Nonprofit Financial Statements Explained

by | Dec 6, 2021

If you’re like most nonprofit leaders, you didn’t get to the top of your organization by burying your nose in nonprofit financial statements.

But in a leadership role, you’ll need to understand both audited financial statements and internal reports to communicate effectively with your donors, grant-makers, board of directors, and your team.

Your financial statements also play a crucial role in maintaining your nonprofit status and passing an independent audit (which you may need to keep your funding).

In this article, we’ll walk you through the five nonprofit financial statements that you’ll need regardless of your size or mission. They are:

  1. Statement of Financial Position
  2. Statement of Activities
  3. Statement of Cash Flows
  4. Budget vs. Actual
  5. IRS Form 990*

*NOTE: Technically the 990 is a tax compliance form rather than a “financial statement.” But, we decided it was important to include here for reason’s we’ll discuss in more detail below.

You’ll discover what information each report includes, how to use it, and additional resources for exploring in more depth.

Ready? Then let’s get started!

But first, a quick note on nonprofit financial statements vs. internal financial reports…

It is completely ok and acceptable to have multiple versions of your financial reports. The key here is to make sure the information is presented in an accurate and useful way.

External (audited) nonprofit financial statements must follow Generally Accepted Accounting Principles (GAAP) standards. That means must use accrual-basis accounting and record transactions in a specific way.

Internally you should create and use reports that give you the information you need to run your business effectively. That might mean using cash-basis accounting, tracking your gains or losses at the program level, or more.

Your accountant should be able to help you get the reports you need. And if they won’t do it, find an accounting firm that will.

 

1. Statement of Financial Position

The Statement of Financial Position is a snapshot of what your organization owns and what it owes to others at a specific point in time.

You may know it better by its name in the for-profit world: the Balance Sheet.

If you or your board come from the for-profit world, it’s okay to call it a Balance Sheet among your team. There are no hard-and-fast rules for internal financial reports. 

But in your audited nonprofit financials, it will be called a Statement of Financial Position.

The Statement of Financial Position has three main parts:

  • AssetsThis is anything of value that your organization possesses or is entitled to, like cash, property, equipment, pledged donations (even if they’re not received yet), accounts receivable, investments, and more.
  • Liabilities – This is anything your organization owes to anyone else, like vendors, creditors, or even employees (outstanding payroll or reimbursements)
  • Net Assets This is the difference between your assets (what you own) and your liabilities (what you owe). Essentially, net assets are what you’d have left if you sold off all of your assets and paid off all of your liabilities. It takes the place of “equity” on a for-profit balance sheet.

financial status with coins

The Statement of Financial Position gives you a snapshot of your financial health by revealing the underlying value of what your organization owns.

PRO TIP: In general, a healthy organization has more assets than liabilities. It’s one of the first things any CPA, bank, or large donor would look at to assess your financial health.

Having more assets than liabilities is a good sign, but it’s a bit more complicated than that. Because in nonprofits, not all assets are created equal… 

Restricted vs. Non-Restricted Net Assets

When a for-profit business has assets, they can usually use them however they want– to buy equipment, give raises, invest in real estate– but nonprofit assets are often more complex.

If a grant-maker or a donor gives you money that is dedicated for specific programs, or that you need to use by a specific date, it’s still an asset. 

But you may not be able to use that asset to pay off your liabilities in the real world.

For this reason, Net Assets are broken down into Restricted Net Assets and Unrestricted Net Assets on a nonprofit balance sheet. So you can see which assets you can use to offset your liabilities, if and when it’s necessary. Ideally, you would have far more assets without restrictions than with restrictions.

 

2. Statement of Activities

The Statement of Activities summarizes the money you’ve received (revenues) and the money you’ve spent (expenses) during a given period.

Essentially, it shows you how much money you’ve “made” or “lost” during that period, which is why it’s often called a Profit-And-Loss Statement (or an Income Statement) in a for-profit company.

