Back To Basics: Nonprofit Financial Statements

From donors to directors to board members, it's absolutely crucial that anyone involved in the nonprofit sector has a basic understanding of nonprofit financial statements. Even if you have a background in for-profit accounting, you may be surprised to learn some of the differences that make nonprofit financial statements unique. Understanding and interpreting these statements is a critical skill for anyone who wishes to gain insight into an organization's finances.


Statement of Financial Position

This statement shows the value of your organization - how it is positioned financially. It shows what you own (assets), what you owe (liabilities), and the difference between them (net assets). Your net assets are further categorized as "restricted" or "unrestricted," depending on how you're allowed to use that money. Unrestricted net assets are a clearer indication of the true value of your organization, since restricted funds are not yours to spend how you wish; if you closed your doors tomorrow, any restricted funds would have to be returned to the donor. In the for-profit world, this type of statement is called a Balance Sheet - so if you hear your accountant talking about a Balance Sheet, know that they're referring to your Statement of Financial Position.

Statement of Activities

This statement shows the income and expenses of your organization - its financial activities over time. It categorizes your different streams of revenue and your various expenses. It also shows the change in your net assets from the beginning of the year to the end of the year. For-profit companies use a similar Income Statement or Profit & Loss (P&L) Statement to show their revenue and expenses; however, while a negative change on a P&L indicates a loss (which is bad), a negative change on a nonprofit's Statement of Activities is not necessarily a bad thing.

For example, say you began the year with $100,000 in restricted assets - money that was collected in previous years and earmarked for a specific purpose, like purchasing books for students. You spent (or "released") $30,000 of this money to buy new books, leaving you with $70,000 at the end of the year. You didn't take a loss - you simply used the funds for their intended purpose.

Statement of Cash Flows

This statement shows how money is coming in and out - the flow of your cash over the year. It allows you see where your cash comes from and where it goes, and understand how much cash is available to pay expenses. There are two ways to prepare a Statement of Cash Flows - the direct method (starting with cash receipts) and the indirect method (starting with the change in net assets). Recently, the Financial Accounting Standard Board decided to let nonprofits use the simpler direct method, without also having to show the indirect method. This makes your Statement of Cash Flows easier to understand.

Statement of Functional Expenses

This statement shows how your expenses are categorized - the function of each expense. "Functions" include specific programs, administrative/general, and fundraising expenses. Beginning in 2017, all nonprofits must also show expenses by "nature," such as salaries, rent, printing and postage, etc. For example, if your director receives a salary of $100,000, this statement shows how much of their time (i.e. what percentage of their salary) is spent on management versus fundraising. Likewise, what portion of your printing and postage costs are used for program needs versus administrative needs? This statement gives you a clearer idea of exactly what you're spending money on.

You don't need a degree in accounting to understand financial statements - all you need is a willingness to learn, ask questions, and draw conclusions based on the information presented to you. Once you understand how to read nonprofit financial statements, you will gain a clearer picture of how an organization is performing financially. This will help you make educated decisions on the funding, managing, and governing of nonprofit organizations.