our nonprofit financial statements keep donors informed about where money is going and how it’s being divided between different categories. There are four financial statements that nonprofits use to track finances:
- Balance sheet
- Statement of activities
- Cash flow statement
- Functional expense report
In this post, we review each financial statement, outline its primary purpose, and suggest areas for improvement. Unlike for-profit organizations, your statements don’t need to focus on how much money you’ve made. Instead, the goal is to be transparent for donors and regulatory bodies, and to demonstrate that you’re managing all funds responsibly.
Balance Sheet
Another name for this financial report is “statement of financial position.” The balance sheet for your nonprofit organization shows the relationship between its assets and liabilities — or, the amount that your nonprofit owns compared to what it owes.
By keeping track of the balance between your organization’s assets and liabilities, you’re equipped to make sound financial decisions for your organization’s future.
Let’s look more specifically at each category. A nonprofit organization’s assets may include cash, property, and investments. By contrast, nonprofit liabilities encompass all types of financial obligations, such as credit card debt, mortgages, and other loans.
For a nonprofit’s balance sheet to balance, its assets must be equal to its liabilities plus net assets. Net assets vary from assets because they represent what’s left after you subtract an organization’s liabilities from its assets.
Your nonprofit’s balance sheet must continually be updated so it accurately represents your organization’s financial health at any given point in time. Comparing current and past balance sheets can show you how healthy and stable your nonprofit’s finances are.
The most important thing you can do to improve your nonprofit’s balance sheets is to ensure they’re accurate and updated at all times. Accuracy leads to transparency, which is what donors seek when they work with a nonprofit. Transparency builds trust and can lead to an expanded donor base and more opportunities for your organization’s future.
If you’re struggling to keep up with your organization’s balance sheets, it may be time to consider a new approach. Updating your method of recording finances can reduce stress and empower your organization to be more clear and transparent.
Statement of Activities
Another important financial document, a nonprofit’s statement of activities, shows a summary of an organization’s expenses and revenue, typically over a fiscal year. This financial statement provides an overview of a nonprofit’s finances, making all its economic activities easy to understand.
Let’s examine the details included in a nonprofit’s statement of activities more closely. First, there will be records of any revenue-generating activities that produce income for the nonprofit. These typically include grants, donations, and other fundraisers.
In addition to revenue, nonprofit organizations also have expenses for their programs, fundraising efforts, and administration.
Any money spent to support the nonprofit should be listed in the statement of activities. Like the balance sheet, this statement also has a net number, known as net income/loss. This number compares total revenue and total expenses to determine whether the organization has a net income or loss for that period.
In addition to comparing total revenue and expenses, a statement of activities keeps the nonprofit’s mission at the forefront of the report. Keeping track of revenue and expenses enables donors and stakeholders to understand how their financial contributions support the organization’s mission.
To make the most of this document, it’s important to understand variance. There is often a difference between a budget and actual expenses. Keeping careful track allows you to plan more effectively for next year. Another factor to consider is donor restrictions — some donations are expressly reserved for specific purposes. Your nonprofit’s statement of activities can help you proactively plan and manage restricted donations.
Cash Flow Statement
The third financial statement you need for a nonprofit is the cash flow statement. This details the cash coming in and out of your nonprofit during a specific period. In this statement, you’ll include information about where money is coming from and what your organization is using it for.
There are numerous small costs associated with running a nonprofit. A cash flow statement helps you track your money at any given time, enabling you to make informed financial decisions in the present moment.
It helps you know how much cash is currently available and equips you to budget more strategically. One aspect of a cash flow statement that’s especially important is the comparison it allows between accrual basis and cash basis.
Accrual Basis vs. Cash Basis
Accrued expenses are delayed — although they’ve already been committed to, they’re actually paid during a separate accounting period. Similarly, accrued income is entered when it’s earned, such as when you receive notice you’ve been awarded a grant, rather than when the funds actually come in. Because of the time difference, they’re more challenging to track. By contrast, the cash basis shows when money actually changes position — it doesn’t account for income or expenses until the actual time funds move from one account to another.
When you accurately track cash in your nonprofit’s cash flow statement, you can compare those numbers with the accrued expenses recorded in your organization’s balance sheet and statement of activities. This can help you understand liquidity, or the amount of money that is freely available for movement at a given time.
Again, your cash flow statement will be easier to record and compare with other records if you use a system that’s simple, reliable, and easy to update. If you can find an updated software program that includes all of these forms, it will be much easier to use them to improve your organization’s financial health.
Functional Expense Report
The fourth financial statement you should have as a nonprofit is a functional expense report. This report categorizes expenses by function, allowing you to easily identify the areas receiving the most funding and the items supported by specific donor funds.
A few examples of function categories include:
- Fundraising
- Administration
- Building upkeep
- Nonprofit services
- Community outreach
By keeping track of the functions that finances support, this report strengthens the relationship with donors and helps you strategically budget for the next period.
Dividing by function is an easy way to explain financial decisions and show the practical impact of all nonprofit funding.
Functional expense reports are incredibly useful for your organization because they allow you to benchmark your spending with that of other, similar organizations. By comparing cost ratios, you can identify opportunities to save and areas where spending can be optimized for greater efficiency. Benchmarking lets you know how reasonable your costs are in each category.
This report is also valuable for demonstrating compliance with regulations. It helps you meet legal requirements, build trust with donors, and reassess your financial goals for the following period. Alongside the other three reports mentioned, functional expense reports help provide a comprehensive picture of your nonprofit’s finances.
