Understanding Your Nonprofit Financial StatementsDec 27, 2022
Nonprofit financial statements may seem like tedious numbers in lists and spreadsheets at times, but understanding them gives valuable insights into your organization’s activities, performance, and overall financial health.
In this article, we will be taking a look at the four types of financial statements that nonprofits use and how having a working knowledge of each will allow you to grow and improve your nonprofit in ways that you may not have imagined.
Four Essential Nonprofit Financial Statements
Standard businesses only make use of three types of financial statements: the balance sheet, statement of cash flows, and income statement.
Nonprofits, however, make use of these three types of financial statements but also include one more - the statement of functional expenses.
Let’s take a look at each of the four types you will be using and see how they are each distinctly important to your organization.
The balance sheet, also referred to as a statement of financial position, is a snapshot of your nonprofit’s financials at any one point in time. It gives a detailed list of all assets and liabilities.
Assets are what your organization owns and liabilities are what your organization owes.
In addition to assets and liabilities, the balance sheet also details your nonprofit’s liquidity. This is represented by what cash your organization currently has on hand and what assets will be available as cash soon.
Furthermore, it is helpful to know that assets are listed on the balance sheet in order from most to least liquid.
Statement of Cash Flows
The statement of cash flows keeps track of, and shows, the money coming into and out of your nonprofit. This statement is broken down into three sections:
- Operating activities
- These are the expenses and revenues received while running your organization.
- Financing activities
- These include interest made on savings and interest payments on loans. Both of which are accounted for in this section.
- Investing activities
- These include interest earned, purchases, and payments involving investments made by your nonprofit.
The statement of cash flows is so important because it shows exactly how you are generating money and how you are spending it. This becomes very helpful when your organization is setting up a budget and reviewing spending.
Income statements, also known as a statement of activities, gives you a wider view of your nonprofit’s financial position. You can think of this as a zoomed-out version of the balance sheet.
Instead of showing a specific point in time in your fiscal year, this statement shows the entire year.
In the income statement, you will find the statement of activities which consists of the following:
- In this case, consists of all cash flow into your nonprofit by way of grants, government funding, donations, etc. This also includes in-kind donations for nonprofits.
- This is the cash flow out of your organization. It should also be noted that this includes pending expenses.
- Change in Net Assets
- This shows how much money you made. The equation for this is Net Revenue-Net Expenses=Change in Net Assets. The profit in this case is referred to as a surplus for nonprofits.
The income statement is important because it gives your donors and board members insight into your organization’s financial position.
Statement of Functional Expenses
The statement of functional expenses is unique to nonprofits and is a breakdown of expenses within each functional area of your organization. These areas include:
It is also important to point out that the IRS will ask for several pieces of information from this report when filing your 990.
This statement shows how expenses are being used throughout your organization, which many donors may find beneficial as it allows them to get a transparent view of where money is being allocated. Some governing bodies in charge of awarding grants and certifications may also make use of this report in order to rate your nonprofit as well.
In addition to the points above, the statement of functional expenses is critical because it helps you keep your organization’s priorities in check. With it, you can see where money is being spent and make adjustments to ensure that your spending reflects your organization’s values.
Understanding Nonprofit Financial Statements is Essential for Organizational Growth
Directors and financial leaders within your organization can leverage your financial statements in order to make things better within your nonprofit.
Knowing precisely how to do this, however, can be difficult.
It is important to remember that each statement provides valuable insight into the inner workings of your nonprofit and the financial health of your organization overall.
If you would like assistance navigating the different types of financial statements for your nonprofit, consider Morris Verdonk Accounting for your needs.
Contact us today to learn how we can help your organization grow!
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