The Statement of activities has 2 main sections:

Revenues

Nonprofit revenues generally include all cash coming into the organization, as well as promises to give in the future. Including:

  • Donations
  • Pledges for future donations
  • Program fees
  • Membership dues
  • Grants
  • Investment income
  • Event revenue
  • And more

Expenses

A nonprofit’s expenses usually include all cash flowing out of the organization during the period. Plus costs incurred but not yet paid, like payroll that won’t be paid until next month or vendor invoices with 30-day terms.

The difference between Revenues and Expenses is reported as Change in Net Assets. It’s what a for-profit company would call Net Income or, simply, profit.

Things to Look Out For on the Statement of Activities

The nonprofit version of the income statement is a bit more complex than its for-profit cousin. Here are 2 things to keep an eye on:

reports

  • Restricted funds – Like on the Statement of Financial Position, you’ll need to track restricted funds separately on your Statement of Activities too. You want to see how much of your revenue is available to offset your operational expenses.
  • Donated goods – GAAP standards require that you assign a dollar value to goods or services donated to your organization. But those goods (especially fixed assets, property, or collections) may not actually offset your expenses. So you need to be cautious of this if you receive large numbers of in-kind gifts.

PRO TIP: Watch your Statement of Activities month-by-month. You’ll probably have deficits in some periods, and that’s okay! But those deficits should be offset by surpluses in other months. Because if you have a deficit every month, then eventually you’ll run out of money.

Sidebar: Cash versus Accrual Accounting

There are 2 different ways to look at your accounting.

Cash basis accounting means that you record revenues and expenses based on when the cash moves in or out of your business. In other words, when it hits your bank account. So, if a donor pledges to donate $5 per month, you record $5 of income each month when the donation is received, not when it is pledged.

Accrual basis accounting means that you record revenues and expenses when they are incurred or earned. That usually means before any cash has changed hands. So, if a donor pledges to make a $5 contribution each month for 1 year, you’d record $60 in income the day the pledge is made (regardless of when it is actually collected).

Many small nonprofits use cash basis accounting internally. But audited financial statements are typically on an accrual basis. For that reason, we default to talking about accrual basis accounting in this article.

To decide which basis is right for your organization, learn more about cash basis vs accrual basis accounting in nonprofits.

 

3. Statement of Cash Flows

The Statement of Cash Flows is one of the core external nonprofit financial statements required for an independent audit, so you should be familiar with it.

That said, it’s only moderately useful for most nonprofits.

It’s often requested by board members. But many times they don’t fully understand what the report is, and what they’re looking for is something that’s not actually in the report. 

So first, let’s talk about what the Statement of Cash flows is

And then we’ll look at what your board probably wants to see (and how to get it for them).

cash flow

What is the Statement of Cash Flows?

The Statement of Cash flows is a relatively simple report that shows if your cash has increased or decreased across 3 segments of your business. 

On the report, you’ll see these 3 categories:

  • Cash from Operations – The change in cash generated from normal business activities (your fundraising and earned revenue minus expenses plus collection of receivables, payments of liabilities, etc.)
  • Cash from Financing – The difference between cash received/borrowed from creditors, versus cash you’ve paid back against outstanding debts (lines of credit, mortgages, loans, etc.)
  • Cash from Investing – The difference between cash received from investments or sales of assets versus cash spent on the purchase of capital, equipment, or other investments

This report can help you explain to your board why you have less cash even after a great fundraising month (maybe you invested in some much-needed equipment).

Or help you understand why your cash increased even as you lost money that quarter (maybe you dipped into your line of credit to make payroll).

But it won’t show you what happened to the cash you spent, which is generally what board members want to know.

What your board wants to see is…

When a board member asks for a cash flow statement, usually it’s because you’re losing cash. And they want to know where it went.

They’re specifically concerned about the flow of cash within Operations

But the Statement of Cash Flows doesn’t give them the detail that they want to see.

What they need is a Statement of Activities (P&L) on a cash basis.

This report will show them which of your activities brought cash into your operation during the period and which expenses ate up large chunks of money. 

