SROI Analysis Stage 5: Calculating SROI
In the previous stage, we learned how to establish outcomes as a result of the activity. The final step in the stage was to calculate the ‘impact’. This brings us to stage 5 of the analysis wherein we’ll learn how to calculate the SROI. You now have all relevant information and data for the calculation of SROI and now is the time to apply theory to practice. This stage is essentially a summary of the financial data recorded and accumulated in the previous stages.
Read the previous stages here :
What we’ll need is (a) financial value of the investment and (b) value of social costs and benefits.
In case of an evaluative SROI, the analysis should be conducted after the period for which the outcome was expected to last along with interim evaluations to assess the efficacy of the intervention. For those carrying out a forecast analysis, you will need to gather data around the period over which the outcomes last.
This stage involves five steps:
- Projecting into the future
- Calculating net present value
- Calculating ratio
- Sensitivity analysis
- Payback period
5.a Projecting into future
This step involves assessing the value of the outcomes that will be projected into the future. For this, you will need to revisit some of the previous stages. In stage 3, we learned to establish the duration of an outcome while in the previous stage, we calculated the impact value. The first step here would use the data from these two stages. You will first need to set out the value of the impact for outcomes that last for a single time frame.
Begin by listing out the number of periods for which the outcome lasts, ie., Year 1, Year 2, so on and so forth, and fill out the value of impact for each outcome. The next step will be to subtract any drop-off for each of the future periods after the first year.
For example, the elderly population of West Java reported fewer visits to the doctor’s clinic for up to a couple of years (duration of the outcome) and the drop-off was estimated at around 10 percent. From the last stage, we can find out the value of the impact of this outcome, which, as per the example in stage 4, came to around $47.
Remember, the drop-off is calculated only for the following years after the first year.
So the calculation here would go like:
Impact in year 1 = $47
Impact in year 2 year
Impact in year 1 minus drop-off (10%)
$47×10/100 = $4.7
Impact in year 3 will take the impact value of the second and have drop-off deducted from it. This will go on for the rest of the years. Similarly, you can work out the calculation and fill out the rest of the columns in the impact map.
5.b Calculating net present value
For this purpose, you will first need to arrive at ‘present value’ which will be calculated by dividing the value of impact in respective years with the discount rate.
Consider the formula:
Present value = value of impact in Year 1/(1+r) +
Value of impact in Year 2/(1+r)2 +
Value of impact in Year 3/(1+r)3 +
Value of impact in Year 4/(1+r)4 +
Value of impact in Year 5/(1+r)5
Taking figures from the previous example, the impact value in year 1 is $42.3. If the discount rate is set at 3% then the present value for year 1 will be $42.3/(1+3/100) = $42.3/1.03
Similarly, the calculation for the remaining years can be carried out and added to arrive at the present value.
Before we go on to calculate Net Present Value (NPV), here’s a note on the concept of discounting:
The process is used so that costs and benefits received or paid across different periods could be comparable and added up to calculate the NPV. Social Value UK in its guide on SROI analysis describes the concept which, “recognises that people generally prefer to receive money today rather than tomorrow because there is a risk (eg, that the money will not be paid) or because there is an opportunity cost (eg, potential gains from investing the money elsewhere). This is known as the ‘time value of money’. An individual may have a high discount rate – for example, if you would accept 2 units of currency in one year, instead of1 now, that implies a discount rate of 100%”.
NPV = Present value – value of investments
We had learned how to assign value to inputs or investments in stage 2. The total of that column will give you the value of investments.
5.3 Calculating ratio
You are now equipped with all data that will help in the calculation of the SROI ratio. It is represented by a simple sum by dividing the discounted value of benefits by total investment.
SROI ratio = Present value/value of inputs
Net SROI ratio = NPV/value of inputs
5.d Sensitivity analysis
Once you arrive at the ratio, another important step is to gauge whether or not, and to what degree, your results would change if some of the key factors or assumptions from the previous stages are modified. As the name suggests, this process is to assess how sensitive is your model to changes made to the elements and which factors bear the most significant effects. You may want to check changes to estimates such as deadweight, attribution and drop-off; financial proxies; the quantity of the outcome; the value of inputs, et cetera.
In this process, you need to calculate how much each estimate needs to be changed so that social return becomes a social return ratio of $1 value for $1 investment. This is the way to exhibit the sensitivity of your analysis to changes in various estimates. This is an important step as it can help you report the amount of change that is necessary to make the ratio change from negative to positive or the other way round.
During this process, you will be able to monitor the changes in the overall ratio as a result of changes made to the estimates. The exercise will help in determining what changes bear a significant impact on the ratio so that you can make a more informed decision in managing the value that you are creating. If your result exhibits a certain degree of sensitivity in a particular indicator, you may want to prioritize that indicator and assign more resources and investment to it.
Tip: The result is sensitive when you can achieve the 1:1 ratio by making little changes. If the changes are greater, it is likely the result is not sensitive. “It is also possible that a choice you made earlier between two proxies is now resolved because the choice doesn’t affect the overall ratio. All of these findings should be discussed in the final SROI report,” Social Value UK states in its guide.
Example: Suppose an outcome is characterized by low deadweight and attribution. There could be a possibility of more change and significantly higher deadweight and drop-off as previously recorded. In such a scenario, reassessing what amount of changes to deadweight or attribution would lead the SROI to fall to $1: $1.
Note: The SROI ratio should be 1:1, which means $1 value for $1 investment. If it isn’t so, you can reassess various elements and make changes to them to arrive at the desired ratio. This leads us to the next step.
5.e Payback period
The final step in this stage is to assess the duration for an investment to be paid off. Simply put, this exercise is to find out how much time it will take for the value of the social returns to start exceeding the value of the investment.
This step is vital for investors and funders as they may use this data to determine how risky the project may get. A short payback period may be less risky, whereas a long payback period suggests the need for longer-term funding.
The formula for calculating the payback period is simple. For example, if the annual impact remains the same for every year, the payback period can be measured by dividing the annual value of impact for all participants by 12 (months). This will give us the value of impact per month. Now, divide the value of the investment by impact per month to arrive at the value of the payback period in months.
Payback period in months = Investment/Annual impact/12
With this, the process of financial projection is complete and can be filled out in the impact map. Although the SROI analysis is complete with this stage, the final step is to file your report and communicate the findings with your stakeholders. We’ll take a look at this in detail when we discuss the next and the final stage in our next blog.