How to Conduct an Economic Analysis
For many charities, understanding how to conduct an economic analysis presents a number of challenges. At the most basic level, these include having the resources and expertise to analyse their work correctly.
The trouble is, economic analysis is crucial for both gaining funding and planning effective projects. Without learning to conduct a proper economic analysis, your charity or NGO will soon struggle to operate effectively.
Luckily, this process isn’t as difficult as you might imagine. In fact, once you understand a few basic principles, you can use a simple framework to conduct effective analyses, for both internal and external use.
This is exactly what we’ll cover today. Let’s start with the basics.
What is an Economic Analysis?
Essentially, an economic analysis is a way of comparing the impact your projects have, with how much they cost to implement. In other words, it’s a way of measuring the value for money that your charity provides to funders.
This is crucial for a number of reasons. For a start, it helps you to think about how you allocate resources. Rather than asking if an approach works, an economic analysis helps you to decide if it is ultimately worth the effort and cost.
In the context of tighter purse strings, and more competition for funding, economic analysis also helps you to prove the value you can provide to funders. Not only does this demonstrate the impact your work has, it also projects professionalism and attention to detail.
The 3 Types of Economic Analysis for Charities
Of course, every charity and their projects are different. Naturally, this means that not every economic analysis is the same. In fact, you’ll want to know how to conduct three different kinds of economic analysis, depending on your specific situation and goals.
For example, you may wish to compare different approaches, or simply establish the return on investment of a single project.
Let’s take a look at each of these types of economic analysis in turn.
A cost-effectiveness analysis is used when you have a number of different approaches or options to use your resources, but want to know which will deliver the best result for a given investment.
In other words, it is used to determine the approach which will offer the best return on investment.
This takes into account two factors:
The cost of each option,
The results for each option.
The goal here is to identify the option which has the best balance of costs and results. However, this falls short of other methods, in that it does not drill into the economic benefits of the project’s results.
For example, a cost-effectiveness analysis might tell you how much it costs to create a certain number of jobs in your local community, but it does not analyse the wider benefit of doing so.
A cost-benefit analysis is more focused on the concrete economic benefits of your work, as well as the costs involved. In this way, it can be used to compare the value and effectiveness of individual projects, as well as comparing between different projects.
Since cost-benefit analyses attribute an economic value to your outcomes, you’ll be able to compare the cost and results of your projects in monetary terms.
However, your outcomes can only have an estimated monetary value. Typically, this is based on a literature review, to help you map an economic value to each outcome of your project. You can then create a formula to relate your investment to its return.
For example, if you know that each job you create is worth £15,000 to the local economy, then you can multiply this by the total number of jobs your project creates, in order to establish a gross return on investment.
Social Return on Investment Analysis
Like a cost-benefit analysis, a social return on investment (SROI) analysis aims to compare the economic value of a project with its costs. However, it differs in the methodology it uses for quantifying economic outcomes.
In addition to using existing literature, an SROI investment involves stakeholders in original research, to understand their real-world experiences of your projects.
So, rather than focusing solely on the monetary value a jobs creation program brings to the local economy, you might also analyse the impact on the local community’s well-being, and the economic implications of this.
How to Conduct an Economic Analysis in 5 Steps
Whichever kind of economic analysis you choose to conduct, the core principles are the same. Here are the five steps you’ll need to follow in order to conduct an economic analysis successfully.
1. Establishing a Scope
The first step of any kind of economic analysis is to establish your scope. This includes:
Your level of analysis,
Your level of analysis includes the specific variables that you’re going to focus on. This typically means breaking your overarching goals down into more specific components. For example if you run projects to improve community wellbeing, this is quite vague.
It’s important to come up with representative variables, which indicate the overall level of wellbeing. These might include access to services, or survey responses from members of the community.
Your time frame might include the duration of your project, or a period thereafter.
2. Mapping Outcomes
Now that you have these representative variables, you’ll need to measure and monitor how they change over time. That is, how do these things change over your desired time period for economic analysis?
You’ll also need to make a convincing case that there is a causal relationship between your project and these changes.
There are a number of ways to prove causality. For instance, you can draw on existing research, or use testimonials and survey data from your end service users.
3. Quantifying Outcomes
If you’re conducting SROI or cost-benefit analysis, you’ll also need to quantify the economic impact of your outcomes. In either case, you’ll want to have a clear framework for how your project delivers an economic return.
The method for doing this varies.
As noted above, the estimation of economic outcomes in a cost-benefit analysis largely draws on existing research and literature, whereas an SROI analysis also requires the input of stakeholders and service users, through social impact measurement.
4. Calculating Economic Value
Next, you’ll use this framework to determine the economic impact of your projects. Luckily, if you’ve done the legwork already, this is as simple as crunching the numbers using the framework you established in the previous step.
It’s important to be rigorous here, as any miscalculations or oversights in your economic analysis can greatly undermine its effectiveness, and credibility for funders.
5. Reporting and Using Results
Finally, you’ll need to know how to interpret and use the results of your economic analysis. The first step here is verification. This involves cross-referencing the results with the experiences of both stakeholders and external economic experts.
Once you have verified your results, you can begin to act on them.
The goal here is to use your economic analyses to ensure that you are operating as efficiently as possible, including by allocating your resources in the most profitable projects.