How to Read Nonprofit Financial Statements: What a Leader Should Notice
What are nonprofit financial statements?
Nonprofit financial statements are the four reports that describe an organization’s finances. The statement of financial position shows what it owns and owes on one date. The statement of activities shows revenue, expenses and the change in net assets. The statement of functional expenses splits costs by purpose. The statement of cash flows tracks the cash itself.
Many executive directors open the monthly financials, find the bottom line and close the file. Coaching applications to the Center for Nonprofit Coaching point to one reason: leaders from non-financial backgrounds consistently name finance as a gap, in words like “I need a coach who is an expert in nonprofit management, especially financial management, as this isn’t my area of expertise.” Reading nonprofit financial statements is a leadership skill at the center of managing nonprofit finances.
Key Takeaways
- Read the statement of activities across its columns before the total.
- Restricted grants move the total, so a year can show a deficit while unrestricted results break even.
- Months of cash without donor restrictions tells you more than a surplus.
- Treat the overhead share as a question about how shared costs, your salary included, were split.
- Form 990 is public. Read yours before funders do.
What Are the Four Nonprofit Financial Statements?
The four nonprofit financial statements are the statement of financial position, the statement of activities, the statement of functional expenses and the statement of cash flows. Under a 2016 update from the Financial Accounting Standards Board (FASB), nonprofits report two classes of net assets and show every expense by both purpose and type.
These rules govern statements prepared under generally accepted accounting principles (GAAP). The expense analysis can stand alone, as below, or sit on the statement of activities or in the notes.
Cash-basis reports look simpler and can omit receivables and releases, so ask your bookkeeper for a list of restricted grants.
| Statement | The question it answers | Look first at |
|---|---|---|
| Statement of financial position (balance sheet) | What do we own and owe on this date? | Cash and net assets without donor restrictions |
| Statement of activities (income statement) | What came in, what went out, and how did net assets change? | Each column, before the total |
| Statement of functional expenses | What did programs, administration and fundraising each cost? | How shared costs were split |
| Statement of cash flows | Where did cash come from, and where did it go? | Cash from operating activities |
What Is the Statement of Financial Position?
The statement of financial position, the nonprofit version of a balance sheet, lists what the organization owns (assets), what it owes (liabilities) and the difference (net assets) on one date. Net assets come in two classes, with and without donor restrictions, and only the second can be used for any purpose.
How many months of cash do we hold without donor restrictions? Divide cash available for general spending by one month of expenses. An illustrative $400,000 organization spends about $33,000 a month, so $100,000 covers three months. Since the 2016 update, the notes must also say which financial assets are available for general spending within one year.
What is restricted, and for what? Net assets with donor restrictions belong to purposes or periods that donors chose, and a large figure there can sit beside a thin operating cushion.
What do we owe against what we will collect? Compare receivables (grants and pledges promised but unpaid) with bills and payroll owed. A receivable pays for nothing until the check arrives.
How Do You Read a Statement of Activities?
Read a statement of activities across its columns before you read down to the total. One column shows activity without donor restrictions, one shows activity with donor restrictions, and the total combines them. The line called net assets released from restriction moves grant money between the columns as restrictions are met, which can make the total mislead.
Consider an illustrative youth program with a $400,000 budget, in year two of a two-year, $100,000 foundation grant. The grant had no conditions, so all of it was recorded in year one under FASB’s rules for recording grants. Grants with conditions are recorded as the conditions are met, so ask your accountant how yours are booked. Year two, in round numbers:
| Line | Without donor restrictions | With donor restrictions | Total |
|---|---|---|---|
| Contributions | $280,000 | $20,000 | $300,000 |
| Program fees | $70,000 | – | $70,000 |
| Net assets released from restriction | $50,000 | ($50,000) | – |
| Expenses | ($400,000) | – | ($400,000) |
| Change in net assets | $0 | ($30,000) | ($30,000) |
The total shows a $30,000 deficit, yet the first column shows that spending was covered exactly. The deficit is timing: $50,000 of last year’s grant was spent this year, and only $20,000 of new restricted money arrived.
What Is the Statement of Functional Expenses?
The statement of functional expenses shows every cost twice: by type, such as salaries and rent, and by function, meaning program services, management and general, and fundraising. Nonprofits that follow FASB standards must report this split, and the full Form 990 asks 501(c)(3) filers for the same three columns in Part IX.
In the example, $310,000 went to program services, $60,000 to management and general and $30,000 to fundraising. FASB requires the notes to explain how shared costs were divided. The IRS instructions for Form 990 place the chief executive’s salary in management and general unless part of that time is spent directly supervising programs or fundraising. An executive director who runs a program two days a week and books the whole salary as administration makes overhead look larger than it is.
Resist reading the overhead share as a grade. A 2013 open letter from the heads of the BBB Wise Giving Alliance, GuideStar and Charity Navigator called it “a poor measure of a charity’s performance,” while granting that “at the extremes the overhead ratio can offer insight.” The useful board question is what the shared costs bought.
