Understanding nonprofit financial statements: 4 key reports

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Note: The content of this blog post is provided by a guest author and is for informational purposes only. It does not constitute financial, tax, or legal advice. Readers should consult a qualified financial professional or accountant for guidance specific to their organization’s needs.

Financial transparency is critical to your nonprofit’s success. Not only do you need to accurately report your finances to comply with nonprofit regulations, but letting supporters know how you’re using their contributions to further your mission can motivate them to stay engaged with your organization long-term.

Your nonprofit’s financial statements are among the most effective tools for promoting financial transparency both internally and externally. According to Jitasa, “Each of the four core reports that nonprofits compile annually summarizes your financial data in a different way, providing unique insights into your organization’s current situation.”

In this guide, we’ll walk through the contents and applications of each of the four major nonprofit financial statements to help your organization create and leverage them effectively. Let’s get started!

1. Statement of activities

The statement of activities is the nonprofit parallel to the for-profit income statement. It provides an overview of your organization’s transactions over the fiscal year, which helps you evaluate your fundraising success and cost allocation. Then, you can use your results to create a better-informed operating budget for the coming year.

Your statement of activities should have three main sections:

• Revenue. Divide this section into subcategories based on the major nonprofit revenue sources: individual donations, corporate philanthropy, earned income, investment returns, and grants. This way, your report will line up with your budget, and you’ll know how much funding you brought in from each source.
• Expenses. The most effective way to organize this section is according to the way in which each expenditure furthers your nonprofit’s mission. These functional expense categories encompass program, administrative, and fundraising costs (and will be covered in more detail later).
• Net assets. This section compares your nonprofit’s net worth at the beginning and end of the year. To calculate your organization’s annual net assets, subtract your total expenses from your total revenue.

As you create your statement of activities, make sure to separate unrestricted and restricted funds in the revenue and net assets sections. Restricted funds have to be used for a specific purpose as designated by the major donor or grantmaker who contributed them, while you can put unrestricted funds toward any area of your nonprofit’s budget. Distinguishing between these categories helps you understand how flexible your organization’s funding is and ensures you spend restricted funds as intended.

2. Statement of financial position

Also known as a balance sheet, the statement of financial position provides an annual snapshot of your organization’s fiscal health. Like the statement of activities, this report also has three sections:

• Assets: Everything your nonprofit owns, including cash, accounts receivable, investments, property, and equipment.
• Liabilities: Everything your organization owes, such as accounts payable, debt, lease obligations, and other deferred payments.
• Net assets: The total amount your nonprofit is worth, calculated by subtracting your total liabilities from your total assets. Make sure to separate restricted and unrestricted net assets on this report as well.

The statement of financial position has applications for both short- and long-term financial planning. In the short term, it’s useful for calculating your nonprofit’s cash on hand. As NPOInfo explains, “Cash on hand, or the total amount of money accessible at any given time from paper bills, bank accounts, and [other liquid] assets, will show how long your nonprofit can survive” given its current expenses. This way, you can determine if your organization is adequately prepared for an emergency and develop a better strategy for saving money.Looking to the future, your balance sheet can help your nonprofit plan for growth. In addition to preparing for emergencies, your organization will need sufficient reserve funds and liquid assets to continue operating while taking on the additional expenses required to build the capacity you need to expand. Analyzing your statement of financial position and comparing it to reports from past years can show you whether your organization is on a positive trajectory for growth.

3. Statement of cash flows

The nonprofit statement of cash flows demonstrates how cash moves in and out of your organization. It tracks revenue generation (cash inflows) and spending (cash outflows) together, using positive numbers for inflows and negative numbers for outflows. All transactions in this report are organized according to three types of cash flows:

• Operating activities. This category covers spending and revenue generation from your nonprofit’s day-to-day activities, meaning most transactions fall into this category.
• Investing activities. This refers to cash movement related to long-term assets like property, equipment, and investments. Cash outflows from investing activities may look like purchasing a new building or renovating an existing one, while cash inflows in this category may include interest earned on endowments or reserve funds invested through brokerage accounts.
• Financing activities. This section includes transactions related to your nonprofit’s capital structure, mostly concerning debt. A line of credit may be a cash inflow from financing activities, while a loan payment would be a cash outflow in this category.

Cash flow reports help keep your nonprofit’s spending and fundraising on track, which is why many organizations compile them both monthly and annually. Annual cash flow statements help you predict cash flows for future financial planning, while monthly reports allow you to check in with your budget regularly and adjust your strategy as needed.

4. Statement of functional expenses

The statement of functional expenses is the one financial statement unique to nonprofits, since it breaks down how your organization’s spending furthers its mission. It’s usually laid out as a table, with various types of payments along one axis and the three aforementioned functional expense categories along the other.

The categories of functional expenses break down as follows:

• Program costs are directly related to furthering your nonprofit’s mission, so they vary widely among organizations. For example, an animal shelter’s program expenses may include spending on pet food and veterinary care, while costs associated with curating and maintaining exhibits might be part of a museum’s program expenses.
• Administrative costs are necessary to operate your nonprofit day-to-day. Common administrative expenses include staff compensation, utility bills, insurance, and office equipment purchases.
• Fundraising costs are the upfront expenses associated with revenue-generating campaigns. These may range from event planning and marketing costs to investments in fundraising software and consulting services.

In addition to your nonprofit’s operating budget, the other financial document that depends heavily on data from your statement of functional expenses to ensure accuracy is your organization’s annual Form 990. Plus, understanding how much of your funding goes toward mission-related activities vs. operational needs can help you manage your nonprofit’s spending more strategically.

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Once you’ve finalized these four financial statements for your nonprofit, share them with your community by attaching them as appendices to your annual report or making them available to download from your website. This way, anyone who wants to learn more about your organization’s finances—whether they’re prospective donors, grantmakers, or corporate sponsors—can do so easily and make an informed decision about supporting your work.

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