Organizational information and financial indicators

The heart of the matter is, what is the Common Form? How was it developed? How will it benefit you?

Kate Ruff on organizational information

The organizational information – what we call the Common Form — is a common set of information fields about organizations. These are things that rarely change like the organization’s name, its business number, address, what sector it is working in, and mission and vision statement. It is the kind of information that is same for years at a time, as well as information that is already standardized and collected elsewhere.

The purpose, or the key benefits, is that it will reduce paperwork for social purpose organizations, and improve the quality of analysis of impact data for portfolio level organizations. We are pulling this information into a common set of organizational information with the notion that this information will be part of the software options that are available to social purpose organizations. So that the data can be entered once and submitted without the need to re-key it when applying for grants or doing quarterly or annual reporting.

We are also working with grant makers and investors to accept and use the Common Form. We are pulling in information items that organizations have into a Common Form. This includes financial statements. Imagine Canada standards. The B Impact Assessment for social purpose businesses. A charity profile, either from Charity Intelligence or charity data.

There are four things that the common organizational information can do.

1. It allow us to make a fair comparison of impact data. One of the things we know to allow for a nuanced analysis are details like how big is this organization: measured in revenue, measured in assets, measured in the number of employees, and often the location of this organization. For example, a job program to help newcomers find jobs. We would expect it to have different results in a small town in northern Ontario than you would in the heart of downtown Toronto.

These are things that allow the numbers to be surrounded by contextual information. The contextual information isn’t in itself impact information, but it is necessary to interpret the impact information.

2. The second thing is what we call ‘hygiene measures’. Hygiene measures is a term that is widely used. I like to describe it in terms of a job interview. You are not going to get a job because you show up at the interview with excellent hygiene, but you might not get the job because of bad hygiene. And when we talk about this in terms of impact measurement, there are a lot of impact practices that don’t necessarily make you a high-impact organization. But the absence of these practices raises questions. So we call them hygiene measures or hygiene attributes. The reason we include hygiene attributes is that we don’t want to duplicate work that’s already been done. The B Corp assessment and the GRI already have the kinds of questions that need to be asked.

3. Reducing paperwork. The third goal is that this information can be collected in one place once and that it can be submitted anytime a charity or social purpose business is applying for investment or grant or during that reporting.

4. And the fourth thing is that this is a beginning measure of investment readiness. If you have your mission and vision figured out, if your financial statements are ready to go, if you have a business plan prepared, if you have bios of key staff members and they represent the kinds of skills and expertise you’re going to need, if you have all these things, then you are beginning to show that the organization is increasingly ready for anything.

Elizabeth Searing on financial indicators

[Elizabeth Searing is an assistant professor at the University at Albany, who is working with Nathan Grassy, Carleton University, to determine what kind of financial measures would be best for inclusion in the Common Approach.]

Many people are comfortable talking about the impacts that they create day-to-day with their programs. Yet there’s a little bit of a heart palpitation when you start talking about money, and that shouldn’t be the case because it’s what helps us make a kind of impact. Even though we’re going to be utilizing financial numbers and accounting numbers, that is nothing to be scared of, and it really is a question of hygiene as Kate was describing.

We’ve narrowed talking about money down to a handful of indicators that can tell us a lot using just a little bit of information. There are five core pieces of information and there are 10 supplemental items.

The five core information items put together different accounting ratios or financial indicators that tell us a lot about the organization. The 10 supplemental items do things to make the simple ratios better. For example, one of the things that we noticed is that these ratios are very simple but they gain a lot in meaning when you’re able to compare them across organizations that are doing the same kind of thing. So they tell you something standing alone but mean a lot more if you’re comparing to other organizations that function like you.

This means being able to include, for example, whether or not you have a lot of inventory. So for example, food banks are separated out into their own comparison group at Charity Navigator because we found that the vast amounts of food that a food bank has on hand made it look a little different. When comparing its financial indicators to say, a homeless shelter or an advocacy organization, they look a lot different. The supplemental financial information is there to improve the usefulness of the financial indicators. And the financial information asked for are total assets (what you own), total liabilities (which is what you owe), total revenues, and total expenses, plus current assets. Nothing too incredibly fancy there.

Let me show what we’re going to actually do with that. There are four key indicators – liquidity, resiliency, sustainability and growth. Each one of these has a mathematical operationalization that we’re going to be able to put together to show something about the financial condition of your organization. And these will be put together using just those five core pieces of information. Now, if you’re able to provide the supplemental information, then that gives us two additional types of indicators:  the administrative capacity and revenue diversity.

