-profitthetwo 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 busi-

ness venture is created, the total of these

three items provides a reasonable approxi-

mation of the extent of the business subsidy.

Table 33shows the estimated annual

business subsidies for Rubicon Programs

3Projections shown inTable 3 for 1996 aretaken from RubiconPrograms current-yearestimates. Projectionsfor subsequent yearsare based on anassumed 10% annualgrowth rate in costs forthe Bakery and a 2.5%growth rate in costs forthe Building andGrounds business.

TABLE6: SERVICECOSTSOFCLIENTSPRIORTOEMPLOYMENT


27/36


as well as the calculation of the total pre-

sent value (as of the beginning of 1991) of

these costs. The present value of the sub-

sidy is $2,767,955 at a nine percent dis-

count rate and $3,659,809 at a three percent

discount rate.

SERVICE SUBSIDY BY PARENT NON-PROFIT

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 byRubicon, 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.

TABLE7: SERVICECOSTSOFCLIENTSWHILEEMPLOYED

4Projections shown inTable 4 for 1996 andbeyond are based onan assumed 2.5%annual growth rate.


28/36


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 maycome in the form of direct support from vol-

unteers (for example, those with special

skills related to the business), or even in

the form of discounts and other trade con-

siderations formerly extended only to the

parent entity. (Also, this private-sector sup-

port 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 private-

sector 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 employ-

eesare not considered explicitly in the eco-

nomic analyses presented in this chapter.

Nonetheless, public and philanthropic deci-

sion makers should be aware that establish-

ing such ventures comes with some potential

for social costs. Most HEDF business ven-tures are aimed at expanding economic

development, at increasing the size of the

economic pie. However, to the extent that

our new business ventures successfully com-

pete 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 Community-

Based Enterprise.

TABLE8: PRESENTVALUEOFSAVINGSTOHUMANSERVICESDELIVERYSYSTEM

1991 1992 1993 1994 1995 FIVE-YEAR


Costs of Unemployed $102,640 $256,601 $461,881 $496,094 $667,161 $1,984,377Costs of Employed $5,580 $13,950 $25,110 $26,970 $36,270 $107,880

Total Costs Saved $97,060 $242,651 $436,771 $469,124 $630,891 $1,876,497

3% $97,060 $235,583 $411,698 $429,315 $560,539 $1,734,196

9% $97,060 $222,615 $367,621 $362,250 $446,939 $1,496,486

1996 1997 1998 1999 2000 TEN-YEAR


Costs of Unemployed $718,481 $769,802 $821,122 $872,442 $940,869 $6,107,092

Costs of Employed $39,060 $41,850 $44,640 $47,430 $51,150 $332,010

Total Costs Saved $679,421 $727,952 $776,482 $825,012 $889,719 $5,775,082

3% $586,075 $609,648 $631,351 $651,272 $681,895 $4,894,436

9% $441,577 $434,054 $424,762 $414,046 $409,651 $3,620,576


29/36


Analyses Using HEDFBenefit Data

FINANCIAL CONTRIBUTION TOPARENT 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 non-

profits 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 pastfive years, the bottom line in Rubicon

Programs income statement has fluc-

tuated substantially, but the growth

trend is quite clear. The total contribu-

tion over these five years has amount-

ed to $1,656,134 (undiscounted). Over

a 10-year period, the total projected

TABLE9: COSTSAVINGSTORUBICONSERVICES

1991 1992 1993 1994 1995 FIVE-YEARYears to Benefit 0 1 2 3 4 TOTALS

Costs of Serving Trainees $208,616 $264,025 $329,011 $338,464 $333,910 $1,474,026

TRAINEES 160 108 68 104 84

TRAINEESLOTS 53.3 36.0 22.7 34.7 28.0

Service Costs/Trainee Slot $3,912 $7,334 $8,549 $9,763 $11,925

EMPLOYEDATRUBICON 6 15 27 29 39

# WHOWOULDBEDISPLACED 3 7.5 13.5 14.5 19.5

Estimated Costs Saved $11,735 $55,005 $115,408 $141,569 $232,544 $ 556,261

3% $11,735 $53,403 $108,783 $129,556 $206,613 $ 510,089

9% $11,735 $50,463 $97,136 $109,317 $164,740 $433,392

1996 1997 1998 1999 2000 TEN-YEARYears to Benefit 5 6 7 8 9 TOTALS

Costs of Serving Trainees $350,606 $368,136 $386,543 $405,870 $426,163 $3,411,343