That way, they can see where the money is going and develop a plan to stop the bleeding.

PRO TIP: Ask your accountant to run a Statement of Activities for Cash vs. Accrual. Any basic accounting software, like Quickbooks Online, should have the ability to produce this report in a few clicks. Comparing these two reports will help you understand the difference between what was earned or incurred but didn’t hit the bank account (accrual basis) and the revenue and expenses that actually impacted cash (cash basis).

 

4. Budget vs. Actual Report

The budget vs. actual report helps you to easily compare what happened in your business to what you expected to happen

It’s probably the most practical financial statement a nonprofit Executive Director or CEO has for making intelligent decisions for their organization.

Budget vs. Actual is an internal report, not part of your audited financial statements. But because the board and leadership are involved in creating a nonprofit budget, it’s often more familiar and more useful on a day-to-day basis.

As the name implies, it shows you 2 pieces of information:

  1. Your budgeted revenues vs. actual revenues 
  2. Your budgeted expenses vs. actual expenses

The report displays the budget and the actual numbers side-by-side so you can easily see where you’re beating your plan or coming up short.

Imagine that you missed your 1st quarter revenue goal. Is it because donations missed projections? You missed out on a grant you were counting on? Or because enrollment in programs is down?

This report makes it easy for you and your board members to find out.

And because it’s an internal report, you can set it up to show the information however is best for your team.

You can run it on a cash basis. Or create detailed Budget vs. Actual reports by month. Or create reports at the department level to make sure each team member gets all the information they need (and only the information they need).

PRO TIP: Match the line items in your budget with your accounts in your accounting system. That will make these reports much easier to create and customize. If they don’t match, ask your accountant to update your chart of accounts to ensure you can get the info you need.

 

5. IRS Form 990

Even though you don’t have to pay federal taxes, almost all nonprofit organizations (the few exceptions are listed here) must file an IRS Form 990 each year. 

The definition of a financial statement is a simple report that can be pulled together monthly (or as-needed) to give you a view of your financial health.

The IRS 990 doesn’t really qualify, since it’s done once per year and first-and-foremost as a tax compliance document.

But we include it here for a couple of reasons…

For one, while it might not be a financial statement in the technical sense, it’s more than just a tax return. It us a publicly available financial document that gives outsiders a glance at your organization’s financial health. 

And secondly, if you fail to file a 990 for 3 consecutive years, you’ll automatically lose your tax-exempt status. That means its one financial document every nonprofit needs to be familiar with, even if you’re too small for an audit or struggle to pull together an accurate Statement of Activities every quarter.

On your Form 990, the IRS requires you to report your financial information according to different rules than you use for your audited financial statements.

You’ll have to exclude unrealized gains or losses from investments, as well as the value of in-kind services and real estate donations. 

You’ll also have to present your expenses in a specific way that may differ from how you present them for your audit.

And, unlike your audited financial reports, IRS 990s are part of the public record– any donor, potential donor, or watchdog agency can find out core financial information about your nonprofit, like your revenues, expenses, and executive salaries.

So it’s very important that you learn to read the IRS 990 and understand what it says about the financial health and governance of your organization.

 

Want to see a live breakdown of real-life nonprofit financial statements

Now you know the basics of five essential financial reports that every nonprofit needs.

But nonprofit organizations are often complex financial entities. Your size, your activities, and your funding sources will all determine which reports you need to run your business effectively.

For a more in-depth breakdown of each of the key reports, click the link associated with each statement report in the article above.

Or, to watch a CPA walk you through some real-life nonprofit financial statements to show you what she looks for, sign up for our free Nonprofit Accounting Reporting Video Masterclass

Tosha Anderson, the founder of The Charity CFO, will walk you through each of these reports step-by-step, including on-screen breakdowns of real-life financial reports from a CPA’s perspective.

It will help you see your financial statements through the eyes of a financial professional. And teach you some tips for quickly assessing your organization’s financial health.

Get the Free Masterclass

 

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