Demystifying Nonprofit Financial Statements: Complete Guide

This statement details the assets an organization owns, the liabilities it owes, and the net assets (or equity in for-profit terms) that remain. For nonprofits, the importance of this document cannot be overstated, as it plays a vital role in securing funding, grants, and donor trust. It demonstrates the organization’s capacity for handling its resources responsibly, showcasing stability and aiding in strategic planning and management.

Donor Confidence

In the Statement of Financial Position, the assets section is typically presented in order of liquidity, with cash and cash equivalents listed first. The liabilities section includes items such as accounts payable, loans, and deferred revenue. The net assets section includes items such as unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Overall, nonprofit financial statements provide a snapshot of your organization’s current financial standing so you can better plan for your nonprofit’s future. Nonprofit organizations must stay current on accounting standard changes and how they may impact financial reporting. Nonprofits can work with accounting professionals or attend training sessions to understand the impact of accounting standard changes and ensure compliance with regulations.

Nonprofit Financial Statement Examples

The Statement of Cash Flows shows the cash inflows and outflows from operating, investing, and financing activities of a nonprofit organization over a specific period. It helps assess the organization’s cash flow and its ability to meet its financial obligations. One key aspect of the additional disclosures is the disclosure of significant accounting policies.

• Net assets are important because they can impact a nonprofit’s ability to obtain funding or grants and its financial stability.
• If your assets increase and your liabilities stay the same, then your net assets will also increase.
• As your transactions and receipts are tracked in a single location, completing your financial statements promptly is much easier.
• It summarizes your revenues and expenses for a specific period and allows both your organization and stakeholders to understand how you’re managing your resources.
• Foundations require nonprofits to provide financial statements when they apply for grants.
• This information helps nonprofits make informed decisions regarding the use of resources and financial management strategies.

Changes in Asset Valuation –  Impact of Changes in Accounting Standards on Nonprofit Statements of Financial Position

• So you can see which assets you can use to offset your liabilities, if and when it’s necessary.
• If you owned a house (an asset) valued at $300K, and you had an outstanding mortgage balance (a liability) of $200K, your net assets (equity) would be $100K.
• It’s critical for showing how much of the nonprofit’s spending is directed toward mission-related activities versus administrative and fundraising costs.
• The focus on restrictions highlights the nonprofit’s commitment to honoring donor intentions and the ethical stewardship of funds, which is less emphasized in the for-profit sector.

Among the list of important finance documents your nonprofit organization has to create and use, the statement of financial position is one of the most important. Accrual basis accounting means that you record revenues and expenses when they are incurred how is sales tax calculated or earned. So, if a donor pledges to make a $5 contribution each month for 1 year, you’d record $60 in income the day the pledge is made (regardless of when it is actually collected). Cash basis accounting means that you record revenues and expenses based on when the cash moves in or out of your business.

Below, you’ll learn about the value of each, what information to report, and how they work together to keep your nonprofit financially sound. When it’s all put together, a nonprofit statement of financial position is a pretty straightforward document. Putting it together, however, can take time because there are a number of essential components you or your accounting expert will need to assemble. A nonprofit statement of financial position is one of several documents nonprofits can use to demonstrate where donors’ money is being spent. Ideally, nonprofits should prepare internal financial statements monthly or quarterly for management purposes. However, externally, annual financial Partnership Accounting statements are standard, often accompanying required annual filings.

Fund Accounting – Nonprofit Statement of Financial Position vs. For-Profit Company’s Balance Sheet

For example, cash is already a liquid asset, so it’s listed first in the assets section. Investments in property and equipment, on the other hand, would need to be sold to become liquid, making it challenging to use them for operating expenses. Assets on the statement of financial position tend to be organized by order of liquidity, which is a term used for the speed of which an asset can be converted into cash.

• The primary reason for this is this method lets nonprofits record revenue when it’s earned.
• Your nonprofit Statement of Activities ultimately gives stakeholders an idea of how well you’re using funds and other resources to successfully support your programming and fulfill your mission.
• A lack of internal controls can lead to errors in financial reporting and potentially fraudulent activities.
• Heliconia Scholarship Foundation shares a financial report with its donors instead of an annual report.
• Today’s donors give as an extension of their identity to causes that mean a lot to them.

The operating activities section of the Statement of Cash Flows provides valuable insights into the day-to-day financial operations of a nonprofit organization. It outlines the cash inflows and outflows that are directly related to the organization’s core activities. The table can include columns for the type of liability, the amount owed, and the due date. This provides a clear overview of the organization’s financial obligations and helps stakeholders make informed decisions. An annual report is a document sent to your donor base letting them know how your organization has grown and changed over the past year.

When Should an Organization Prepare Its Nonprofit  Statement of Financial Position? – Understanding Balance Sheets

With these tips, nonprofits can approach financial statements strategically and present their activities in an accessible manner for boards and the public. Financing activities refer to the activities that involve raising funds for the nonprofit organization. These activities include obtaining loans, issuing bonds, and receiving contributions from donors. The funds nonprofit statement of financial position raised through financing activities are used to support the organization’s operations and programs. It is important for nonprofit organizations to carefully manage their financing activities to ensure financial stability and sustainability. By effectively managing financing activities, nonprofits can secure the necessary resources to fulfill their mission and serve their beneficiaries.