What are the Most Important Nonprofit Financial Statements

It can tell you how much is receivable, which is especially important when managing reimbursable grants and multi-year pledges. It differentiates net assets with donor restrictions from those without restrictions. Reading and understanding nonprofit reports is essential for making sound decisions about your organization’s future. You can use unrestricted funds for any mission-oriented purpose, including paying general operating expenses and salaries. Operating activities in a not-for-profit’s Statement of Cash Flows include cash transactions related to the core mission-driven activities of the organization.

Expenses:

When reviewing expense allocations, a high percentage dedicated to program services suggests the organization prioritizes mission-driven activities. Together, these sections give a comprehensive view of how a nonprofit generates, spends, and invests its cash, offering essential insights for evaluating financial sustainability and strategic decisions. This section reflects cash flow from financial transactions, such as taking out loans, repaying debt, or securing funds through special fundraising initiatives. Investing activities focus on cash flow related to long-term assets, such as purchasing or selling property, equipment, or investments. For example, buying new office equipment or upgrading facilities would fall under this section. Conversely, a negative change in net assets highlights that expenses were higher than revenue, signaling potential financial challenges that may require adjustment in budgeting or fundraising efforts.

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If you cannot find a nonprofit’s Statement of Activities, you can also ask the organization for a copy. Nonprofits unwilling to share this information should be questioned about their reasons for lack of transparency. Your organization must also list expenses on https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ your Statement of Activities report. You should split your expenses by programs, administrative, and fundraising costs. Organizations can also use this report to educate board members and staff leadership on financial needs and opportunities.

• By assessing both assets and liabilities, it is possible to calculate the nonprofit’s net assets which can help determine overall financial health.
• Gathering all financial data for the fiscal year is a critical task that underpins the integrity of nonprofit financial statements.
• This detailed classification underpins effective financial management, demonstrating an organization’s commitment to stewardship and accountability.
• That means your leadership can determine if marketing needs to increase or if expenses in some areas need to be trimmed down.
• This financial statement reports the amounts of assets, liabilities, and net assets as of a specified date.
• Whether you’re looking to strengthen transparency or improve financial literacy across your team, this article is your roadmap to mastering nonprofit financial management.
• Nonprofit expenses are categorized to provide transparency in resource allocation, allowing stakeholders to see exactly how funds are distributed and used within the organization.

Breaking Down Form 990: Key Financial Statements That Define Your Nonprofit

Then, they’ll attach their complete financial statements as appendices in case some readers want to dig deeper. Wellington Zoo – Its annual report uses audited financial statements to show the organization’s financial health. Having a general understanding of how it works can help you ensure your organization is making informed decisions and investing in the most impactful financial strategies that fuel growth. A systematic approach for organizing funds for projects and operational expenses. Similar to equity, the net assets section denotes the “value” of the nonprofit.

The Statement of Financial Position provides an overview of the organization’s assets, liabilities, and net assets at a particular point in time. For nonprofits, net assets are categorized as either with donor restrictions or without donor restrictions—a critical distinction that affects how funds can be used. The statement of financial position plays many key roles in your nonprofit’s accounting activities and operations, so it’s important to create and analyze it accurately.

This statement also offers insights into the nonprofit’s operating, investing, and financing activities, thus assisting in identifying over/underspending compared to the cash inflow. With a statement of cash flow, you can assess the ability of the nonprofit to generate cash, how day-to-day operations are financed, its ability to pay short-term debts, and what is being reinvested into the nonprofit. To determine the assets versus liabilities of your organization, you need to list all the assets of your nonprofit that can be used to cover its liabilities and help accounting services for nonprofit organizations maintain its programs.

Common Financial Metrics and Ratios for Nonprofits

• It allows you to remain transparent about your resource allocations to stakeholders and report expenses on your Form 990.
• They also help the organization to better understand its financial health and make smart decisions.
• Similar to LLS, Heifer International has an entire page on its website devoted to sharing its financial information with stakeholders, including a graph that maps out its expenses over the fiscal year.
• By sharing your financial statements, you can let them see for themselves just how effectively you’re working to accomplish your mission.
• Though nonprofits are not required to create an annual report, many organizations compile and release one every year, as it can be an invaluable fundraising tool.

This allows you to compare your planned versus actual financial activities and evaluate how closely your organization was able to stick to its budget. Most organizations report their assets in order of liquidity—i.e., how easy it would be to turn them into cash if necessary. Therefore, cash is typically at the top of the list because it’s already liquid, and property and equipment are at the bottom because you’d have to sell them for them to become liquid. Partner with the nonprofit accountants at Jitasa to create and interpret your statement of financial position. We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month. Charitable nonprofits expending $750,000 or more in federal funds during a year are also subject to special audit requirements.

Examples include bank balances, accounts receivable, pledged donations, investments, and prepaid expenses. Fortunately, with nonprofit accounting software, your nonprofits can reduce or eliminate these challenges. Creating accurate 501c3 financial reports requires meticulous attention to detail and adherence to accounting standards, such as Generally Accepted Accounting Principles (GAAP). Here are the not-for-profit financial reporting requirements to make your report both useful and engaging. The cash flow statement (CFS) shows how cash moves in and out of your nonprofit. The expenses statement helps you see how well you’re managing your resources and whether your spending aligns with your mission.

• There is a difference between a Statement of Activities and an income statement.
• To start, begin with a solid understanding of nonprofit financial accounting principles.
• The expenses listed in this statement are broken down further into exact expenses, including salaries, events, and administrative costs.
• It shows how well the organization is playing its game of supporting its mission with the resources it has.
• This could lead to the use of an account entitled Resource Development in order to balance the budget.

This statement is important because it helps stakeholders understand the organization’s ability to generate cash from its operations and how it manages its cash resources. In addition to unrestricted net assets, nonprofit organizations may also have restricted net assets. Restricted net assets are funds that are designated for specific purposes by donors or other external parties. These funds are subject to restrictions and can only be used for the specified purposes. It is important for nonprofits to track and report on both unrestricted and restricted net assets to ensure transparency and accountability.