TRAINEES 190 90 90 90 90

TRAINEESLOTS 30.0 30.0 30.0 30.0 30.0

Service Costs/Trainee Slot $11,687 $12,271 $12,885 $13,529 $14,205

EMPLOYEDATRUBICON 42 45 48 51 55

# WHOWOULDBEDISPLACED 21 22.5 24 25.5 27.5

Estimated Costs Saved $245,424 $276,102 $309,234 $344,989 $390,650 $2,122,659

3% $211,705 $231,231 $251,436 $272,338 $299,400 $1,776,198

9% $159,509 $164,631 $169,162 $173,138 $179,866 $1,279,697

5Projections shown in Table5 for 1996 and beyond arebased on an assumed 20%annual growth rate inBakery sales and costs ofgoods sold and an assumed5% annual growth rate forBuilding and Grounds salesand costs of goods sold.We further assumed thatannual increases in operat-ing costs could be held toapproximately half thesegrowth rates.


30/36


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 per-

cent discount rate, it is equivalent to

just over $4.75 million.

REDUCTIONS IN COSTSTO HUMANSERVICESSYSTEM

The largest single category of benefitspotentially arising from business ven-

tures operated by non-profit organiza-

tions 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

6,6we 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 pro-

grams vocational training unit. Table

77shows estimates of the costs of

these same services by disabled and

formerly homeless employees in

Rubicons business ventures.

Finally, in Table 8,8we subtractpost-employment cost estimates from

pre-employment cost estimates to get

approximations of the overall reduc-

tion 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

1991 1992 1993 1994 1995 FIVE-YEAR


Cost Per Placement $1,479 $1,517 $1,556 $1,596 $1,637

PLACEMENTSATRUBICON 6 9 12 2 10 39

# WHOWOULDBEDISPLACED 3.0 4.5 6.0 1.0 5.0

Estimated Costs Saved $4,438 $6,828 $9,337 $1,596 $8,185 $0,384

3% $ 4,438 $6,629 $8,801 $1,461 $7,272 $28,601

9% $ 4,438 $6,264 $7,859 $1,232 $5,798 $25,592

1996 1997 1998 1999 2000 TEN-YEARYears to Benefit 5 6 7 8 9 TOTALS

Cost Per Placement $1,678 $1,720 $1,763 $1,807 $1,852

PLACEMENTSATRUBICON 3 3 3 3 4 55

# WHOWOULDBEDISPLACED 1.5 1.5 1.5 1.5 2.0

Estimated Costs Saved $2,517 $2,580 $2,644 $2,710 $3,704 $44,539

3% $2,171 $2,161 $2,150 $2,140 $2,839 $40,061

9% $1,636 $1,538 $1,447 $1,360 $1,706 $33,278

TABLE10: COSTSAVINGSTORUBICONSPLACEMENTSERVICES

6Projections of employmentlevels shown in Table 6 for1996 and beyond are based onthe sales growth rates cited inthe previous note. Cost dataare based on a 1995 cost studyand client survey conductedon behalf of RubiconPrograms by the authors.

7The cost estimates shown inTable 7 are based on several

assumptions. We assumedthat Rubicons new full-timeemployees would be ineligiblefor further benefit payments.We also assumed that theywould be expected to pay fortheir own housing (althoughRubicon housing is available

Footnotes continued on page208


31/36


percent discount rate, the savings is just

over $3.6 million; discounting at three per-

cent results in a 1991 present value of

almost $4.9 million.

REDUCTIONS IN COSTSTO PARENTNON-PROFIT

Next, we must consider the savings experi-

enced by Rubicon itself as a provider of ser-

vices. 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 manage-

ment services. While they are eligible for

some supportive services after their full-

time 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 peri-

od, 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 busi-

nesses 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 Table10,10which 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 INCOMETAXES 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 calcula-

tion.) Table 1111shows the estimated state

and federal personal taxes that these busi-

nesses have generated by employing for-

merly non-taxpaying homeless and

disabled clients, as well as the calculations

TABLE11: PERSONALINCOMETAXESGENERATED

1991 1992 1993 1994 1995 FIVE-YEARYears to Benefit 0 1 2 3 4 TOTALS

Taxes Per Employee $3,564 $3,564 $3,564 $3,564 $3,564

EMPLOYEES 6 15 27 29 39

Estimated NewTaxes $10,692 $26,730 $48,114 $51,678 $69,498 $ 206,712

3% $10,692 $25,951 $45,352 $47,293 $61,748 $ 191,036

9% $10,692 $24,523 $40,497 $39,905 $49,234 $ 164,851

1996 1997 1998 1999 2000 TEN-YEAR


Taxes Per Employee $3,564 $3,564 $3,564 $3,564 $3,564

EMPLOYEES 42 45 48 51 55

Estimated NewTaxes $74,844 $80,190 $85,536 $90,882 $98,010 $ 636,174

3% $64,561 $67,158 $69,549 $71,743 $75,117 $ 539,163

9% $48,643 $47,815 $46,791 $45,611 $45,127 $ 398,837


32/36


TABLE12: SUMMARYOFDISCOUNTEDCOSTSANDBENEFITS

Continued


33/36


TABLE12 CONTINUED SUMMARYOFDISCOUNTEDCOSTSANDBENEFITS

It is reasonable to generalize here that these savings in servicedelivery costs are likely to be the most important contribution of

