How to Read Your Nonprofit’s Financial Statements
Audited or not, prepared by you or by a bookkeeper or accountant, your nonprofit organization needs to produce financial statements, and it’s critically important for you to understand how to interpret them.
Nonprofit financial statements include two important substatements:
The statement of position (also called a balance sheet) provides an overview of what an organization is worth. It outlines how much money is available in bank accounts and other investments; the value of property, furniture, and equipment; immediate bills; and other debts and liabilities.
The statement of activities outlines Revenues, Gains, and Supports and Expenses and Other Losses, which tell you how much money the organization received in the past year, its sources for that income, and how it spent that income. Statements of activities divide an organization’s income and expenses into three categories:
Unrestricted funds were available to the organization to spend in the fiscal year covered by the statement.
Temporarily restricted funds were promised or awarded in the year covered by the statement but they were given to the organization for it to spend in the future or for a specific task that isn’t yet complete.
Permanently restricted funds were given to the organization for permanent investments — such as endowments. Earnings on such money may be used toward the organization’s costs (your board will set a policy about how much of these earnings may be used), but the amounts donated as restricted gifts shouldn’t be spent on current activities.
The statement of activities also contains a statement of functional expense, which details expenses spent on programs and those expenses that were exclusively for general and administrative costs and for fundraising costs.
Many staff and board members are drawn to nonprofit organizations because they’re knowledgeable about the services they provide, but their eyes glaze over when they’re faced with financial statements. This lack of interest in finances is understandable but can be dangerous: The board and staff are stewards of the organization’s resources, and they’re responsible for its financial health.