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

A good compensation for low (or absent) economic stability score can be a solid theory of change for the indicators involved in the evaluation.

CASE STUDIES

Let’s discuss the application of this evaluation using the example of organizations receiving consultations as part of the launch of the methodology. The balance sheet data below is based on the actual data of the organizations, but shows the actual indicator values.

CASE 1

The organization has been manufacturing and selling products for people with disabilities for several years, and it is planning to expand the business, but no investments have been made towards the expansion so far.

We use the balance sheet data to calculate three ratios (see Tables 5, 6, 7).

Table 5. Current liquidity ratio

Table 6. Financial sustainability ratio

Table 7. Return on sales ratio

We then use these ratios to calculate the final score and determine the economic stability ratio (see Table 8).

Table 8. Calculated economic stability ratio

S = 0.4 * CL score + 0.3 * FS score + 0.3 * ROS score = 0.4 * 0 + 0.3 * 1 + 0.3 * 1 = 0.6

Conclusions on the calculated economic stability ratio:

Current liquidity falls outside the standard range of values, exceeding the upper limit due to the volume of inventories (large volume of finished products and materials for production). This ties up money unreasonably. To improve the indicator, the organization needs to improve efficiency of inventory management, cutting stocks by half at least. The high stocks level may be indirectly caused by the scheduled business expansion, but this requires further checks. If the overstocking is indeed the result of one-off management decision, the following periods will bring the current liquidity ratio towards the standard value by increasing the turnover.

The company falls into the second class of economic stability (S = 0.6); improving this score requires a specific action plan to increase current liquidity.

CASE 2

The organization opened a second office in 2022, where people with disabilities provide services. The first office has been up and running successfully for several years. The second office required major financial investment at the beginning of the year, for renovating and equipping the premises. It opened towards the end of the year.

We use the balance sheet data for 2022 to calculate three ratios (see Tables 9, 10, 11).

Table 9. Current liquidity ratio

Table 10. Financial sustainability ratio

Table 11. Return on sales ratio

We then use these ratios to calculate the final score and determine the economic stability ratio (see Table 12).

Table 12. Calculated economic stability ratio

S = 0.4 * CL score + 0.3 * FS score + 0.3 * ROS score = 0.4 * 0 + 0.3 * 0 + 0.3 * 1 = 0.3

Conclusions on the calculated economic stability ratio:

Current liquidity falls outside the standard range of values, having fallen below the lower limit due to the liabilities exceeding the assets. The company took a loan to open the second office, and the current financial situation is forcing it to find the funds to repay the debt, which is indeed a risk for the social enterprise, as the office renovation was unexpectedly delayed and the launch had to be postponed. To improve this indicator, the second office needs to be run very efficiently.