What Does the Statement of Cash Flows Tell You?
The statement of cash flows shows where cash came from and where it went during the year, in three groups: operating activities, investing activities and financing activities. It explains why an organization can report a surplus and still struggle to make payroll, or report a deficit while its bank balance holds steady.
The usual gap is timing. Revenue is recorded when it is earned or promised, and cash often arrives later. A government contract that reimburses costs after you spend them creates a receivable first and cash months afterward. Look at cash from operating activities first: a negative figure two years running deserves a conversation, even when the statement of activities looks fine.
How Do the Four Statements Fit Together?
The four statements describe the same money from different sides. Follow one grant and it appears as revenue on the statement of activities, net assets and a receivable on the statement of financial position, cash on the statement of cash flows, and program costs on the statement of functional expenses.
Take the same illustrative $100,000 grant, paid $50,000 a year. In year one, the statement of activities records all $100,000 with donor restrictions and releases the $50,000 spent, so the total runs $50,000 ahead of the unrestricted result. The statement of financial position ends the year with $50,000 still restricted and a $50,000 receivable. Cash flows show only the first payment, and functional expenses show $50,000 of program costs.
In year two, the receivable becomes cash, and the last $50,000 is released and spent with no new grant revenue beside it in the total. Net of the $20,000 in new restricted gifts, that produces the $30,000 deficit above.
A surplus in year one and a deficit in year two can be the same grant doing exactly what it was meant to do.
What Should You Ask Your Bookkeeper?
Ask your bookkeeper or treasurer questions that turn each statement into a decision: how many months of cash you hold, what is restricted and when it releases, what you are owed and owe, whether operations covered their costs, and how shared costs were split.
- How many months of expenses does our cash available for general spending cover?
- What makes up net assets with donor restrictions, and when does each release?
- Which receivables are more than 60 days old?
- Are any bills or payroll taxes past due?
- What was the change in net assets without donor restrictions, and how much came from releases?
- Where did revenue differ most from the budget, and why?
- How were shared costs split, including the executive director’s salary?
- What does each program cost in full?
- What does the cash forecast show for the next six months?
- Which grants pay after we spend, and how long do payments take?
Are Nonprofit Financial Statements Public?
Partly. Form 990, the annual return tax-exempt organizations file with the IRS, is public. You must provide copies of each return for three years from the later of its due date or filing date, immediately for in-person requests and within 30 days for written ones. Audited statements are a separate document, and state rules on sharing them vary.
The IRS public disclosure rules allow a reasonable copying fee and keep donor names and addresses on Schedule B private, except for private foundations.
Form 990 and your audited statements will not match line for line. The BBB Wise Giving Alliance notes that Form 990 “was not designed or intended to follow GAAP,” and it shows items an audit leaves out, such as the board roster and leadership pay. Anyone can look up your return on ProPublica Nonprofit Explorer, so read it before it is filed.
How Do You Present the Numbers to Your Board?
Present the numbers to your board as a short story with a decision attached: what happened against the budget, why it happened, and what you propose. Lead with months of cash and the change in net assets without donor restrictions, then explain any restricted grant that moves the total.
Three sentences can carry a monthly report: “We ended the quarter with three months of cash. The deficit on the total comes from spending last year’s grant as planned, and our unrestricted results broke even. We propose holding the new hire until the second grant payment arrives.” For the wider relationship, see managing up to your board.
The Center for Nonprofit Coaching is a coaching organization, not an accounting firm. When a leader needs technical work such as restructuring a chart of accounts, we say so during matching. Coaching works on the leader’s part: noticing what changed, deciding what to ask and saying it to the board plainly. Six sessions will not make anyone an accountant. They help a leader see patterns, which is the focus of one-on-one coaching for executive directors carrying the finances.
This week, find net assets without donor restrictions and compare the figure with the same date last year. Write down one question about the difference for your bookkeeper.
For a thinking partner in that conversation, six coaching sessions cost $300, $400 or $600 for organizations with operating expenses under $250,000, under $500,000 or over $500,000. Volunteer coaches donate their time, which keeps fees 85%+ below market rate. Apply for coaching.
Frequently Asked Questions
What is the difference between audited, reviewed and compiled financial statements?
In an audit, an independent certified public accountant tests the records and gives an opinion on whether the statements are fairly stated. A review checks that they are plausible, with far less testing. A compilation presents management’s numbers with no assurance. Ask your accountant which one your funders require.
What does net assets with donor restrictions mean?
It is the part of net assets that donors limited to a purpose, such as one program, or to a period, such as next year. It moves to net assets without donor restrictions when the restriction is met.
How often should an executive director read the financial statements?
Monthly, with a fuller review each quarter before the board or finance committee meets. A monthly look at cash and the budget variance leaves time to act before the board sees a surprise.
Where can you see example nonprofit financial statements?
Look up a similar organization on ProPublica Nonprofit Explorer, which posts filed Form 990 returns, or find an annual report with audited statements on its website. Your own latest year-end statements are the most useful example, because you know the story behind them.
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