As a nonprofit leader, your financial stewardship is important to remain compliant with the IRS. One way to ensure you remain within the confines of your tax-exempt status is to file and share a number of financial statements.
You have a primary responsibility to your donors, grantmakers, and other stakeholders to find ways to share these statements while still following the highest accounting standards.
Not only that, these statements need to be sound and easy to understand so as to provide a window into the financial health of your nonprofit.
This helps build trust and transparency-the two single most important assets for your organization.
But what are the financial statements?
Financial statements are a set of reports that demonstrate how your nonprofit is doing financially. They include:
- Statement of financial position
- Statement of activities
- Statement of functional expenses
- Statement of cash flow.
Interestingly, these statements mirror for-profit financial statements but offer different insights specific to the roles and responsibilities of a nonprofit.
Let’s discuss them in detail so you can know what you need to do to stay compliant and accountable.
Statement of Financial Position
A statement of financial position is a balance sheet for nonprofits, except that the net assets section takes the place of the equity section in a for-profit organization. It gives you a birds-eye view of what your organization owns (assets), its debt and liabilities, and its overall worth (net assets).
Knowing how to record these entries will help you create a sound and well-organized report that gives a true picture of your organization’s financial health, current cash flow, and stability.
This is anything that belongs to the nonprofit, including property, cash, equipment, investments, receivables, prepaid expenses, and pledged donations.
Assets can be broken down as follows:
- Current assets (Investments, pledged donations, bank balances, etc.)
- Fixed assets (Land, vehicles, fixtures, large equipment, etc.)
- Non-current assets (Trademarks, patents, endowments, long term investments, etc.)
This includes anything that is owed or due to others.
They are categorized as either:
- Current liabilities (payable within a year, such as short-term loans, lines of credit, outstanding bills, accrued expenses, and payroll tax liabilities)
- Non-current liabilities (long-term liabilities, such as long-term loans and mortgages)
3. Net assets
Ideally, this is the true value of your organization. It’s everything belonging to you after deducting all liabilities.
Total Assets- Total Liabilities = Net assets
- Money raised= $10,000 in a given month
- Property = $350,000
- Accounts = $100,000
What’s the net asset?
Net assets = ($350,000+$100,000 + $10,000 – $20,000) = $440,000
This means that your nonprofit has $440,000 that can be deployed to further its goal and mission.
Your nonprofit’s statement of financial position provides several insights:
- The overall financial health of your organization
- Your organization’s liquidity to take on additional risks, such as expansion and hiring staff
- Your ability to pay back existing debts
- Your capacity to launch new programs and initiatives
- The statement of financial position also helps your stakeholders understand how your organization is funded, how it uses its resources, and what its future financial position may look like.
Statement of Activities
A statement of activities is similar to a for-profit income statement and is used to show the revenue and expenses between two different reporting periods. It shows how you’ve spent your donations and what you’ve achieved with the available resources.
It provides accountability and transparency to your board and donors. This financial report contains three segments:
How much money did you bring in? What were the earned revenue, donations, grants, government funding, and money received through fundraisings and special events?
GAAP requires that you separate revenue as either:
- Restricted: This includes all donations that the donor has given directions on how and when you can spend the funds.
- Unrestricted revenue: these are funds that you are free to use for any mission-oriented purposes, including paying salaries and expenses.
These are all liabilities necessary to achieve your goals and mission. Proper accounting practices dictate that you split your expenses as either administrative/operation, program-based, or fundraising.
To achieve your mission, it is important that you keep your administrative expenses as low as possible and only increase the cap as you grow and expand.
3. Change in net assets
This gives a snapshot of how much money you’ve made between the reporting periods. Did you make more than you gave out? This is your bottom line and acts as a buffer during a slow fundraising quarter. It is calculated by subtracting your expenses from the net revenue.
You should monitor the change in net assets constantly to identify trends and changes in revenue and expenses. This will help you recalibrate your approach to cover any deficits and find solutions to fix the shortfalls.
Why is a statement of activities important?
- It helps you comply with GAAP standards and IRS regulations
- It helps you maintain the transparency and accountability required by the board donors and the taxman
- Helps you identify the need to tweak an ongoing program or project that’s not running optimally
- Help financial leaders show where funding is going and determine the long-term viability of various programs.
- Helps you make informed decisions on the organization’s critical areas, such as whether to cut expenses, secure additional funding or provide membership discounts
- Makes it easy to file Form 990 by providing well-organized financial records
Statement of Functional Expenses (SOFE)
A statement of functional expenses is a financial report used to show how expenses are incurred in your organization’s functional areas. It is also described as a matrix as it shows expenses across the three functional areas of your nonprofit – management and administration, fundraising, and programs.
Your donors, board members, and stakeholders want to be sure that their money is being spent wisely in achieving your organization’s mission.
This ancillary report provides a breakdown of how much money is spent in each area and makes sure that the funds are used only where necessary.
- The SOFE helps you answer questions like:
- Are we spending more than we allocated for fundraising?
- Are our programs running at optimal cost?
- Is there room to cut administrative and operational expenses without compromising our mission?
- Is there a need to invest more in programs or fundraising?
Cash Flow Statement
The Cash Flow Statement (CFS) keeps track of and records cash inflows and outflows in a given period. It reports the change in an organization’s cash and cash equivalents during an accounting period.
A CFS report has three sections:
- Cash flows from operating activities: Shows change in cash other than those reported in the financing and investing sections.
- Cash flow from investing activities: Shows amounts spent and received from long-term assets such as vehicles and equipment.
- Cash flow from financing activities: This section shows amounts received from borrowing and repayments.
Work with Financial Statements Nonprofit Expert
As a nonprofit leader, making sense of all these financial reports can be difficult, especially if you don’t have a rich background in finance. Working with an experienced and qualified partner can provide credibility to your financial statements, deliver consistent reporting practices over time, and protect your 501(c)(3) or 501(c)(4) tax-exempt status.
At The Charity CFO, we help you understand the ups and downs of your organization’s financials, help you stay on top of IRS regulations, and provide detailed financial statements that can be filed and shared with confidence.
Contact us today to learn more about our services and start getting the personalized nonprofit CPA support you need.