What exactly are nonprofit financial statements and how do organizations use them? Most nonprofit leaders are juggling multiple responsibilities, from fundraising to operating activities and everything in between. In the midst of it all, these financial statements may seem like just another administrative burden. 😵💫
In this article, we’ll explore why nonprofit organizations need financial statements. Plus, how they contribute to informed decision-making, effective nonprofit budgeting, and accountability.
In this article:
4 types of nonprofit financial statements
Balance sheet
Income statement
Cash flow statement
Statement of functional expenses
How do nonprofit financial statements compare to for-profits?
Using nonprofit financial statements as a powerful marketing tool
Showcase your impact with storytelling
The bottom line
Stay on top of cash flow with banking built for nonprofits
What are nonprofit financial statements used for?
Nonprofit financial statements are primarily used for financial reporting and IRS requirements. However, their importance goes beyond the need to jump through regulatory hoops.
Financial statements can also serve as strategic tools to help you fulfill your nonprofit’s mission and make a bigger impact on the communities you serve. 👐
For example, nonprofits can use financial statements to…
Improve decision-making: These statements offer a clear overview of the organization's financial health. This helps leaders make informed, data-driven decisions about program expenses, resource allocation, and strategic planning. 👍
Boost donor transparency: They provide insight into how funds, both restricted and unrestricted, are being used. This transparency assures that resources are managed responsibly. 🪞
Get more funding: Well-managed and clear financial statements can demonstrate financial stability and responsibility. These are two very important factors when it comes to attracting significant funding from donors or grants. 💸
Implement internal controls: Financial statements assist in implementing effective internal controls, ensuring that all assets are safeguarded and financing activities are conducted efficiently. ⚙️
Why do nonprofits need financial statements?
Financial statements are much more than just accounting documents. They are powerful tools that can level up the success and impact of your organization. 🧰
They are so much more than simply tracking incoming and outgoing funds. They offer a clear view of an organization's financial health, guiding you on your mission to create positive change in your community. 🧑⚕️
Here are a few reasons why nonprofits need to understand their financial statements:
Accountability: Financial statements enhance accountability and transparency. Both of these are vital for building trust with stakeholders (i.e. board members, donors, and regulatory organizations like the IRS). 🧾
Resource allocation: By shedding light on revenue streams and expenditures, they help nonprofits to get the most impact per dollar spent. 💵
Legal compliance: They are key to fulfilling regulatory requirements, like maintaining the organization's tax-exempt status. ⚖️
Attracting donors: Well-prepared financial statements can help attract new funding, as potential donors or grant-giving institutions often require them to assess financial stability and commitment to the mission. 🧲
Financial statements are much more than a peek at a nonprofit's finances. They are also a compass guiding nonprofits toward their mission objectives with confidence. 🧭
4 types of nonprofit financial statements
Nonprofit financial statements provide a snapshot of your organization's financial health and performance. They paint a picture of your organization's financial health so you can make informed decisions.
1️⃣ Balance sheet
A balance sheet in nonprofit accounting is also called the statement of financial position. It provides an overview of your finances and helps assess your organization's solvency (ability to pay off debts) and liquidity.
The balance sheet shows your organization's assets, liabilities, and net assets at a specific point in time.
Assets: what your organization owns
Liabilities: what you owe (i.e. accounts payable)
Net assets: assets from the current year as well as the previous years' operations (can be obtained from your annual reports).
Reviewing the balance sheet is a great way to see just how your nonprofit stacks up and pinpoint any areas you want to focus on in the future. You can use this formula: Assets - Liabilities = Net Assets. If your nonprofit has more assets than liabilities, you’re likely in good financial shape!
2️⃣ Income statement
An income statement (AKA, the statement of activities) summarizes your organization's revenue and expenses over a specific time period—quarterly, monthly, yearly, etc. It helps you understand your financial performance and whether your organization is operating out of a surplus or deficit.
The three main sections of an income statement are:
Revenue: money coming in (donations, grants, revenue, etc.)
Expenses: money spent (payroll, program expenses, etc.)
Change in net assets: how much money the organization made
The income statement is a great way to determine where money is coming in from, if the organization will get the same money next year, and where money is being spent. You can use this data to assess how your nonprofit is achieving its mission-driven goals and what adjustments, if any, need to be made.
3️⃣ Cash flow statement
This statement tracks the monthly cash flow in and out of your organization. It helps you monitor your cash flow, identify potential cash shortages or surpluses, and ensure your organization can meet its financial obligations, like current liabilities and program expenses.
