Social costs are costs that are necessitated by having a particular social mission. In social enterprises with an employment mission, these costs are often related to providing the extra training, supervision, and support that enable individuals with significant barriers to employment to become successful employees. Whatever the specific social mission is, incurring social costs is not an accidental matter; it is a by-product of doing social mission work. Social enterprises are set up to accomplish special tasks and those tasks generally cost extra money.
In the effort to accurately represent social costs in a social enterprise’s income statement, the degree of precision is a function of the amount of time invested. Given this relationship, it is important to clarify objectives in advance based on the individual circumstances of an organization and managerial goals. There are several key questions to consider, such as:
- Do you want a quick, back-of-the envelope estimate?
- Or is your enterprise willing to invest the time necessary to obtain a more accurate representation of social costs?
However an enterprise decides to weigh the importance of social cost accounting, it should consider using the six steps delineated below to determine what social costs to track and how to represent them.
- Understand current enterprise costs and cost drivers
- Select the most important social cost categories and drivers
- Estimate, for each of the costs selected, what percentage is due to mission
- Calculate the social costs
- Report the enterprise performance before and after social costs
- Review and revise social cost calculations regularly
Step 1 – Understand current enterprise costs and cost drivers
In order to identify and quantify social costs, first identify all current revenues and costs. As a prerequisite, make sure the enterprise financials are complete and aren’t missing any costs. It is helpful if the enterprise is tracking all costs uniformly through the same system and, if appropriate, costs are allocated accurately between the program and enterprise sides.
Step 2 – Select the most important social cost categories and drivers
You don’t need to account for every social cost, just the most important ones. It doesn’t make sense to track a particular social cost if it has a small dollar impact and will entail large methodological challenges. On the other hand, it is worthwhile to gather and track particular data when the costs being tracked are large in dollar impact and the methodological challenges are small. As a general rule, focus effort only on social costs that are big enough to matter and easy enough to estimate.
If the social costs facing your business are not immediately clear to you, it might be useful to begin your analysis by thinking about the nature of your business as reflected in the components of its cost base. For example, if you have a large number of trainees and labor is the largest component of your enterprise’s cost base, then it is likely your most significant social costs are related to employee inefficiency or additional supervisory time. On the other hand, if you employ trainees and are manufacturing a product made with expensive materials, then wastage might be your most significant social cost.
To ensure you list all of the social costs relevant to your business, request input from as many of the business’s staff as possible. These individuals can alert you to any dimensions you have missed or to instances where you have defined a social cost too broadly. Supervisors and other individuals who are involved in the day-to-day operations of the business can be especially helpful in analyzing the additional costs incurred by a social enterprise carrying out a social mission.
Step 3 – Estimate, for each of the costs selected, what percentage is due to mission
Now that you have identified what the biggest cost drivers are, you can begin to estimate how much can be attributed to social mission. Some costs, such as those related to employee supports, will be clearly attributable to the social mission. Others, such as wastage, will be less clear. Is the amount of wastage the result of employing a less experienced workforce as part of your enterprise’s mission, or is it simply the result of poor business management? While there is simply no way answering this question with absolute certainty, you can make a more informed and confident estimate after some thoughtful and critical analysis.
When making these estimations, make sure to incorporate the expertise from throughout your organization. The people closest to the front-line will often best understand the impact of the mission on business operations and costs. It is also good practice to collect internal data and compare it with external benchmarks.
Once you have identified the amount of each cost you can reasonably attribute to the social mission, simply apply those percentages to each of the corresponding line items.
Throughout this process, it is worth keeping in mind that it is as much an art as it is a science. Don’t get hung up on perfection and remember that the goal is to come up with estimations that are backed up by thoughtful and critical analysis. At the end of the day, this process aims to help your enterprise have a clearer understanding of its costs in order to isolate potential areas for improvement. It would not serve your enterprise well to over-account for social costs and, in doing so, cover up general inefficiencies.
Step 4 – Calculate social costs
So far, this process has identified what the cost drivers are and informed estimations of what percentage of those costs are related to social mission. With these two inputs, you can now attribute dollar amounts to each social cost.
Using this simple formula, you can calculate social costs for each item on the income statement:
Step 5 – Report the enterprise performance before and after social costs
Now that the social costs have been quantified, your enterprise can utilize double bottom line accounting. Below is an example of a double bottom line income statement:
Double bottom line accounting clearly delineates the enterprise’s business and social costs, and as a result provides a clear picture of the impact that social costs have on the enterprise’s financial performance.
Step 6 – Review and revise your social cost calculations regularly
Managing your double bottom line is a continuous process. Use the double bottom line income statement to continually manage both the business and the mission performance of your enterprise. REDF recommends that you review and revise your social cost methodology regularly because:
- Your business cost structure may change over time (e.g. growth may provide scale benefits)
- You may revise your social mission (e.g. hiring people with different barriers to employment)
- External conditions may change (e.g. regulatory changes, funding)
However, it is important to clearly document your current methodology and rationale for social cost allocations in order to make fugure revisions much easier.
At times this process may be difficult, but the benefits of quantifying social costs make it worthwhile. Distinguishing social costs from ordinary business costs enables managers to understand the extent to which a social purpose enterprise is profitable as a stand-alone business and in turn shapes important strategic and operational decisions.
In addition to facilitating informed decision making on business issues, accounting for social costs facilitates informed decision making regarding the social mission. For example, each month managers can weigh social costs against estimates of social impact and ensure they are appropriately in line. In instances where they are not in line, managers can undertake cost reduction efforts or can take steps to maximize social impact. More informed and effective decision making on business issues and the social mission ultimately enhances a social purpose enterprise’s ability to achieve both economic and social goals. Social costs cannot be ignored, for they lie at the very heart of social enterprise.