How to Read Nonprofit Financial Statements

Nonprofits are unique because the focus is on accountability, not profitability. However, just because there is no rush to distribute profits, a healthy financial position is required for the organization to continue to grow, thrive, and carry out the original mission, or purpose, of the nonprofit. Financial statements are one of the most important tools that the leaders of a nonprofit organization can use to ensure the future health of the entity. 

Since nonprofit financial statements differ from traditional financial reports, we’ve put together this simple guide to reading those essential statements.

Statement of Activities

A nonprofit’s Statement of Activities is an adopted income statement, or profit and loss report. The Statement of Activities measures the impact of the company’s revenues and expenses and gives users the total change in net assets. The activity reported on this statement covers a specified period of time, usually one month or one year. 

Change in Net Assets = Revenues – Expenses

Revenues

The revenues, or income, collected by most nonprofit organizations include:

• Operational revenues – from membership dues, assessments, and service revenues
• Contributions – Donations, owner contributions, investments, gifts – categorized as restricted or unrestricted
• Grants – Released funds from grant agencies or foundations, categorized as restricted or unrestricted
• Fundraising income – Revenue from all fundraising efforts, sometimes categorized by program or project

Expenses

Typical expenses listed on a Statement of Activities include:

• Fundraising expenses
• General management and administrative expenses
• Program costs – categorized by program or project

Change in Net Assets

The change in net assets gives the total profit for a period of time. In nonprofit organizations, that total change gives insight into how much money is available to reinvest into the organization’s mission. Another option for excess profits is for nonprofits to set up reserve funds for future expenditures. 

Statement of Activities – Highlights

When reviewing the Statement of Activities, interested parties should pay special attention to:

• The amount of restricted versus unrestricted funds
• Changes in actual revenues in comparison to prior periods
• Changes in expenses over time or missing expenses
• Variances in revenues and expenses from the annual budget
• The use of generated fundraising revenues

Statement of Financial Position

The Statement of Financial Position resembles a for-profit entity’s Balance Sheet. While the statement of activities focuses on the money coming into and out of the organization, the Statement of Financial Position brings attention to the assets and liabilities of the company to provide users with the total net assets. The assets and liabilities listed on a nonprofit’s Statement of Financial Position are listed as of a certain date, typically the end of the prior month or year-end. 

Assets = Liabilities + Net Assets

Liabilities

An organization’s liabilities include any money that is owed to another party. Liabilities include expense payable balances for money that is owed for services or products received, like payroll, payroll taxes, and outstanding supplier balances. Loans and notes payable, through banks or individuals, are also listed in the liability section of the Statement of Financial Position. 

Net Assets

Net Assets represent the amount of equity a nonprofit has.  Included in net assets is:

• Total fund balances – separated by appropriate restricted and unrestricted funds
• Earnings – total calculated on current year-to-date revenues after expenses are paid

Assets

A nonprofit’s assets include everything the organization owns. Assets are listed on the Statement of Financial Position in the following categories:

• Cash – Separated by operating accounts, savings accounts, and reserve balances
• Fixed assets – Including equipment, machinery, computers, software, furniture, fixtures, vehicles, and other fixed assets
• Accumulated depreciation 

Statement of Financial Position – Highlights

The statement of financial position, or balance sheet, gives insight into:

• Financial Health Metrics, including the current ratio, which indicates the nonprofit’s ability to pay its obligations
• Changes in liabilities, or debt
• Material changes in cash balances
• The value of fixed assets owned by the entity and the need for any upcoming repairs, replacements, or additions

Statement of Cash Flows

The statement of cash flows for an organization is typically prepared by a CPA at the close of a financial audit, but some entities prepare the report internally annually. This financial statement shows a summary of where the organization’s money was allocated and spent over a determined amount of time, typically one year.

A formal statement of cash flows is different from daily cash management reports or cash forecasts because it separates the movement of cash into three categories. 

Operating Activities

The money that comes in and goes out for ordinary operations, like:

• Revenues
• Operating expenses including general administrative expenses, salaries and benefits, utilities
• Fundraising and program expenses

Financing activities

Money that flows in and out of the organization due to activities related to debts and borrowing activity, like loan and note payments made each month as well as any income from stocks and bonds.

Investing activities

The money that was spent on capital investments, like real estate, equipment, and other fixed assets and also any money received from the sale or benefit of those investments.

Supplemental information

Any cash activity that doesn’t fall into the operating, financing, or investing categories, gets summarized in the supplemental section of the statement of cash flows. This part of the statement may include expenses related to interest payments, income taxes, and any non-cash transactions.

Final Thoughts

Nonprofit financial statements are a useful tool for nonprofit leaders to grow and manage their businesses. The most common nonprofit financial reports include:

• Statement of Activities – Like an income statement, shows how much money is left from revenues after all expenses are paid
• Statement of Financial Position – Like a balance sheet, shows how much the organization owns and owes
• Statement of Cash Flows – Shows the movement of money into and out of the organization

Having organized and accurate financial reports is the key to running an efficient nonprofit organization. If you’re ready to step up the financial reporting game at your nonprofit, give JFW Accounting Services a call today to learn how we can help.