Позитивные изменения, Том 3 №1, 2023. Positive changes. Volume 3, Issue 1 (2023)

In the fall of 2022, the Social Projects Support Fund commissioned the development of a model for evaluating the impact of social entrepreneurship projects. An expert group of the model authors from the Positive Changes Factory, the Gladway Foundation, and other organizations suggested including an “economic sustainability” component alongside “social impact” and “relevance of the problem addressed.” Ten social enterprises participated in testing the model. In this material, we will present the essence of the evaluation of economic sustainability of the projects proposed under the model developed, and why its methodology can aid in making the right decisions.

Elena Avramenko

Expert of the project “Development of a Social and Economic Impact Assessment Model for NGOs” by the GLADWAY Foundation, Lean 6 Sigma Green Belt master

A HARMONIOUS UNION

Social entrepreneurship should ideally be a harmonious union between an effective solution to an important social problem and a sustainable business model. An organization can only manage change and make a positive impact on the society if it has constant and reliable financial resources. In light of this, financial analysis of your commercial activities is an important components of success. By looking at the dynamics of financial performance from year to year, a company can understand the strengths and weaknesses of its management, and therefore can plan and improve performance over time. That is why the experts decided to add an economic sustainability indicator to the model being developed.

The need to evaluate economic sustainability and financial performance of a social enterprise is evidenced by the success stories of Western companies offering social impact consultancy services (see Figure 1). For example, JBJ Consult (Switzerland) provides evaluation of profitability, self-sufficiency, return on investment and other financial indicators, making sure their clients’ businesses yield both financial and social return. Another example is the Monitor Institute by Deloitte, which works with social impact organizations to improve their impact and managerial performance, and to optimize resource utilization.

Figure 1. The Use of Economic Indicators in Evaluating Social Entrepreneurship in Western Countries (Based on Evolution & Philanthropy Research Organization)1

* – relevant for institutional investors who want to start with a pilot, to assess risk

THREE KEY INDICATORS

The economic stability indicator formula is based on the principle of accessibility and unambiguity of the data used: when compiling the evaluation model, the authors indicated specific locations in the accounting balance sheet where the respective indicators can be obtained. Therefore, it is no longer necessary to describe the economic component in terms of risks and in the context of investment, as suggested by SROI and IMP methodologies. These methodologies require using not just accounting, but econometric analysis methods, which may not be available to a wide range of social entrepreneurs. The scale and scope of most social entrepreneurship projects does not require hiring an expert in computational methods in economics and/or the social sciences.

That is why easily accessible indicators were chosen for this model, which reflect the economic effectiveness component of the social enterprise, and which every enterprise can calculate without going too deep into complex analysis methods.[34]

The proposed evaluation of the organization’s financial condition uses such ratios as current liquidity, financial sustainability and return on sales, based on figures that can be found in the standard accounting statements.

1. Current liquidity shows whether the organization has enough working capital to cover its current liabilities as they fall due.

2. Financial sustainability shows the degree of the organization’s dependence on external funding and helps predict its solvency in the long run.

3. Return on sales is a comprehensive measure of the efficiency of material, labor and monetary resources utilization. A decrease in this figure means either a decrease in sales or inefficiency of economic activity.