Nonprofits operate differently from for-profit companies. Because they rely on donor funds to stay operational, nonprofit organizations must provide financial reports to ensure transparency and compliance.
These reports show where income comes from and how it’s being spent. These reports are legal requirements and reassure donors that their money is being used as intended.
Statement of Financial Position
The Statement of Financial Position, which lists the assets and liabilities of your organization, is the equivalent of the Balance Sheet in a for-profit company. The statement presents your total net assets at a specific time and can be broken down by whether those assets are unrestricted or have donor restrictions or designations. This statement is also helpful in determining your capacity for growth or if you have enough funds to start a new program or make a significant purchase.
Assets include all the cash and fixed assets your nonprofit owns, such as office supplies, event equipment, and property investments. Donations, grants, and other donations your nonprofit receives are also listed as assets in the statement.
These assets are divided into categories based on their liquidity, with the most liquid ones (like cash) listed first. Investments in property and equipment and short-term receivables like accounts payable are listed next. Finally, your long-term debt and any loans and grants you owe to other organizations or individuals are liabilities.
The liabilities section of the Statement of Financial Position is organized by the amount your nonprofit owes and by the date it must be paid. The most common liabilities are loan payments, outstanding invoices, and gifts to others. You may also have a few other liabilities unique to your nonprofit, such as tax liability or legal expenses.
Statement of Retained Earnings
Nonprofit financial reporting is different than for-profit bookkeeping. However, it must still be accurate and organized to provide valuable insights into your organization’s financial health. Whether you handle financial reporting in-house or rely on the help of an outside accounting for nonprofit organizations, all administrative staff needs to have a basic understanding of these reports and how they are prepared.
The balance sheet of a for-profit business is comparable to the statement of retained earnings. It lists your nonprofit’s assets and liabilities at a given time and provides users with the total change in net assets.
Assets can include physical items, such as office supplies or event equipment, and money, such as cash donations or grant funds. They may also consist of immaterial assets like trademarks or copyrights.
Liabilities, on the other hand, are what your nonprofit owes to others, such as accounts payable and debt. These are usually broken down into two categories: current and long-term. The former are obligations owed within one year, while the latter represent those that can be paid over several years.
Finally, the statement of functional expenses outlines your nonprofit’s actual costs by categorizing them into three main areas: programs, fundraising, and administration and management. This gives donors more insight into how your nonprofit uses their donations. It is a requirement for nonprofits to submit this report to the IRS when filing Form 990 and to websites.
Statement of Activities
Nonprofits should use a statement of activities to report their revenues and expenses over a period. Like a profit and loss statement for for-profits, the statement of activities helps nonprofits determine whether they are getting enough money to fund their operations. It also helps them identify the areas needing changes (increase in revenues or decreases in costs) to fund their programs.
Revenues are listed by source, including individual contributions, grants, donations, and investments. They are then further broken down into unrestricted, temporarily restricted, and permanently restricted funds for a more accurate picture of where the organization’s funds lie. Expenses are then broken down into three categories: program, administrative, and fundraising. This information is then compiled to reveal your nonprofit’s net assets over the reporting period.
A surplus indicates that your nonprofit’s income has exceeded your expenses, which increases net assets. Conversely, a deficit shows that your nonprofit’s expenses exceed its income. Using the statement of activities in conjunction with your other financial statements can help you better understand how to improve your nonprofit’s finances and stay on track to fulfill its mission.
Statement of Cash Flows
Nonprofits must understand how much cash flows in and out of the organization. This enables nonprofit leaders to identify and address potential problems before they become serious.
The statement of cash flows starts with net income or net loss, which comes from the nonprofit’s profit and loss statement (statement of activities). From there, the cash flow statement looks at all the cash coming in and out of the nonprofit during a specific period.
This includes the organization’s operating revenue, including donations and ticket sales, and operating expenses, such as salaries and equipment purchases. The statement of cash flows also includes the nonprofit’s financing activities, which can include the sale of assets and the repayment or issuance of debt.
The statement of cash flows also adjusts net income back to the cash basis. This means that values such as the value of an asset that is sold or a decrease in current assets, such as accounts receivable, are added back into net income because they represent losses on the accounting books but don’t affect actual cash.