Nonprofit financial statements may initially seem like a bunch of gibberish.
However, all nonprofits must adhere to strict standards in terms of financial transparency, meaning whatever your role within your organization is, it’s important that you understand its financial statements and what they say about your organization.
If you’re feeling overwhelmed, don’t panic. We’re going to take a deep dive into financial statements with you, and we’ll even provide you with some nonprofit financial statement templates to use within your own organization.
Let’s go!
Nonprofits must comply with IRS guidelines for filing financial statements to ensure they are adhering to nonprofit rules and regulations.
Many of these financial statements are similar to what a for-profit business would file, but there are some significant differences. As an employee, board member, or even donor at a nonprofit, it’s important to understand the organization’s financial statements for a few reasons.
First and foremost, having a solid understanding of the organization’s financial situation enables leaders to better plan for the future.
If an organization is interested in adding a new staff position, growing programs, or investing in professional development, there needs to be adequate funding to support those endeavors. Without solid financial reporting and a good understanding of those reports, it’s impossible to make informed decisions about these financial investments.
Additionally, nonprofits rely a lot on charitable gifts, grants, and donations to generate revenue. Some of those funding sources come with restrictions—or rules—on how they may or may not be spent. It’s important to understand the organization's different revenue streams to ensure that the funds are stewarded appropriately.
Along those same lines, nonprofits have a responsibility to their donors when filing financial statements. Unlike for-profit businesses, nonprofits are required to be incredibly transparent with their financials so that donors can understand how their investments are being utilized to help the organization carry out its mission.
Nonprofits must follow basic accounting practices and share the details of how income is expended in a way that donors, funders, and grantors can understand. This ensures financial transparency, which is a great way to build trust with stakeholders and other constituents.
If you’re new to nonprofit financial statements, you might be wondering—where do I even begin? Don’t worry—we are going to walk you through the main types of financial statements, what information they capture, and what they mean for your organization.
Let’s go!
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Everyone working and involved with a nonprofit should have a solid grasp on how to read and understand nonprofit financial statements.
In the world of nonprofit accounting, there are four required financial statements that nonprofits must produce. These are:
We’re going to walk through these one at a time so you can get a better understanding of each statement and what they entail.
The Statement of Financial Position, sometimes referred to as the “balance sheet”, values all the assets held by the nonprofit as well as all of the debts owed.
Let’s take a minute to dive into these terms.
The assets section of the nonprofit balance sheet defines what the nonprofit owns. It includes items such as accounts receivable, property and equipment investments, long-term receivables, and cash assets.
On the balance sheet, assets are usually listed in order of the amount of time it would take them to become liquid assets. Since cash is already liquid, it’s typically listed first in the assets section. Property and equipment investments, on the other hand, would require sale to become liquid, so they fall further down on the list.
The liabilities section, on the other hand, is a summary of everything that the organization owes. This includes accounts payable and any debts. For instance, unpaid credit card balances, loans, or expenses owed to employees or vendors will fall in the liabilities section.
Liabilities are typically organized by due date. Short-term investments are labeled as “current liabilities” and should be due within the year. Meanwhile, long-term liabilities are obligations that can be paid over multiple years, such as a loan or mortgage on a property.
The final section of the balance sheet is the net assets section. This portion of the financial statement shows your total assets minus your total liabilities.
The net assets are then split up and organized into two categories: “with donor restrictions” and “without donor restrictions”. This indicates whether funds are required to be spent in a specific manner—with donor restrictions—or not.
For example, if an individual donates money to a nonprofit animal shelter, they could “restrict” that donation for a specific program or purpose, such as “veterinary costs”. That animal shelter would then include that donation in the category “with donor restrictions”.
However, if an individual donates money to a nonprofit and does not indicate any specific way in which those funds should be spent, that is considered “unrestricted funding” and the organization can determine how to best spend those dollars.
In the end, after reading a nonprofit’s Statement of Financial Position, you should have an idea of the nonprofit’s net assets, and how much of that is with or without restrictions.
An organization’s Statement of Activities shows the nonprofit’s revenue and expenses over a designated reporting period.
