Return on Investment (ROI) is a simple calculation that tells you the bottom line return of any investment (i.e., the profits in relation to the capital needed). It is a performance measure used to evaluate the efficiency of an investment, often in relative to other alternative investments. The formula of ROI is simply the ratio or percentage between the benefit (return) of an investment divided by the cost of it.
ROI = (Gain – Cost) / Cost
For example, if you buy some shares of a start-up company at $50 each and sell them later at $70 each., then the ROI is ($70-$50)/$50 = 40%.
ROI is a very popular metric because of its simplicity but keep in mind that it also comes with certain risks that should be carefully considered when making investment decisions. Among many factors that are missing from this measure is time. Looking back at the example, this start-up company seems to be a good investment at 40% ROI, but what if this calculation is based on a 10-year duration? What if there’s another option of 8% ROI which pays off within just a year? Another point to be concerned is the cost factor. While the ROI calculation remains the same for all types of investment, there’s a variation in how the costs are accounted for, such as transaction fee for stocks or upkeep cost for real estate.
Social Return on Investment (SROI) is a more recent measure developed from the need of a quantitative approach to measure the social impact of a project or business. SROI employs a concept called Triple Bottom Line (TBL), taking into consideration and evaluating the monetized value the social and environmental return in addition to just the economic return. These three bottom lines, closely linked to the sustainability topic, are often paraphrased as Profit, People, and Planet. However, criticisms are still mainly on the lack of consistent method in calculating the benefits of social impact into the monetized value.
Measuring the social impact of your social enterprise or non-profit is critical as you build up your credibility with stakeholders and raise funds from investors and donors, but I personally still don’t see a clear need of SROI yet. It’s rather a matter of setting your target and systematically tracking the results. If you founded a social enterprise to help reducing the usage of foam food containers with natural, biodegradable material, just tell me your goal – how many foam containers do you aim to replace in a year and three years from now? You can even further elaborate the impact by showing the approximate annual carbon footprint that will reduced from your business. In the end, it’s just about getting your audience to buy in – show them that you are serious and have a clear, well defined goal to achieve.
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