Nonprofit organizations do not have the same financial reporting requirements as for-profit businesses. Since nonprofits operate for the purpose of fulfilling their mission instead of distributing profits, financial reporting can get lost in the shuffle. However, when that happens, internal stakeholders, like CEOs, Board Members, and management, and interested third parties, like the IRS, potential donors, and grant funding agencies, don’t have the advantage of accurate financial information when making decisions.
Because financial statements are the most efficient way to measure financial health, it’s imperative that organizations create a process to produce accurate statements. One type of financial statement that gives readers a detailed view of how the organization is doing is the balance sheet.
What Is A Nonprofit Balance Sheet?
In nonprofit entities, the balance sheet is called a Statement of Financial Position. Just like a balance sheet gives readers a snapshot view of what a company is worth, the Statement of Financial Position quickly shows what a nonprofit organization owns and owes.
Nonprofit accounting best practices recommend creating a Statement of Financial Position each month when the monthly accounting records are closed. At that time, a manager or accounting should review the statement for accuracy.
Each balance listed for either an asset or a liability should tie out to the general ledger balance in the accounting records and be able to be supported by other documents. For example, a liability that commonly appears on a balance sheet or Statement of Financial Position is commercial real estate loans. If a nonprofit has a mortgage or loan that they are paying on, the supporting documentation for that balance would be the statement from the lender.
Statements of Financial Positions are used internally to analyze financial health and make decisions about the organization’s ability to start new programs, make large purchases, or expand. They are also used by potential donors and agencies that disburse grant funds when reviewing the risk of putting money into the organization.
The information presented on the statement is also required when a nonprofit is applying for tax exemption with the Internal Revenue Service (IRS). The data compiled on the Statement of Financial Position is also helpful to tax preparers and internal finance and accounting team members when preparing Form 990, which is the annual return required for nonprofit organizations.
What’s On The Nonprofit Balance Sheet?
A Statement of Financial Position lists the assets (what the organization owns) and the liabilities (what the organization owes). The liabilities are subtracted from the assets to give the organization’s net assets (what the organization is worth) as of a certain date.
Assets – Liabilities = Net Assets (Equity)
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
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 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
Financial Metrics Found On The Nonprofit Balance Sheet
We’ve already discussed some of the internal and third-party uses for the Statement of Financial Position. However, when financial decision-makers are reviewing a balance sheet there are two common metrics calculated to measure the financial health and future of the organization: LUNA and Cash on Hand.
LUNA stans for Liquid Unrestricted Net Assets. In nonprofit accounting, LUNA is calculated to show users how many months the organization can pay operating expenses using liquid assets, like cash and other assets easily converted to cash. It is a great measure of sensitivity for stakeholders to understand the organization’s reliance on recurring revenue. LUNA is calculated as follows:
(Unrestricted assets – property and equipment)/average monthly expenses = LUNA
The industry standard for stable organizations is to be able to have enough liquid assets to cover at least three months of operating expenses.
Cash on hand
Another quick evaluation of the nonprofit organization that can be done using the Statement of Financial Position is the months of cash on hand. The cash-on-hand calculation is similar to LUNA but does not consider whether assets are restricted or unrestricted. An organization is considered financially secure if they have three to six months’ worth of cash on hand. The equation for cash on hand is as follows:
Total cash (including assets easily converted to cash)/average monthly expenses = Cash on Hand
Just like for-profit entities, it is important that nonprofit organizations maintain accurate financial records. The nonprofit balance sheet, or Statement of Financial Position, shows an organization’s net assets, or equity, by listing out the assets and liabilities as of a certain date.
The Statement of Financial Position is typically part of a monthly financial packet, which may also include a Statement of Cash Flows and a Statement of Activities. Many nonprofit organizations choose to outsource financial reporting to nonprofit accounting experts, like JFW Accounting Services.
If you are interested in taking your organization’s financial health to the next level, schedule a chat today to see how we can help you to meet your organization’s financial goals.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.