top of page

Understanding Nonprofit Financial Statements: A Guide for Board Members and Donors

So you're thinking about joining the board of a nonprofit and or donating to support an organization whose mission aligns with a cause you are passionate about. Before you join the board or make a donation, you want to have confidence your efforts and money will go to a nonprofit that is running efficiently.


For those that are familiar with the financial statements of for-profit companies, understanding the financial statements for a nonprofit will be an easy transition. If you aren't finance savvy, don't fret. These financial statements are structured to help you understand if the money going into to the nonprofit is enough to cover the money going out.


So what are the key financial statements nonprofit publish to provide donors, volunteers, corporate sponsors, and other stakeholders a view of how they are performing?


4 Key Nonprofit Financial Statements

  1. Statement of Financial Position (aka the Balance Sheet)

  2. Statement of Activities (aka the Income Statement)

  3. Statement of Cash Flows

  4. Statement of Functional Expenses (the expenses to drive programs, fundraising and general management)


Statement of Financial Position

This statement provides a summary of the assets and liabilities of the not-for-profit organization. It consists of 3 sections: Assets, Liabilities and Net Assets.


Assets = Liabilities + Net Assets


The assets section outlines what the nonprofit OWNS. This includes things such as cash, accounts receivables, property and office equipment.


Liabilities section outlines what the nonprofit OWES. They may owe their employees (wages), vendors (product & services), contractors (services) and other institutions. This includes accounts such as accounts payable, wages, payable and loans payable.


The Net Assets section (identified as the equity section on the balance sheet of for-profit organizations) is the balance of Assets minus liabilities. This section is typically displayed in 2 line items, 1. with donor restrictions and 2. without donor restrictions. (Restrictions discussed further below with the Statement of Activities)


You can use this statement to understand the nonprofit's liquidity. If assets are greater than liabilities that is a sign of liquidity. A good liquidity measure is the current ratio, which is current assets divided by current liabilities. The higher the ratio, the more liquid and better equipped the organization is to pay back their liabilities.


Statement Activities

This statement shows a summary of the revenues and support received as well as the expenses incurred. This statement will include 2 categories to account for restricted and unrestricted revenue and support.


Donor support may come with or without restrictions. For example, a grant donor my specify that the funds may only be used for a specific program or purpose. Another is example is a donor may specific that a donation is placed in an endowment and the interest is used to fund a specific project. These funds would be categorized under the with restrictions category. These funds can be challenging to manage as a donor can designate the funds be restricted to a project only they can choose. For nonprofits with a significant amount of revenue that is restricted, you want to understand those restrictions to see if they will or will not be applied to the same programs you may be passionate about seeing survive.


As we are all familiar with expenses, these are the costs incurred to keep the nonprofit running.


The net asset total is the result of revenue less expenses. A positive change in net assets is a good sign the nonprofit is managing its finances effectively.


SAMPLE STATEMENT OF ACTIVITIES

Statement of Cash Flows

The statement of cash flows is the same statement presented by for-profit organizations.


The statement shows how cash is moving in and out of the organization. The cash flows are grouped into 3 categories. Cash flow from 1. operating activities, 2. investing activities and 3. financing activities.


Operating activities refers to the revenue and expenses associate with the everyday operations of the nonprofit.


Investing activities sections outlines cash flows from investments. Things such as property and equipment (long-term investments) and interest income from investments.


Financing activities reflects cash flows from loans and notes payable


When cash is effectively managed, there is a balance between the inflow and outflow to ensure the business is liquid enough to meet financial obligations.


Statement of Functional Expenses

This financial statement accounts for the expenses from the statement of activities grouped by the purpose it served. Those categories are 1. program services, 2. management, and 3. fundraising.


Program expenses are incurred for the nonprofit to provide its services as it carries out its mission and cause you support.


Management expenses, as they are titled, refer to the costs of managing the organization. Without management of the organization, the programs cannot be carried out.


Fundraising expenses are incurred when the organization is raising funds. The include items such as event planning, marketing, and equipment.


SAMPLE STATEMENT OF FUNCTIONAL EXPENSES

In summary, when reviewing nonprofit financial statements, you want to understand if they are liquid enough to cover their liabilities, understand what portion of their donations are restricted, and how money is being spent to support the programs that drive the mission of the nonprofit.


IRS Form 990: The IRS requires nonprofits to complete form 990. This form is to provide additional transparency into the nonprofits financials and are publicly available.

Comentários


bottom of page