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Return on Investment (ROI) & Social Impact

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.

triple bottom line

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.

Image from Wikipedia.org

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Leadership: It’s all about those little things

If you work in consulting or any corporate’s planning or client-facing department, you probably have heard the term customer experience quite often. This issue has been one of the emerging business trends as a result of a more connected world and the tech savvy generation. To put it simply, it’s about winning your customer’s loyalty by various approaches to show them that you do care and they are valued. I will write about that later but what I want to share today is actually a story about my own colleague experience.

The other day ago, while I was helping out my supervisor on several research works, e-mails coming and going off my inbox as usual, one mail arrived and it was not related to my current tasks at all – it’s a report on sustainability practices by leading retail and consumer goods companies. “Thought you might be interested.” is all that was written. To my understanding, I mentioned my interest in corporate citizenship and sustainable development only once when my supervisor interviewed me almost a year ago, and I have never mentioned about it again. Yes, she did remember and do share the resources to me during the busy work time. That day I told myself I’m going to work harder on my next task to deliver over her expectation and help her out more than what she asks, and yes seriously I’m willing to try that despite the doubt in my own ability.

I don’t think you need to be that awesome to be a good leader. Many people tried so hard to inspire their subordinates by irrelevant things such as being a role model in hard work or occasionally treat them with some nice meals, but sometimes it’s all just about those little things that you listen and care.

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Employees vs Independent Contractors

Why do entrepreneurs prefer hiring contractors ? It saves a lot of money.

When a company hires someone as a contractor (such as web developers), the company does not have to withhold income tax, pay social security and medicare taxes, or even comply with hourly minimum wage requirements, and also is not subject to many state and federal employment laws.

But things are not that simple. The problem is a venture cannot simply hire anyone as a contractor even in the case the worker willingly agrees to such classification – If the worker is classified as an employee under legal standards, the venture can face a substantial liability for the payment of back taxes, back pay, and penalties for improperly classifying the worker as an independent contractor.

While there’s really no single clear cut test, the determination is usually based on an analysis of the relationship between the worker and the organization and how much control the organization exerts over the worker. For example, contractors retains a great deal of control over how they complete their work projects and can work for other companies simultaneously. In the U.S., the Internal Revenue Service (IRS) looks at three main categories of factors in determining the worker classification for the purpose of federal employment taxes and withholding taxes as following.

  • Behavioral control – e.g., requiring the worker to go through extensive training
  • Financial control – e.g., reimbursement of out-of-pocket payments such as taxi fares
  • Relationship of the parties – e.g., giving the worker paid vacation time, length of the term of work

However, it’s a still a good practice to have a signed independent contractor agreement to set forth the understanding.

Another crucial thing to note is that contractors, unlike employees, own the work they create, so make sure to address this in the contract, assigning all ownership of work created to the company.

Reference: Law and the Entrepreneur by Esther Barron and Steve Reed (Northwestern University) on coursera.org

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