In the business world, the concept of return on investment (ROI) is a simple one. Return on investment simply refers to the profit generated by money invested into a business and it is usually expressed as a percentage gained per year. In the world of non-profit organizations, the concept ROI has a number of useful, but different applications, in addition to the business application.
Social Return on Investment
Non-profit organizations exist to achieve social and/or religious goals. Some non-profit organizations are very effective and efficient at converting money into the achievement of their social and/or religious goals. Others are notoriously ineffective and inefficient. Although it is not always easy to measure social return on investment, it is important to develop measurable indications that allow the non-profit organizations to assess their social return on investment. There is a direct relationship between visible results and the willingness of people to donate.
Financial Return on Investment
The business definition of ROI does have a number of direct applications to non-profit organizations as well.
In Fee Charging Non-Profits that do not Solicit Donations
Many non-profit organizations deliver products and/or services for fees. They differ from businesses primarily in their full reinvestment of profits into their organization. In many respects they are like "growth stocks" except there are no owners who will eventually reap a capital gain. For example, in the past there were many "mutual" insurance companies that functioned in this manner, although many of them have become for-profit businesses in the last few decades. ROI in these non-profits is similar to ROI in businesses, although it must be balanced with their social ROI.
In Non-Profits that Rely Primarily on Donations
Even non-profits that rely primarily on donations should consider the financial return on certain investments. For example, if they buy a facility, they should determine that the cost will be lower than leasing the same kind of facility and that the investment pays back more than, for example, an endowment fund. Money invested into various donor development programs needs to be compared in terms of financial ROI.
In Fee Charging Non-Profits that also Solicit Donations
Private schools and camps are good examples of non-profit organizations that charge fees but also solicit donations. While social ROI is an important measure in these organizations, financial ROI is also very important. Many private schools and camps charge fees that cover the full cost of their operational and capital expenses and then solicit donations to fund scholarships for families that cannot afford full fees. Financial ROI can easily be measured in these organizations. In fact, financial ROI is an excellent tool for evaluating their financial "investments" program and capital areas. Money invested into donor development programs must also be assessed in terms of ROI.
Do you have effective tools for assessing social and financial ROI in your non-profit organization? We will be discussing various measures of ROI in future newsletters. This is one of our specialties at Vic Wiens Consulting.