Unraveling Nonprofit Financial Statements To Help Your Organization Do Even More Good

Jan 17, 2024 | Nonprofits

When you run a nonprofit, you have to make every dollar count. Nonprofit financial statements help you stay on top of your income and expenses in a way that shows how you are responsibly using donors’ money.

In this post, we’ll unpack what makes nonprofit financial statements different from for-profit entities. We’ll also show you how to read them properly, prepare them accurately, and better understand why they matter.

The work you do is important, so you deserve to have financial statements that help you make an even bigger impact on your community. Let’s dive in!

Nonprofit Financial Statements

You might be tempted to think that nonprofit financial statements are the same as the financial statements for any regular kind of business. Not true.

Because each type of organization’s stated goals differ, the information each one needs to operate properly will also be different.

For-profit businesses exist to make money for their shareholders…whether that’s a single owner or thousands of investors. They sell products or provide services to create revenue that brings a profit that they can then distribute to those people. 

Nonprofit organizations, on the other hand, exist to meet a need within their community…locally or even internationally, the size doesn’t matter. Funds are generated mostly from donations or revenue from goods or services they sell. Instead of distributing money to shareholders, nonprofits roll all of their proceeds back into the organization to keep doing what they do.

An easy way to think of the difference between for-profit and nonprofit is that for-profit companies make money while nonprofit organizations raise money. The first wins by making as much profit as possible. The second wins by making as much impact as possible.

Nonprofit entities are required by law to disclose how they spend the money they bring in. For-profit businesses are not. And that’s where the biggest difference in nonprofit and for-profit financial statements comes in.

These are the 4 financial statements a nonprofit organization needs to generate:

1. Income Statement (Statement of Activities)

This document gives details about all of your organization’s revenue and expenses for the recorded time period.

Revenue includes income sources such as donations, grants, memberships, gifts-in-kind, or money from investments.

Expenses cover everything involved with the costs of fulfilling your nonprofit’s stated mission such as salaries, rent, utilities, insurance, advertising, and supplies.

Additionally, your income statement should include a section showing your net assets to demonstrate that you have been effective at managing your organization’s resources over the reporting period.

(You can find more details on this in a previous post we did on “Best Accounting Practices for Your Nonprofit.”)

2. Expense Statement

Your expense statement (better known as a Statement of Functional Expenses) is a more detailed version of your Income Statement / Statement of Activities expense section. This report is not one that you would find being used by for-profit companies. However, it has great value for nonprofits since it shows how money is being spent in the various areas of your organization. Typically, it is broken down into the following categories:

  1. Management/Administration
  2. Fund Raising
  3. Programs

3. Cash Flow Statement

Similar to a for-profit business, a Statement of Cash Flows demonstrates how money flows into and out of your organization. It is a helpful tool for determining which activities generate the most revenue and which use the most of your financial resources.

4. Statement of Financial Position (“Balance Sheet”)

This last report is where you will find the biggest difference between for-profit financial reports and nonprofit financial statements. Companies that exist purely to generate maximum profit for their owners use a Balance Sheet to show equity. The “Equity” section in a nonprofit’s Statement of Financial Position, though, is replaced with a “Net Assets” section.

Net Assets reflect your organization’s total assets minus liabilities. They are further broken down into the same “unrestricted” and “restricted” categories that we mentioned earlier. 

How to Prepare Nonprofit Financial Statements

Charity Charge has a great article on its site that lists “10 essential steps for preparing nonprofit financial statements.” It is worth a read (after you finish this post, of course), but here is a quick summary of a few of the key points.

  1. Know Which Statements You Need – We just covered those in the section above, so you’re off to a great start!
  2. Gather Necessary Information – This is where good record-keeping comes in handy. Each report requires different pieces of data, so make sure you and your team stay on top of keeping files organized throughout the year.
  3. Use An Accrual Basis – This method of accounting is better for nonprofits since it records transactions at the moment they occur. That way, whenever money comes in or gets spent you can see it. Doing so demonstrates transparency and helps build trust with your donors.
  4. Be Sure To Review – Once all of your financial statements have been created, take time to go back over them carefully to ensure that everything is clear and accurate. Many organizations have an independent outside firm audit their reports to further guarantee the highest levels of transparency and integrity. 

You can create your own financial statements of course, but it is always a good idea to at least have a good CPA firm look things over too. They can help guide you through the process and serve as an extra set of eyes to catch errors. Our team has been partnering with nonprofits for decades and can gladly help your organization too.

How To Read Nonprofit Financial Statements

Because we understand that you are busy actually running your organization, this post is just a basic overview of nonprofit financial statements. If you would like to dig deeper into how to read the statements we’ve talked about here, the Association of Nonprofit Accountants & Financial Professionals has created a great “Guide to Understanding Nonprofit Financial Statements” that is worth reading.

Why Nonprofit Financial Statements Matter

Knowing how to prepare and read nonprofit financial statements is important, but they aren’t truly useful skills unless you understand the “why” behind them. Nonprofit financial statements matter for several reasons. 

  1. Compliance – The most basic reason they matter is because the government says they do. In order to stay legal and protect your nonprofit status it is important to maintain statements that accurately reflect your organization’s financial activity.
  2. Transparency – It takes money to keep the doors open so you can continue doing good work in your community. Unless you can provide transparency through accurate financial statements, the donors you depend on won’t trust you enough to partner with you.
  3. Risk-avoidance – Money has a way of spending itself if you don’t keep an eye on it. If your organization is like most nonprofits, you need every dollar to stretch as far as it possibly can. Having up-to-date financial statements can help you spot problem areas in your spending before they become serious issues.
  4. Decision-making – As you make plans for the future of your nonprofit, having solid information is crucial. These financial statements can give you what you need to make good decisions and grow your impact.

We Can Help You Unravel Your Nonprofit Financial Statements

Whether you are looking for help creating good financial statements for the first time or cleaning up some that have just become a mess, our team of experienced accountants can help.

Our firm has over 40 years of experience and multiple offices across West Tennessee. (And thanks to the magic of the Internet, we’re available remotely to virtually anyone anywhere.) To unravel your statements and make every dollar count, schedule a call today.

P.S. – Be sure to check out a couple of other posts we’ve done on this topic too:

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