Not-for-profit organizations have a specific set of financial statements, each important to provide information about the organization’s financial position and performance. A complete set of financial statements for a not-for-profit organization includes a:
- Statement of Financial Position
- Statement of Activities
- Statement of Functional Expenses
- Statement of Cash Flows
Statement of Financial Position
The Statement of Financial Position is the not-for-profit balance sheet. It shows the organization’s financial position as of a certain date. This statement includes assets, liabilities, and net assets. Assets and liabilities are classified, meaning separate by current and non-current. Assets are presented by nearness to cash and liabilities are presented by nearness to maturity. An important part of this statement is the net assets section, which is divided into two categories:
- Net assets with donor restrictions: Funds that must be used for specific purposes or during specific time periods due to restrictions made by the donor of the gifts.
- Net assets without donor restrictions: Funds the organization can use freely.
Statement of Activities
The Statement of Activities is similar to an income statement. It reports revenues and expenses, gains and losses over a specific period, and reclassification between classes of net assets. The following are required in the statement of activities:
- Change in total net assets broken down by the change in net assets without donor restrictions and the change in net assets with donor restrictions.
Statement of Functional Expenses
All not-for-profit organizations are required to report information about the functional and natural classifications of their expenses. This can be done as part of the Statement of Activities but is commonly done as a separate statement. Functional classifications for expenses include:
- Program Services – the activities that carry out the Organization’s mission.
- Support Services – everything not classified as a program service. These may include fundraising and administrative expenses.
Most of a not-for-profit organization’s expenses should go toward program services. This ensures resources are being used to fulfill the organization’s mission.
Statement of Cash Flows
The Statement of Cash Flows shows the cash received and spent during a period. It categorizes cash movements into:
- Operating Activities: Day-to-day operations.
- Investing Activities: Buying or selling assets.
- Financing Activities: Borrowing or repaying money.
This statement helps assess whether the organization has enough cash to operate and how well it is managing its funds.
How to Use These Statements
Each financial statement has a unique purpose and provides insights into the organization’s operations:
- Statement of Financial Position: Check the balance between current assets and liabilities to see if the organization can meet its short-term obligations. Review net assets to understand how much of the funds are restricted versus unrestricted.
- Statement of Activities: Look at changes in net assets to evaluate whether the organization is bringing in enough income to support its operations. Identify trends in revenue sources and expense allocation for long-term planning.
- Statement of Functional Expenses: Review how expenses are allocated to ensure the majority are directed toward program services. This is an important measure of accountability and efficiency, especially for donors and grant providers.
- Statement of Cash Flows: Analyze cash flows from operating, investing, and financing activities to understand how cash is being managed. Positive cash flow from operations is a good sign of financial health.
Conclusion
Financial statements provide a clear picture of a not-for-profit organization’s financial health. Regularly reviewing and understanding these reports helps ensure transparency, accountability, and good decision-making. This supports the organization’s mission and builds trust with stakeholders, including donors and board members.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
