A Complete Guide to Demystifying Nonprofit Financial Statements

The statement of cash flows (or cash flow statement) is one of the main https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ financial statements (along with the income statement and balance sheet). One of the main financial statements (along with the statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders’ equity). The income statement is also referred to as the profit and loss statement, P&L, statement of income, and the statement of operations. The income statement reports the revenues, gains, expenses, losses, net income and other totals for the period of time shown in the heading of the statement.

• A lack of understanding of revenue recognition can lead an organization’s management team to make the wrong decisions for the organization.
• The statement of financial position provides a snapshot of the organization’s financial position at a specific point in time.
• The statement of cash flow shows how money is flowing in and out of various accounts, reflecting how donations are being spent in line with the mission of the nonprofit.
• This report provides an overview of your nonprofit’s financial health at a particular moment.
• Nonprofit financial reports support risk management by offering a comprehensive view of the organization’s financial position.

Good Practices for Financial Reporting

• This last part, functional expenses, is a financial statement that shows how money is spent on different areas, like programs or administration.
• This applies only to US donors, who must comply with the IRS’s legal due diligence requirements.
• Monitoring the movement of your net assets will allow you to make better financial decisions and ensure that your resources are used in the most effective way.
• It is then broken down into restricted and unrestricted revenue, showing how these funds can be utilized by the organization.

•  Expenses This section reports all cash that flows out of your organization, including the cost of programs, fundraising, and overhead. Assets are listed in order of liquidity, or their ability to be converted into cash. 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.

Statement of Functional Expenses: Where Every Dollar Goes 🔍

Notes can clarify accounting methods, commitments, contingent liabilities, or any significant events that might impact financials. This statement shows how changes in the balance sheet and income statement affect cash and cash equivalents. For example, some nonprofits generate income through sales of products, whether these are merchandise, publications, or other goods related to their mission. Sponsorships, partnerships with for-profit entities, and endowment income can also play roles in diversifying revenue.

Understanding nonprofit financial statements: 4 key reports

It’s important to note that while such events can be lucrative, they also involve costs and extensive planning, and their net revenue should be carefully assessed against the effort and resources expended. The Statement of Financial Position report is required by the IRS and must be submitted with the organization’s Form 990. This report is more like a financial overview of the entire organizations financial health.

Nonprofit Financial Statements: 4 Essential Reports to Know

It’s important to note that nonprofit financial statements are not just for internal use. They are also used for compliance purposes, as regulatory bodies require nonprofits to submit these statements regularly. Additionally, donors and funders often request financial statements to evaluate the financial health and sustainability of an organization before making accounting services for nonprofit organizations contributions. The statement of financial position provides a snapshot of the organization’s financial position at a specific point in time.

Types of Nonprofit Financial Statements Explained

• There are four key financial statements that are tied to nonprofit accounting, which we will explore below.
• This is a one page document that makes it very easy for donors and board members to understand exactly how the nonprofit is doing financially and where the bulk of revenues as well as costs are coming from.
• Revenue recognition in nonprofits is intricate due to the varied sources of funding and the conditions donors often attach.
• Nonprofit financial statements are detailed reports that showcase an organization’s financial position, activities, and cash flow.
• Whether you add graphs to visualize your most important financial details or simply include your audited reports on your website, consider how you can cater to your audience’s interests and preferences.
• Meanwhile, it is important for nonprofits to be aware of their legal obligations.

That’s why we are here to further help non-profit accounting professionals understand the most important nonprofit financial statements and how they can benefit the non-profit organizations for which you work. Some key indicators to analyze in nonprofit financial statements include the current ratio, fundraising efficiency ratio, and program expense ratio. These indicators provide insights into the organization’s financial health, fundraising effectiveness, and allocation of resources. Preparing clear and compliant nonprofit financial statements is a fundamental responsibility of nonprofit organizations.

• A record in the general ledger that is used to collect and store similar information.
• However, the account balances will be combined into a few amounts that are presented in the financial statements and IRS Form 990.
• This financial statement reports the revenues and expenses and the changes in the amounts of each of the classes of net assets during the period shown in its heading.
• It’s important for nonprofits to include a statement that clearly shows how these funds are being used to support their mission.
• These financial statements should clearly show each accounting heading and any money paid under that accounting heading.

Donations can come from individuals, corporations, or other entities, often driven by the desire to support the organization’s mission. These donations may be one-time gifts or recurring contributions, and they can vary in amount from a few dollars to significant sums. Grants, on the other hand, are typically funds provided by foundations, government agencies, or other institutions for specific purposes or projects.