business ventures mounted by non-profit organizations, and theseare precisely the kinds of contributions that for-profit, private sector

organizations are generally unable to make. While many non-

profit businesses are likely to fail, just as most for-profit enterprisesfail, the data that we have examined at Rubicon suggest thatregardless of how such business ventures fare financially, they are

likely to more than justify their existence by the consequentsavings in service delivery costs that they create.


34/36


$0

$250,000

$500,000

$750,000

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

$2,250,000

$2,500,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

NewTaxes

Placement Savings

ProgramSavings

SystemSavings

Business Profits

Figure 4: Total Benefits

U

ndiscountedBenefits

UndiscountedBenefits

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Costs Benefits

Figure 5: Cumulative Costs and Benefits


35/36


to discount these to their 1991 present val-

ue. 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 cal-

culations because its net effect is zero.

That is, while it represents a benefit

received by government, it is merely anoth-

er costpaid either by the new business

venture or by the non-profit parent organi-

zation. In sum, the total funding available

for public services does not change,

whether UBIT is required or not.

There are also several additional bene-

fits 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 werepreviously destitute. They also include the

personal satisfaction derived by these ben-

eficiaries of Rubicons employment prac-

tices. 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.

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

ServiceSubsidy

Business Subsid

Grants

UndiscountedCosts

Figure 6: Total Costs


36/36

Summary and Conclusions

In Table 12, we summarize the variouscosts and benefits described in this chap-ter. Over the entire 10-year period, the total

costs of Rubicons businesses are projectedto 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 bene-

fit 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 bene-

fits reduces the size of the net benefit,

because so much of that benefit is ascribed

to future years and is, therefore, more heav-

ily 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 vari-ous savings to the human services deliv-

ery system, to Rubicon itself, and to

Rubicons job placement services

amounts to approximately 50% more than

the total financial contribution of the busi-

nesses to the parent non-profit corpora-

tion. It is reasonable to generalize here

that these savings in service delivery costs

are likely to be the most important contri-

bution of business ventures mounted by

non-profit organizations, and these are pre-

cisely the kinds of contributions that for-

profit, private sector organizations are

generally unable to make. While many non-

profit 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 ven-

tures fare financially, they are likely to more

than justify their existence by the conse-

quent savings in service delivery costs that

they create.

to them as a safety net). We conserv-atively estimated that their use of men-tal health, substance abuse, andcriminal justice services would beapproximately 50% of their pre-employ-ment use. Finally, we noted that allRubicon employees have health insur-ance, thereby eliminating their use ofpublicly-funded hospital and emer-

gency room services.

8 We assumed that approximately halfof the employees would find work else-where in the absence of their employ-ment at Rubicon, and that half wouldcontinue to receive public services.

9We used the reportedOrganizational/ Program Expenses

(excluding enterprise staff and debtreduction) to formulate our estimatesof the costs shown in Table 9. We fur-ther assumed that trainees spendapproximately four months at this lev-el, and that the number of traineeslots was, therefore, approximatelyone-third the number of traineesshown for each year. Since the numberof trainees dropped precipitously dur-ing 1993, we smoothed our estimatesof costs per slot by averaging the twoadjacent years cost rates. We alsoassumed that approximately half of theclient-employees would be find otherjobs in the absence of the Rubiconbusinesses, and that the remaining50% would continue to be served.Finally, we relied upon Rubicons for-ward plan of 90 trainees per year forour projections beyond 1995.

10The placement costs shown in Table10 were derived by applying a 2.5%inflation factor to the 1995 cost esti-mate developed by Rubicon. Again, weassumed that approximately half of theplacements would be made at otheremployers in the absence of the oppor-tunities created by Rubicons ownbusinesses.

11The taxes included in Table 11 arefederal and State personal income tax

(estimated at 7.66%), social security(15.3%, including both employees andemployers contributions since thelatter has already been subtractedfrom revenues), and California Statedisability insurance (.8%). As above,we assumed that approximately half ofthe new employees would have foundwork elsewhere in the absence of theRubicon businesses.

Footnotes continued frompage202

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