Financial Management for Nonprofit Organizations, 3rd Edition

APPENDIX 9BEVALUATING SOCIAL ENTERPRISES

In this appendix, we present a diagnostic tool to assist in evaluating social enterprises (some of which may be referred to as “earned income ventures”) from a liquidity perspective. We start with a brief argument for considering liquidity, follow with a numerical example, and then show how the graphical Financial Return & Financial Coverage Matrix (FRFCM) may be used in decision-making.¹

If the ALT (Approximate Liquidity Target) Theory is approximately correct,² and/or liquidity is of paramount importance (say, because the nonprofit is capital constrained and engaging in moderate or extreme capital rationing), then calculated Social Return on Investment (SROI, as presented by REDF and others) might be supplemented with or replaced by a form of Social Return on Financial Coverage Ratio (SROFCR). Regardless, the framework that follows should prove useful to nonprofits considering for-profit business ventures.

Hypothetical Organization XYZ has four possible business ventures to consider: A, B, C, and D. Which one(s) should it favor, and which ones avoid? As input into this, consider the table of relevant data for the ventures (Exhibit 9B.1).

Bubble Graph

Data Social Return, Financial Return, and Liquidity Analysis for New Nonprofit Business Ventures

Project	Social Return (5 year Projected)	Initial Investment*	Target Liquid Funds**	Financial Coverage Ratio: ABS(TLF/II)-1	Financial Return Present Value	Memo: NPV
A	300,000	$(100,000) ...