Nonprofits can receive revenue from a variety of sources, including cash contributions, donated materials, grants, program fees, or investment returns.
The expenses that a nonprofit incurs should all tie back to the organization’s mission in some way—whether that’s funding daily program operations or purchasing needed supplies for a specific project.
Here are some examples of common nonprofit expenses:
The Statement of Activities financial statement aims to show that the nonprofit is a good steward of its funds and is staying compliant with financial regulations. It should also help the reader understand where the organization’s funding is going and if the existing programs have long-term financial sustainability.
Since this statement reflects finances over a designated reporting period, it’s a good idea to review historical statements as well to analyze if the organization’s funding has remained consistent over time.
The Statement of Cash Flows shows how cash moves in and out of the organization.
Rather than measuring the profitability of the organization, like the Statement of Activities does, the Cash Flows Statement shows where the nonprofit’s money is coming from, where it’s going, and how much cash is on-hand at any given moment.
This statement is pulled on a monthly basis, and typically consists of three primary sections:
Each of these three sections breaks down into further detail to provide more insight into the specific activities that bring funds into the nonprofit and how those funds are being spent.
When you analyze a nonprofit organization’s Statement of Cash Flows, you not only know how much money is coming into the organization, but you know exactly how much cash is being spent in any given month.
The Statement of Functional Expenses details the expenses incurred during a specific reporting period and categorizes them by functional area: program services, general/administrative expenses, and fundraising expenses.
Let’s dive into each of these categories a bit:
In the category of program services, many nonprofits break down their expenses even further by specific program and list the categories from highest expense to lowest expense. This is not required, however, it is industry best practice.
When you read a nonprofit organization’s Statement of Functional Expenses, you are able to ascertain how the organization is spending its funds. You can determine the percentage of spending on general/administrative costs versus the amount being spent directly on programs.
Below is a screenshot of how the organization Charity: Water breaks down their functional expenses in their 2021 Annual Report. The visual charts they use make it really clear to readers how much was spent percentage-wise on program services, fundraising, and administrative costs in a given year.
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So now that you know more about the four common financial statements nonprofits are required to generate, you still might be wondering—what on earth do these statements look like?
Well, don’t worry! We’re going to share with you a template of each financial statement so that you can easily create financial statements of your own!
We want to make sure that you are well-versed in all four of the required nonprofit financial statements, so we’re going to provide you with a template for each.
This Statement of Financial Position template is a great example of what this statement should look like.
It details the organization’s assets, liabilities, and net assets. The net assets are split into the two categories we talked about: “with donor restrictions” and “without donor restrictions”.
As you can see, this template is very easy to read and follow. The “Assets” section is clearly separated from the “Liabilities and Net Assets” section so that readers can differentiate between the categories.
The Jitasa Group has a great Statement of Activities template on their website. You can copy this template and plug in the relevant financial information for your organization.
So easy to use and to read!
You can see that the “Revenue” section is broken into categories including individual donations, grants, investment income, and other.
And the “Expenses” section captures the three categories of expenses that we already reviewed: program services, general/administrative, and fundraising. This template follows industry standards which we love!.
DonorBox has a super detailed Statement of Cash Flows template on their blog. This template is a great example of how your Statement of Cash Flows should be organized.
This template does an amazing job of clearly showing the cash flows from two different time periods: 2020 and 2021. This helps stakeholders compare the cash flows over time to see where there might be fluctuations.
ANAFP has a great template for the Statement of Functional Expenses over a 12-month period. Check it out!
The organization’s expenses are clearly outlined across the three primary categories: program services, general/administrative, and fundraising over the course of an entire calendar year. This is so helpful in ensuring that stakeholders can see the total expenses for any given time period.
Nonprofits are required to be incredibly transparent about their finances. Whatever your involvement is with a nonprofit organization, you should be well-versed in nonprofit financial statements.
The nonprofit financial statement templates we provided are a great starting point for creating financial statements for your own organization. We hope that the insights shared in this post will help you ensure that your organization is adhering to nonprofit finance rules and regulations.
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