Essential Financial Reports For Nonprofits

Nonprofits are not-for-profit organizations intended to earn revenue for programs, grants, and other societal support systems. Nonprofits use four main financial statements for accounting, each with a unique purpose: Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Functional Expenses.

In order to keep your organization in good financial health, you need to be informed. A comprehensive report on the organization's financial health and stability is often requested by accounting auditors, potential grantors, board members, or other interested parties. Even if you don't have a lot of experience with finances, that doesn't mean you can't learn the basics.

Balance Sheet

You may have heard of the Statement of Financial Position or Statement of Financial Condition. It's the nonprofit Balance Sheet that reflects a nonprofit organization's assets and liabilities. In accounting, the formula for assets equals liabilities plus equity.

This is largely the same as a for-profit company's Balance Sheet, except the owners' equity has been substituted for net assets. The reason for this substitution is that owners' equity represents both contributions of funds with donor restrictions and earnings from the organization that are not distributed to others.

Income Statement

Though initially designed for the financial dealings of for-profit companies, the Income Statement is also an effective tool for nonprofit organizations. While the formula is different—revenues minus expenses equals change in net assets—it still shows the changes in unrestricted funds or funds with donor restrictions coming into an organization versus costs going out.

It's also helpful to look at Income Statements when considering funding a certain project; if the costs are greater than the forecasted benefits, it's likely not in your best interest to pursue it. Nonprofit organizations are similar to for-profit businesses in many ways, but there's a crucial difference: they don't need to make a profit. They use the money they acquire to fulfill their missions and achieve their goals.

Statement Of Activities

While it's not nearly as exciting as a for-profit company's Income Statement, the nonprofit organization's equivalent is, nevertheless, a very useful document, and one that should be consulted often. The Statement of Activities (sometimes called the Statement of Support) shows how your net assets change over time. Your net assets, or net assets available for charitable purposes, are increased by revenue and decreased by expenses paid.

Statement Of Financial Position

The SOP, or Statement of Financial Position, is an accounting document that details a nonprofit's financial standing at the end of its fiscal year. The Balance Sheet-esque statement includes assets, liabilities, and net worth sections—which are analogous to cash, debt, and equity on a for-profit company's Balance Sheet. A nonprofit's SOP is generally due annually on the last day of its fiscal year.

A surplus on the SOP is a positive sign. A surplus means there are more assets than liabilities, which indicates that the nonprofit has enough money to cover its expenses and still have some left over. The Statement of Financial Position is conventionally prepared at the end of the fiscal year, although larger nonprofit organizations or those with extensive financial holdings may opt to prepare it more frequently.

Statement Of Cash Flows

Nonprofits have a lot of incoming revenues and expenses, and more often than not, they have little to no regular income. That's why the Cash Flow Statement is so important; it demonstrates where the money comes from to pay for these costs and where the money goes after everything is paid. The Statement of Cash Flows typically includes three sections: net cash from operations, net cash from investing activities, and net cash from financing activities.

Cash flows are a crucial area of financial management that most nonprofits don't give enough attention to. With limited capital, it's important to know exactly how your nonprofit is managing revenues and expenses. Although there are many ways to generate and measure cash in and cash out, most nonprofits use a Statement of Cash Flows.

Statement Of Functional Expenses

A nonprofit's SOFE lists all of the organization's expenses broken into several functional categories: salaries and benefits, rent and utilities, etc. The statement breaks down the types of spending even further. For example, salaries may be listed under management, fundraising, program services, etc.

These financial statements are a great tool for showing your donor base, staff, and potential grantors how your organization spends its money. Ideally, these financial statements should have a balance between funding programs and maintaining a staff.

Administrative expenses shouldn't be grossly out of proportion to program funding. On the other hand, administrative funding shouldn't be pushed down so low that you're not attracting competent, quality people to your nonprofit organization.

Annual Report

Nonprofit annual reports don't have to be formal, stuffy documents that you give only to a board member or major donor. Annual reports can help inspire a potential donor or volunteer by showing the financial impact your organization has had on the community.

The following areas of information could be relevant for an annual report:

• Attendance records for fundraising or community events that could point to improved revenue in the future
• Donor lists and their giving levels that could show an increased sense of mission support
• Discussion of the mission, services and programs, activities and changes over the past year, lobbying successes, etc.

An annual report is a simple and powerful way to tell your story, inspire donations, help build goodwill among stakeholders, and promote transparency. It also gives your donors an opportunity to connect with the people who benefit from your organization.

Additional Tips

Nonprofits deal with a lot of different issues, and different situations call for different approaches. In some cases, it's important to be forthright, and in other cases it's necessary to be a bit more careful in your disclosure. But you should never withhold required information from the public.

Aplos provides helpful resources, but it is not meant to be a substitute for professional services. Always consult a CPA or trusted professional when seeking tax or accounting advice.