#1 Accounting Challenge for Social Impact Companies

#1 Accounting Challenge for Social Impact Companies

TOMS may be the latest to champion ethical shopping, but it’s a trend popping up more and more – especially here in Colorado. It’s a fad that will likely stick as Millennials continue to support and start socially responsible organizations. While great in theory, ethically sourced companies are hard to measure. Unlike dollars and cents, social impact doesn’t transfer well to a P&L. So how do we adjust to a world of socially conscious consumers? As of yet, there is no right answer but it is an accounting challenge worth addressing.

If you manage or are thinking about starting a social impact business or nonprofit, here’s what you need to know from a financial perspective.

The Challenge

Today, most social impact companies and nonprofits measure success using the triple bottom line (TBL) method developed by John Elkington in the early 90s. TBL is an accounting framework that factors in social, environmental, and financial accomplishments. Accountants refer to these as the 3Ps: people, planet, profit.

In theory, TBL is a wonderful idea. But, it has no standard for measurement which results in pros and cons.

Pro: TBL gives organizations the flexibility to apply the 3ps to their specific needs.

Con: TBL creates ambiguity in the way each organization measures their 3ps which can result in biased calculations for impact and sustainability. 

So, while TBL is excellent in concept, implementation is weak. Particularly for those who aren’t financial gurus. Without regulation, it’s too easy for leadership to express only the good things that support their organization’s purpose. This approach can skew perspective and negatively impact future projections. Guaranteed, complications will arise if the balance sheet doesn’t accurately portray where funding is coming from and how it’s being used; especially the allocations for social impact. 

The Solution

Work with a trained TBL professional who understand the complexities of measuring social impact. While most CEOs and Executive Directors excel at propelling their mission, managing complex accounting systems isn’t usually their expertise. Nor should it be. So, it would behoove them to outsource this function to a qualified TBL advisor who can create measurements for sustainable growth. Plus, provide a real-time picture of cash flow. This approach will help leadership know where their business stands at all times, making important decision-making easier.

In Conclusion

Ethically sourced companies are here to stay. And while disruptive to traditional accounting standards, we must find ways to adjust to the socially conscious consumer. Until a universally accepted method is adopted, accounting frameworks should be implemented by professionals who are trained in meeting the highest standard of accountability and transparency.

Want to learn more about TBL and the 3ps? CFOShare can help. With more than a decade of experience, our team provides worry-free financial and operational services to entrepreneurs, small businesses, and nonprofits. Contact us for a free 6x60 review today. We’ll sit down with you for an hour to discuss your specific needs.

Schedule your free review here.

 

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