Administrative capacity is what’s also known as the overhead ratio. There is a lot of discussion and tension around this measure. I assure you, we thought about whether to introduce this at all. I’m one of the people that have actually published research on the dangers of focusing too much on administrative capacity because funders have a tendency to look for something unrealistically low. But keeping the conversation in the open benefits all of us. We wanted to include it because we think that an open conversation about administrative capacity and what it costs to actually run an organization is important and that by keeping this out of the limelight, and that might actually undermine the conversation.

Liquidity is a way of measuring essentially whether or not you’re going to have the ability to recover if, for example, there’s a revenue shock. So, for example, if at the end of the year, you have $12, and your average monthly expenses are $2, then you have six months of expenses. It’s expressed in months. Everything else is a percentage.

Resiliency is a fraction of what you owe to what you own. It’s the amount of money that you owe per dollar of things that you own.

Sustainability is a measure of net income per dollar of assets. It’s like a return on investment (ROI), but a little bit different because if you’re a charity, you’re not looking to ROI and need something a little bit different.

The growth measure looks at net income.

The funny thing about a lot of these ratios is that if we were just in this to make a whole bunch of money, where we would be trying to maximize net income. You’d be trying to maximize profit. That’s really not what we’re doing. So low numbers can be a cause for concern in terms of sustainability because it means when we’re not making a lot, we don’t have a lot of net income per dollar of asset. But really high numbers are also a concern because it means that, for example, if you have a whole lot of current assets compared to your monthly expenses, then you might be sitting on a lot of money that could be doing good somewhere.

And so that’s one of the concerns I have in referring to these as financial health measures – because, you know, both extremes, can cause concern, but that’s why they’re really more diagnostic elements. So these are things that we’re able to look at and that you’re able to look at. And they should be able to give you a little bit of insight on whether or not you need to dig a little bit further.

Kate Ruff describes the research process and the benefits

I really want to highlight that that analysis can come from very, very few accounting numbers. So even if a charity has to just type in a few numbers, it’s not a lot. And there’s a rich analysis that can be done to understand the financial health of the charity and social purpose organizations more broadly. It goes along with the granting and investing decisions that portfolio managers need to make. It’s part of the story of giving control about ‘what and how to measure’ to social purpose organizations, while also equipping the portfolio managers, the investors, the grant makers, the networks, etc. with the tools to understand what’s going on in and across a range of organizations.

I would like to highlight how the other parts of this were developed. The common organizational information was developed by building on work that was already done. I can’t emphasize enough how the common approach is creating this coherence. First, there was an analysis of existing sets of uniform indicators. The kinds of organizational information – that hygiene data – that is necessary to improve the interpretation of impact and helps portfolio managers do a better job understanding the impacts and the decisions they need to make. So that included a look at IRIS, which is a set of networks offered by the Global Impact Investors Network [GIIN], the Global Reporting Initiative [GRI], B Corp – and Elizabeth mentioned the International Comparative Social Enterprise Models Project. That just highlights a few of them.

We also reviewed the grant applications from major funders. That’s looking at the questions they are asking to find those common questions. There was an initiative in the past six or seven years, where a few grant makers got together and tried to harmonize a grant application. So we built on that, taking away the impact questions, which we are keeping very, very flexible, and focusing on the organizational adjustments. We consulted academic literature, and right now, our process is working with these portfolio managers, the grant makers, the investors – to say, “Can you use this? Will you use this and try to get this out there as the common set of organizational information?”

How will this benefit you?

It depends on who you are. For those organizations that report to funders and investors, the common organizational information should drastically simplify and reduce paperwork. For grant makers, investors, social purchasers, this is the first round of data collection. And we know that a best practice in investing and grant-making is to have the first round not be too onerous. For analysts looking at organizations this provides content – the basic information across the organization – regardless of the corporate form. So that’s agnostic to legal form, and looks at social impacts and good hygiene across social purpose organizations. For software providers, we know many people are entering this field, providing software to social purpose organizations to help them manage the data. We are working with two (Impact Dashboard and SAMETRICA), and we are talking to many others. The basic fields are already created, so by building this common organizational information into your software, we’ve done some work for you.

Q: How are you creating the drop-down menu of populations, for example, which vocabularies?

There are existing taxonomies, and the intention is to adopt widespread widely use taxonomies that are already out there while also allowing a free text entry field. Then part of governing the standard over time is to use that open text entry field to understand where the drop-down menu is insufficient and improve it.