The charity sector could lose credibility with funders because of the poor quality of its impact measurement, according to the author of a new report.
A position paper published this week by the think tank New Philanthropy Capital examines how charities apply social return on investment, which measures an organisation's impact in financial terms.
It says that SROI, which has been backed by the Government, had the potential to be "an incredibly useful tool for understanding and increasing charity effectiveness", but was held back by the low quality of the evidence in many SROI reports.
Lucy Heady, head of measurement at NPC and author of the report, said many funders were sceptical about charities' use of SROI.
"There is far too much emphasis in the sector on producing a final SROI ratio showing how many pounds of effect are produced for each pound invested," she said. "Often it's used as a fundraising tool, rather than to actually measure impact.
"The Cabinet Office has produced very good guidance on how SROI should be used, but many charities aren't following it. The Government is increasingly using SROI, and charities need to make sure they can meet its requirements."
The report says that charities can improve their SROI by becoming better at collecting evidence and developing financial benchmarks against which to measure that evidence.
Heady said it was important that the financial value placed on an outcome, such as an individual getting a job, was the same for all organisations. "Different charities are assigning different financial values to outcomes, and multiple charities are claiming success for the same outcome," she said.