What to look for in nonprofit accounting financial statements

Nonprofit accounting financial statements may seem like a chore. They can be meticulous and time-consuming to prepare. However, the benefits of these statements far outweigh any possible inconvenience. Nonprofits use financial statements to comply with IRS regulations, build trust with donors, and plan for the future.

You may think that nonprofit financial statements are the same as those at for-profit companies, but this is not the case. The financial statements used by for-profit companies are typically the income statement, balance sheet, statement of cash flows, and statement of owner’s equity. While nonprofit financial statements have some overlap with these, there are key differences.

Here are the main nonprofit accounting financial statements:

• Statement of activities
• Statement of financial position
• Statement of cash flows
• Statement of functional expenses

Let’s take a closer look at each.

Statement of activities

This is the nonprofit equivalent of the income statement. As with the income statement, the statement of activities presents all revenue and expenses for a reporting period, but the goal is different. A for-profit company measures how much money they are making because they want to earn a profit. Nonprofits want to make money, but not to earn a profit. Expenses are subtracted from revenues to show the change in net assets, rather than net income. The money nonprofits make is reinvested into their programs and services.

The statement of activities is exactly what it sounds like. It looks at all of your organization’s activities so you can see what is working and what isn’t. Common revenues for nonprofits include contributions, grants, and investment income. Common expenses include administrative expenses, fundraising, and program services.

The statement of activities looks a bit different from the income statement. Separate columns classify revenue based on whether it is restricted or unrestricted. Restricted revenue is funds that are for a specific purpose. If your nonprofit receives grant money, there may be stipulations over how it is used. On the other hand, unrestricted revenue can be used as the nonprofit wishes.

Statement of financial position

As with the balance sheet, the statement of financial position is a snapshot of your nonprofit’s finances at a specific point in time. The balance sheet follows the basic accounting equation, which is:

Assets = Liabilities + Owner’s Equity

Instead of owner’s equity, the statement of financial position looks at net assets. Therefore, it displays assets (what you own), liabilities (what you owe), and net assets (your value).

Like the statement of activities, the statement of financial position sorts net assets based on whether or not they are restricted.

Statement of cash flows

The nonprofit statement of cash flows is very similar to that of a for-profit company. It looks at cash inflows and cash outflows, which is cash coming in or leaving your organization. These cash flows are then sorted into the below categories:

• • Operating activities: Occur during the normal course of business
  • Investing activities: Buying or selling long-term assets
• Financing activities: Funding, such as loans

Statement of functional expenses

This statement is unique to nonprofits. It is required for nonprofits to report expenses based on their functional classification and their natural classification. This may sound confusing at first, but it’s actually pretty straightforward.

Classifying expenses by their function demonstrates what they were used for. Functional classifications include program costs, management and general costs, and fundraising costs.  Natural classifications look at the type, or nature, of the expenses. These include salaries, rent, utilities, and so forth.

Getting maximum value from nonprofit financial statements

Now that you know what goes into the main nonprofit financial statements, it’s time to learn how to use them! While financial statements are required for reporting purposes, there is much more to it than that. The financial statements can help you assess how your business performed for the period. Your nonprofit probably has financial goals it wants to achieve. With these goals in mind, you can look at each of your financial statements and see whether or not you’re on track to achieve them. If not, you can always make adjustments.

You should set goals, create a budget, and compare the budget to the actuals from your financial statements.

Let’s take a look at how each of the financial statements we discussed can provide value for your organization.

• Statement of activities: You may find that your net assets are not as high as you want them to be. To make changes, you might need to find ways to cut back on expenses or find new funding opportunities to boost revenue.
• Statement of financial position: This broad overview of your nonprofit’s financial health gives you a quick look at your assets, liabilities, and net assets. As with the statement of activities, you may need to adjust your operations if your net assets are too low. You can determine if you’re paying off your liabilities and measure liquidity.
• Statement of cash flows: You can determine if there’s enough cash available to pay off expenses. If not, you can quickly make changes in your nonprofit’s operations to avoid running out of cash!
• Statement of functional expenses: The main purpose of this statement is to comply with IRS regulations. It is part of Form 990. However, it is also beneficial to provide transparency to donors so they can see how you are using your funds.

Need help with nonprofit accounting financial statements?

Nonprofit financial statements can be confusing. It’s important that they are accurate and are properly interpreted for use in future planning. Consider partnering with a firm to connect data to your goals and provide insights on where your nonprofit is going.

The Charity CFO works exclusively with nonprofits to help with accounting, including preparing financial statements and providing CFO-level guidance. Contact us today to help your nonprofit succeed in its mission.