How to Read Financial Statements for Nonprofits
As a non-financial manager, or Board member, do you ever look at a set of financial statements and your eyes cross? It may look like a jumbled mess but it has valuable information that is important to understand. Here, we’ll dive into some of the basic nonprofit financial statements and how to read them.
Statement of Financial Position
One of the first statements usually presented to a Board by a nonprofit’s management is the Statement of Financial Position, also known as the Balance Sheet.
This statement presents the nonprofit’s assets, liabilities, and net assets (fund balances). It’s important to measure the assets against the liabilities using a current ratio analysis. This will help determine the overall health of your nonprofit organization.
The asset categories generally include cash, prepaids, receivables, and other assets. When comparing these to your nonprofit’s current and long-term liabilities, look to see if your assets can cover those liabilities.
This can include accounts payable, accrued payroll, or other short and long-term obligations. The higher your nonprofit’s current ratio number is, the better off the organization stands in being able to pay the liabilities.
Another category presented on a Statement of Financial Position is the net assets. The total of the net assets and the liabilities balances out to equal the assets. Net assets are divided into two categories.
One is with donor restrictions and the other without donor restrictions. These two categories tell us the balances of all of your nonprofit’s different funding sources. They will also tell us whether they are unrestricted for any use or restricted for a specific use.
When your nonprofit’s revenues are recorded, the net assets will increase and when expenses are recorded, the net assets decrease. When a Statement of Financial Position is presented as a comparative to the prior period, you will see the change column presented to show either an increase or decrease in net assets.
This is essentially the same as saying the organization experienced a net income or net loss for that comparative period. The surplus or the deficit in any given period is what carries forward to the next.
Statement of Activities
The second statement that is useful for a Board or nonprofit management is the Statement of Activities. The purpose of this statement is to lay out all of your nonprofit’s revenues and expenses in a column format to show the net income. You can also see the organization’s loss at the very bottom.
The change in net assets and ending net assets balance can be shown underneath the net income (loss). This would tie out to your nonprofit’ organization’s Statement of Financial Position. The columns presented in this statement can vary. An example is presenting two columns separated out by revenue and expenses, without donor restrictions and those with donor restrictions.
Another option is to separate columns for the different departments or programs your nonprofit organization has. A third option is to separate the columns by functional expenses showing by a program, general administrative, and fundraising expenses.
Statement of Revenue and Expense – Budget vs. Actual
A third and very effective statement for budget tracking purposes is the Budget vs. Actual. This statement tracks your nonprofit’s current and year-to-date revenue and expenses against your projected budgets for all categories. It should provide insight as to why there may be variances.
A nonprofit needs to ensure the revenue goals are being met for the year in order to carry out its mission. If revenues are tracking lower than expected, it may be necessary to adjust goals for the year. The same is true for tracking expenses against the budget.
Did your nonprofit organization have unexpected expenses that are causing a major budget variance? If expenses are tracking lower than expected, does it correlate with lower than expected revenue or vice versa with higher than budgeted expenses? Depending on the reasoning for the variances, you may need to modify ongoing expenditures or strategies based on the current situation.
The main purpose of financial statements is to provide financial insight to a nonprofit organization. Learning the information presented in a financial statement is important to understand for decision-making.