How to Read Your Nonprofit’s Financial Statements - dummies

How to Read Your Nonprofit’s Financial Statements

By Stan Hutton, Frances Phillips

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 and your board members to understand how to interpret them.

Nonprofit financial statements include two important substatements:

  • The statement of financial 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 basic formula at the heart of this statement is Assets – Liabilities = Equity.

  • 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. The basic formula at the heart of this statement is Revenues – Expenses = Income. Statements of activities divide an organization’s income and expenses into three categories:

    • Unrestricted funds were available 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, subject to applicable state laws), but the amounts donated as permanently restricted gifts shouldn’t be spent on current activities.

    The statement of activities also contains a statement of functional expenses, 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 the board accepts the responsibility of providing fiscal oversight.

If your board lacks members with financial expertise, your board orientation could include training on reviewing and understanding nonprofit financial statements. BoardSource and other nonprofit service organizations also can help board members understand what they’re reviewing and what questions they should ask to ensure financial integrity.