You may have experience with financial statements especially if you have accounting classes, but nonprofits have unique financial statements. The wording and the terminology that is involved in the for-profit world don’t always translate to the nonprofit world. Different terminology is just the beginning. Well-intended citizens with no nonprofit financial management experience who join a board of directors of a nonprofit organization may be overwhelmed and fail to oversee their organization’s financial performance.
So, I’d like to write a bit about how nonprofit financial statements are different and what you need to do to analyze them as a member of the Board of Directors or a person on a committee staff person.
Let’s start with what the nonprofit world calls the statement of financial position. If it was a for-profit corporation, we’d call it a balance sheet. It’s really not all that different. In some ways, it is different, but essentially a picture in time of what the assets of the organization were at that particular point in time both the assets and the liabilities. Those assets and liabilities should be equal. That’s why they call it a balance sheet, but in a nonprofit world, we call it a statement of financial position.
STATEMENT OF ACTIVITIES
In a for-profit world, the next financial statement you might see would be the income statement. It shows the income and the expenses. Some people call it the profit and loss statement. In a non-profit world, it’s called the statement of activities. Again, it’s pretty much the same thing as you would have in a for-profit world, except some of those activities are generating income.
This is going to have a restriction of one type or another. Those restrictions may be temporary restrictions. They may be permanent restrictions. In other words, you might do a fundraiser, and that fundraising activity might be to generate money for a specific project and so the funds that are generated are restricted to be spent on that specific project. Once the project is complete the restriction may be lifted.
A restriction could be permanent or a restriction can be temporary. The statement of activities is essentially the income statement. The profit and loss statement that an organization would have if it was a for-profit organization.
Another financial statement for a non-profit would be the statement of cash flow. Now, this is not necessarily income and expenses. It’s more akin to what a for-profit organization would call the source and use of funds. Some of these funds may not be from income or may not be spent on expenses. They might be from some other source of financing the sale of assets. Borrowing of money. Repayment of loans, gifts. Thus, the source and use of funds in a for-profit world become the statement of cash flows. In the nonprofit world, you often have what we call the statement of functional expenses that don’t really break down into the profit world.
It is unique to the nonprofit world where you may show various activities of the organization. The income from those activities and the expenses can identify what activity of the organization for positive or negative cash flow. You know a negative cash flow is not necessarily a bad thing for an activity within a program. I know of a lot of not-for-profits that’ll run five or six activities during the year. One or two of them will produce nice positive results. Maybe fundraising results and three or four of them might produce negative results because profit is not always measured in dollars. Sometimes it’s measured by the services provided.
Some say I want to work for a not-for-profit organization. I don’t want to worry about trying to balance my balance sheet and trying to come out with more money at the end of the year than I started with. That’s going to be a very short-lived assignment because a not-for-profit is a tax status, not a business plan. Organizations that don’t pay attention to having profits or in the not-for-profit world what we call a positive cash flow those organizations are going to go out of business. You have to find some way to fund your activities either by fundraising or by programs that have positive cash flows. Nonprofit organizations are not exempt from the rules of economics.
The last part of financial statements that you need to pay attention to is what’s called the notes. Interestingly, this is the part that people ignore the most. It’s the part that is the most important. I like to tell people all the really good stuff is hidden in the notes.
I will write about the note and how you analyze financial statements. I’ll take each financial statement and talk about what you want to look at when you look at those statements what you want to find what kind of things tell you whether or not your organization is in good shape or bad shape.