Social Enterprise Guide: Standardizing Social Return on Investment Accounting

Before investing in a business venture, investors need to know the expected return on investment (ROI) - given the risk of the investment, what return is it likely to yield? In order to attract investment, therefore, a business venture must make projections concerning expected financial return on investment (FROI). Social enterprises are no different, except that social impact, not revenue generation, is the primary objective of a social enterprise. Likewise, investors who fund social enterprises are more concerned with the likelihood that the enterprise achieves its social goals rather than whether it generates financial returns. Thus, social enterprises must be able to calculate the social return on investment (SROI) that financial backers can expect.

As of this writing, there is no standardized method for calculating SROI. This is important, since ROI is only valuable in a relative sense. An ROI number in a vacuum is useless to investors because they need to know how investments of similar risk will pay off before choosing where to invest. In other words, if an investment with Company A is expected to offer 50% returns while similarly risky companies offer 75% returns, an investor is unlikely to invest in Company A. If, however, similarly risky companies offer 30% returns, Company A will have little trouble finding investors. Thus, understanding a company's impact requires a comparison of its performance to its competition.

The stakes for developing a standardized framework for calculating SROI are high. Firstly, managers of social enterprises would be better able to gauge the strengths and weaknesses of their firms when compared to the competition. Secondly, the most effective social enterprises would be able to attract the most investments, which would optimize social benefits derived by society at large. Thirdly, a standardized framework would drive investment in social enterprises because investors seeking to yield optimum SROI would be confident in their ability to compare investments across companies.

When it comes to FROI, accountants have little trouble monetizing expected returns - invest $100 and you can expect to make $150. With SROI, however, the situation is different. "Managers and investors concerned with sound management of firms' social and environmental impacts," observe Alison Lingane and Sara Olsen in the California Management Review, "will be frustrated in their efforts to use financial accounting for management of these activities, since standard accounting does not address them." Social benefits are not easily monetized, which creates problems for SROI accountants.

One common technique to monetize social benefits is to use comparison costs - how much money would it cost to create the same benefit? Urgent Care Social Enterprise in the UK, for example, can measure the money the government saves as a result of decreased emergency room visits. It is important to remember that SROI calculations must take into account what makes a company different from a standard venture in the industry. For example, all health care ventures provide the social benefit of improved health; investors seeking optimum SROI want to know how a specific health care program produces higher social outputs than its competitors.

What techniques do you know of for calculating SROI? Please share in the comments.

NOTE:For more information on calculating SROI, see "Guidelines for Social Return on Investment" by Alison Lingane and Sara Olsen (2004), and "Social Account for Nonprofits: Two Models" by Betty Jane Richmond, Laurie Mook, and Jack Quarter (2003).