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5 financial documents for every US nonprofit

Auditors, potential grantors, the board of directors — any of these groups might request a comprehensive report on your nonprofit's financial health and stability. If the thought fills you with dread, don't despair. Even if you have a limited financial background, you can learn the basics. Being informed will help you make sure your organization's financial management is in good hands. Let's start with five common financial documents.

Statement of financial position (SOP)

The SOP is the nonprofit's equivalent of a for-profit company's balance sheet. It provides a snapshot of your organization's finances, listing assets in order of liquidity — the speed at which they can be converted to cash — and liabilities in order of length of obligation. The SOP is conventionally prepared at the end of the fiscal year, although larger organizations or those with extensive financial changes might choose to prepare an SOP quarterly or even monthly.

Assets include cash and cash equivalents, such as gift cards or certificates, grants receivable, or depreciable furnishings or equipment. Liabilities include accounts payable, grants due to other organizations, or debts. Your net assets are those remaining assets after liabilities have been subtracted from assets. The "accounting equation" (assets = liabilities + net assets) demonstrates that your nonprofit has enough cash or cash equivalents on hand to equal your outstanding debts.

Donor contributions — which are part of your net assets — are accounted for and totaled separately in the SOP based on their category: unrestricted, temporarily restricted or permanently restricted. Temporary restrictions might be grants or donations with particular donor stipulations, such as being used for a particular program or at a particular time. Permanent restrictions, such as endowments, are not especially common among smaller nonprofits but should be included if applicable.

Statement of activities

The statement of activities (sometimes called the statement of support) shows how your net assets change over time, increasing as revenue comes in and decreasing as expenses are paid. The statement of activities is the nonprofit equivalent of a for-profit income statement.

Like the assets section in the SOP, the statement of activities distinguishes between unrestricted, temporarily restricted and permanently restricted activities. If revenue comes in within one year (or other specified period) but with a restriction that prevents it from being used immediately, that income is designated as temporarily restricted. If a donor makes an endowment or some other financial gift that can never be applied to programs, it would be designated as permanently restricted. However, the income earned from an endowment in the form of interest does get reported, again with appropriate restrictions.

Income that isn't cash, such as a donation of goods, may be recorded in the revenue column. Similarly, any expenses that the acceptance of such goods entails — such as added security or storage facilities — should be recorded in the expenses column.

There are some complex ins-and-outs of activity statements for issues such as donation of services and acquiring collection items for museums (which aren't always classified as revenue). These are addressed in the generally accepted accounting principles (GAAP) for activity statements. Keep in mind, however, there are differences in the GAAP treatment of donated goods and services and how these items are recorded on the IRS Form 990.

Statement of functional expenses

As the name implies, the statement of functional expenses lists expenses by function, such as program expenses, administrative expenses and fundraising expenses. Taking it one step further, this statement also lists expenses by type, such as salaries and benefits, rent and utilities, and so on. The presentation is usually a matrix or table.

The division shows readers of this financial statement — whether auditors, board members or potential grantors — the balance your nonprofit maintains between funding programs and maintaining a staff. On one hand, administrative expenses shouldn't be grossly out of proportion to program funding. On the other, administrative funding shouldn't be pushed down so low that you're not attracting competent, qualified staff.

In practice, costs might be in two or more categories at the same time. In this case, it's appropriate to determine a relative breakdown and properly allocate costs in each category proportionally.

Statement of cash flows

The statement of cash flows provides a picture of the cash coming in and going out in a given period, whether it's a year, a quarter, a month, or generated on demand for a determined time period. The statement of cash flows typically includes up to three sections, depending on your nonprofit's sources of cash. For most nonprofits, this means net cash from:

  • Operating activities (such as unrestricted funds raised from fundraising activities or cash fees from fee-for-service operations)
  • Investing activities (such as expenses or earnings from the purchase or sale of equipment or other long-term investments)
  • Financing activities (such as earnings from issuing or redeeming bonds)

Annual report

Often, nonprofits have relevant information about finances that isn't included in basic financial statements. Enter the annual report, which you can use to communicate your organization's fiscal health in richer detail. Information relevant to the annual report might include:

  • Attendance records for fundraising or community events — noting that significant attendance could point to financial improvement in the future, especially if a new donor pool has been identified
  • Lists of donors and their giving levels
  • Discussion of the mission or the past year's activities, lobbying successes, volunteer support and so on

Done well, an annual report can inspire support for your mission. Even better, annual reports help attract donors while fostering a culture of transparency and accountability.

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Disclaimer

MissionBox editorial content is offered as guidance only, and is not meant, nor should it be construed as, a replacement for certified, professional expertise.

Disclaimer

References

National Assembly of State Arts Agencies: How to assess nonprofit financial performance by Elizabeth K. Keating and Peter Frumkin (2008)

Accounting Coach: Financial statements of nonprofits

Nonprofit Accounting Basics: Statement of financial position (2009)

Forbes: Five tips to better manage nonprofit finances by Neela Pal (2015)

References

Author

Baltimore-based writer and educator