Cash flow statements include:
Operating activities: expenses related to the normal course of business (payroll, donations, grants, etc.)
Investing activities: buying or selling long-term assets (i.e. selling property or purchasing equipment)
Financing activities: how the organization is funded (loans, credit cards, etc.)
This statement is a great way to stay informed about how cash resources are being used during the fiscal year. When you’re reviewing your cash flow statement, look at the organization’s spending to make sure it aligns with the mission and goals.
4️⃣ Statement of functional expenses
This statement summarizes your organization's expenses by 3 categories: program, administration, and fundraising. It shows how resources are divided among different functions, allowing transparency and accountability.
Here is a brief breakdown of each category:
Program expenses: costs directly supporting your nonprofit’s mission.
Administration expenses: costs necessary for running your nonprofit.
Fundraising expenses: costs related to fundraising events or campaigns.
The main purpose of this statement is to help you file your annual taxes with the IRS. However, it’s also a great way to analyze expenses and make data-driven decisions for the annual budget.
How do nonprofit financial statements compare to for-profits?
Not-for-profit and for-profit organizations have some differences when it comes to their financial statements, due to their different objectives:
🦸 Mission vs. profit: A for-profit business's goal is to maximize profits for shareholders, reflected in the focus on profit and loss. Since nonprofits are mission-driven, their financial statements emphasize resource utilization to achieve their goals.
📨 Income statement vs. statement of activities: Businesses have income statements displaying revenues, expenses, and any profits or losses. Nonprofits have a statement of activities, with revenues (often donations), expenses, and changes in net assets.
📊 Balance sheet vs the statement of financial position: For-profit companies have a balance sheet listing assets, liabilities, and equity. Nonprofits use a statement of financial position, showing assets, liabilities, and net assets. It also details how funds are used (i.e. funding with or without donor restrictions).
💰 Cash flows: Both types of organizations prepare a statement of cash flows, but nonprofits categorize their cash flows into operations, financing, and investing. Businesses use operations, investing, and financing categories.
Understanding these differences is crucial for anyone involved in nonprofit financial management. While there are several differences, they both serve the same purpose... to help stakeholders make informed decisions.
Financial statements can serve as powerful narratives that speak to an organization's mission and impact. They can also play a crucial role in marketing strategy. 📊
Here are a few ways you can leverage your nonprofit’s financial statements in your marketing efforts:
Build trust and transparency: Nonprofit financial statements, such as the 990, are public documents. They demonstrate an organization's financial responsibility and can build trust among current and potential donors. A clear and detailed financial report shows donors how the nonprofit manages funds effectively and aligns spending with its mission. ⭐
Demonstrate strategic priorities: Financial statements quantify an organization's impact. By demonstrating how funds are allocated, these statements reflect the nonprofit’s accomplishments and progress toward its goals. 🥅
Attract donors. Clear and transparent financial statements provide a robust picture of the organization's financial health. Guidestar found nonprofits that were transparent with their financial reports received 53% more in contributions. 💸
Showcase your impact with storytelling
How can nonprofits use their financial statements to tell a story to donors, board members, and others? 🤔
Provide context. Use your financial statements to demonstrate how funding has supported the organization's mission. This will give donors and investors a deeper understanding of the impact their contributions have had. 📖
Include visuals: Graphs, charts, or other visual aids can help make complex financial information easier to read. They can also be used to highlight key metrics or trends that demonstrate the organization's success. 📈
Be transparent: Transparency is key for building trust with donors and investors. Include all relevant financial information in your statements. This shows stakeholders that the organization values honesty and accountability. 🪞
When nonprofits use their financial statements as a storytelling tool, they can further engage stakeholders in their mission. Plus, they showcase the strategic priorities and programmatic growth of the organization. This not only helps attract new support but also strengthens relationships with current donors. 💪
Relationship building is key to long-term sustainability for the nonprofit. Don't just look at financial statements as a boring tax requirement. Start seeing them as an opportunity to highlight your organization's achievements and inspire others to join your cause. 🤝
The bottom line on nonprofit financial statements
Nonprofit financial statements are not just financial documents. They are so much more than that! These statements are powerful tools that contribute to the success and impact of your organization. ⚒️
By understanding and leveraging these statements, you can make informed decisions and ensure transparency and accountability. Embrace the power of financial statements, and let them guide you on your mission to create positive change in the world. 🌎
Stay on top of cash flow with banking built for nonprofits
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