Nonprofit leaders wear many hats – fundraiser, program manager, team coordinator, administrator…the list goes on. But it’s often the “accountant” hat that causes the most discomfort. Whether you’re a director, volunteer, or board member, you probably didn’t get into nonprofit work for the pleasure of reconciling bank accounts.
In this series, we’ll explore some of the basic accounting concepts that every nonprofit professional should know.
Financial Statements
Your nonprofit financial statements provide an overview of your organization’s financial health. These statements may be viewed by board members, donors, grant funders, or other parties invested in the success of your nonprofit. Understanding your financial statements can help you make smart decisions about the future of your organization.
Nonprofit finance is complicated, and no single statement can paint a complete picture. There are four different types of nonprofit financial statements:
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expenses
A complete set of financial statements can help reveal your organization’s strengths, weaknesses, and areas for opportunity.
Statement of Financial Position
The Statement of Financial Position provides a snapshot of your nonprofit’s financial status at a specific moment in time. This statement shows your organization’s assets, liabilities, and net assets. In other words, it shows what you own, what you owe, and what your organization is worth financially. This is also known as a balance sheet.
As a nonprofit, some of your grants and donations may come with donor restrictions. This restricts your ability to spend money or use certain assets. For example, a donor may give your nonprofit $50,000 under the condition that those funds can only be spent on one specific program. You cannot spend that money on anything else, even if your rent is past due or another program needs the funding more. The Statement of Financial Position will help you understand how donor restrictions impact your organization’s financial viability.
Your Statement of Financial Position can help answer these questions:
What is the current value of our owned property, equipment, and other assets?
How much debt are we carrying?
Can we meet our short-term financial obligations?
How much of our wealth is available or unavailable in specific situations?
What’s the most effective way to use our resources?
Statement of Activities
The Statement of Activities shows your nonprofit’s income and expenses over a specific period of time. If you add up all of your income and then subtract all of your expenses, you’re left with a number that a for-profit company would call “profit” or “loss.” But in the nonprofit world, this is known as a “change in net assets.”
Comparing your income and expenses between different time periods can be useful to track your organization’s growth. It can also help you plan for specific events. For example, if your organization hosts a large annual event in October, you might expect your expenses to increase around that time. You’ll want to ensure that you’re bringing in enough income to compensate for your anticipated expenses.
Donor restrictions are also identified on the Statement of Activities. You will typically see two columns – one for income/expenses with donor restrictions, and one for income/expenses without donor restrictions.
Your Statement of Activities can help answer these questions:
Where is our money coming from, and what are we spending it on?
How much did we receive in grants this year compared to last year?
Which financial quarter tends to have the greatest expenses?
How much of our donation income came with donor restrictions?
Statement of Cash Flows
The Statement of Cash Flows tracks the flow of cash in and out of your organization. Cash flows are broken down into three categories: operating (normal business activities such as donations, program fees, supplies, employee salaries, etc.), investing (buying or selling long-term assets), and financing (loans, credit card payments). This statement does not include non-cash items like depreciation.
The Statement of Cash Flows shows exactly when cash actually leaves or enters your organization. This is helpful to ensure you don’t overdraft your bank accounts. For example, if a donor pledges a large contribution in April, but the check doesn’t arrive until August, you’ll want to make sure you can still pay your bills in the meantime. It’s not uncommon for a nonprofit’s cash flow to fluctuate, with positive cash flow around annual events or fundraising drives, and negative cash flow at other times of the year. Your Statement of Cash Flows helps ensure that your organization always has enough liquid cash on hand.
Your Statement of Cash Flows can help answer these questions:
How much cash do we have available?
Is our cash flow typically positive or negative?
Are there any seasonal fluctuations in our cash flow?
Do we run the risk of becoming “cash poor”?
Statement of Functional Expenses
The Statement of Functional Expenses is unique to nonprofit organizations. While you may already track your expenses by “natural” categories – rent, salaries, travel, postage, etc. – the Statement of Functional Expenses further separates your expenses into three “functional” categories: program services, fundraising, and general/administrative. Program expenses are directly related to your nonprofit mission. Fundraising expenses are associated with an appeal for financial support, and general/administrative expenses cover the essential everyday costs of running your organization, also known as overhead.
For example, consider something simple – postage. Let’s say your nonprofit mission involves mailing books to children. When you mail out a book, the postage on that shipment is considered a program expense because it is directly related to your mission. But when you mail a fundraising appeal to your donor list, postage suddenly becomes a fundraising expense instead. And when you mail a check for your electric bill, it’s considered a general/administrative expense. In this way, the same “natural” expense – postage – can be split between three different “functional” categories, depending on its intended purpose.
The Statement of Functional Expenses helps your organization comply with state and federal regulations (including filing your Form 990). It also helps you identify how much of your organization’s money is going towards mission-based activities versus fundraising or administrative expenses.
Your Statement of Functional Expenses can help answer these questions:
What percentage of our expenses are mission-related?
How much do we spend on fundraising efforts?
What are our overhead costs?
Is there an opportunity to redirect funds towards our mission?
Need more help? At Altruic Advisors, our nonprofit accountants have helped more than 500 organizations across the country with outsourced accounting, Form 990 preparation, and nonprofit audit services. Together, we can help you create good.
