Financial statements are summaries of an organization’s financial position at a given point in time. Both for-profit and nonprofit organizations produce various financial statements, including but not limited to a statement of financial position, balance sheet, and more. Nonprofits focus on specific financial statements to help auditors, donors or members, and the public understand how they are spending their resources.
The four key financial statements everyone at your organization should understand include:
- Statement of financial position
- Statement of functional expense
- Statement of activities
- Net asset classification
If you feel like reading a financial statement is reading a foreign language, never fear. In this article, we’ll demystify these common documents and help you understand what they mean and why they are important to your organization. And of course, if you have any questions, or would like help with preparing or understanding your organization’s financial positions, Welter Consulting can help.
Four Important Financial Statements Every Nonprofit Should Understand
Statement of Financial Position
The statement of financial position is also called a Balance Sheet, and you’ll see it referred to as a Balance Sheet in for-profit organizations. This document helps you understand your organization’s liquidity, or the ease with which an asset can be turned into cash on hand. It also indicates the organization’s solvency and financial stability.
Key items to note include assets, liabilities, and net assets. Assets are the total amount of resources (cash, property, etc.). Liabilities are the debts owed (loans, accounts payable, and others). Net assets are what’s left when you subtract total liabilities from total assets. If the net assets number is positive, the organization shows a surplus. If it’s a negative number, there is a deficit.
Statement of Functional Expense
This financial statement is unique to nonprofits. It shows how the organization spends its income. It typically covers a specific time period, such as a quarter or year. It will show you expenses such as program expenses, management and general expenses, and fundraising activities. From these numbers, you can quickly see the categories in which the organization is spending the money.
Statement of Activities
You may see the Statement of Activities referred to as an Income Statement or Profit and Loss Statement in a for-profit company. It essentially covers the same things: revenues, expenses, and changes in net assets. The revenue categories reflect all income obtained by the organization within an established time frame: grants, donations, fundraising activities, fees for services or products, investments, and similar activities. Expenses, as the term suggests, are the costs of running the organization, including overhead, administration, fundraising and more. And changes in net assets are simply the change in the beginning and ending balances in the net assets category for the identified time period.
Net Asset Classification
The net asset classification is typically divided into two categories in nonprofit accounting: unrestricted and restricted. Restricted assets may be temporarily or permanently restricted, and these restrictions can vary with the specific asset. Net assets are calculated by subtracting liabilities from assets. The resulting figure represents the accumulation of activity over time.
The Big Picture: What the Numbers Reveal
Understanding accounting terms may seem boring or trivial, but it’s really the starting point to understanding the state of the organization. If you understand how to read these four pieces of basic financial knowledge, for example, you’ll get a pretty good picture of what’s going on within the organization: how financially stable it is, if it’s having difficulties, if it needs to cut spending or if it has room to grow. Nonprofit financial statements are the keys that unlock insights that can help you make informed decisions about your organization’s future.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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