Even though nonprofit organizations don’t earn profits or pay taxes, they still need to prepare financial statements. These documents help organizations meet their financial accountability and transparency requirements under state and federal law. They also help nonprofits understand their performance and make decisions based on that information.
While some nonprofit financial statements are similar to what for-profit businesses file, there are also some key differences. Here’s a look at five essential financial documents for nonprofits, what each statement is designed to show, plus an example of a nonprofit financial statement.
Nonprofit Financial Reporting and Tax-Exempt Status
The Internal Revenue Service (IRS) is responsible for determining the tax-exempt status of a nonprofit organization. To maintain your IRS 501(c)(3) status, you are required to submit four financial statements to the IRS each year: a balance sheet, income statement, statement of cash flows, and statement of functional expenses.
Many nonprofits will also share these financial statements with their donors, and use them in their annual reports. Financial statements give donors a better understanding of how your organization is doing. Foundations also typically require nonprofits to provide financial statements when they apply for grants.
5 Most Important Nonprofit Financial Documents
Here’s a look at five key financial statements for profits. Three of these reports are similar to for-profit business financial statements. One of the statements (the functional expenses statement) is entirely unique to nonprofits.
1. Nonprofit Statement of Financial Position
Similar to the balance sheet of a for-profit entity, the statement of financial position is the financial statement that gives the most insight about the overall financial health of a nonprofit.
With for-profit organizations, the balance sheet equation is: assets = liabilities + owner’s equity.
As a nonprofit organization, you do not have owner’s equity because you are not a publicly-traded company, so the equation is slightly different. It looks like this:
Assets = Liabilities + Net Assets
Here’s a closer look at each component of a nonprofit balance sheet.
Assets
A nonprofit’s assets are what the organization owns. It includes items like your cash assets, accounts receivable, property and equipment investments, long-term receivables, and prepaid expenses. It also includes intangible assets, such as copyrights, trademarks, or patents, that your nonprofit owns.
Assets are listed in order of liquidity, or their ability to be converted into cash. For example, cash is already a liquid asset, so it’s listed first in the assets section. Investments in property and equipment, on the other hand, would need to be sold to become liquid, making it challenging to use them for operating expenses.
Liabilities
This is where you’ll list the things your nonprofit owes, such as your accounts payable, grants payable (if you give grants to other organizations), debt, and other expenses.
While assets are organized by liquidity, liabilities are usually organized by due date. Short-term liabilities (owed within the year) are labeled as “current liabilities,” while obligations that can be paid over multiple years are considered “long-term liabilities.”
Net Assets
A nonprofit’s net assets are its assets minus its liabilities, or, in other words, any assets left over after liabilities are taken out.
Total Assets – Total Liabilities = Net Assets
However, because some money received may have been given for a very specific purpose, net assets needs to be broken down into the following three categories:
1. Without Donor Restrictions (funds that can be used for any purpose)
2. With Donor Restrictions (funds that can only be used for a specific purpose)
3. With Temporary Donor Restrictions (funds that are free to be used for other purposes so long as the original purpose was fulfilled or the time for it has come and gone)
Understanding a nonprofit’s net assets is pivotal to both short- and long-term planning. This is because it’s possible for a nonprofit to have plenty of money, yet still struggle month to month. For example, it may have run a very successful fundraising campaign, but if it pledged that money to one specific mission or purpose, then that money cannot be used for things like rent, salaries, or utilities, even if it is sorely needed.
What Does the Statement of Financial Position Tell You?
A nonprofit’s statement of financial position can tell you how well the organization is performing financially at a given moment in time. Generally, a healthy nonprofit will have assets that are greater than their liabilities, and their net assets will have a large surplus that can be used to achieve its future goals.
The statement of financial position also gives board members, donors, and foundations a clear view of your organization’s available cash and where you are as compared to past years.
Keep in mind, though, that this report is more accurate and helpful if your organization uses an accrual method of accounting, rather than the cash method. Accrual accounting allows nonprofits to record revenue when earned and expenses when incurred rather than when the money actually enters or leaves the account (which is how cash accounting works). As a result, it can provide a more accurate statement about when financial changes occurred, and a more accurate nonprofit balance sheet.
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2. Income Statement (Statement of Activities)
For nonprofits, income statements are often referred to as statements of activities. Like a for-profit company’s income statement, a statement of activities shows all of the financial activity that has taken place in your organization and the financial result of your work.
In contrast to the balance sheet, which is a picture at a single point in time, nonprofit income statements show financial activity over a period of time (usually a quarter or year).
The basic equation is:
Revenues – Expenses = Change in Net Assets
Here’s a look at each component:
• Revenues This includes all flows of cash into your organization, such as donations, grants, fundraising, earned revenue, and government funding. To comply with Generally Accepted Accounting Principles (GAAP), you must separate your revenue into at least two categories – restricted revenue and unrestricted revenue.
• Expenses This section reports all cash that flows out of your organization, including the cost of programs, fundraising, and overhead.
• Change in Net Assets This is your nonprofit’s “bottom line.” In the for-profit world, they call the difference between revenues and expenses net income (or profit). But a nonprofit calls the difference between revenue and expenses change in net assets. This is your surplus, or funds available to continue operations.
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3. Cash Flow Statement
A nonprofit’s cash flow statement provides information on how cash flows in and out of an organization on a regular basis. Typically pulled on a monthly basis, this report provides insight into the specific activities that are bringing funds into the organization, and how those funds are being spent.
Like a for-profit cash flow statement, a nonprofit cash flow statement is divided into:
• Operating activities This includes revenues and expenses from operating your nonprofit (such as the cost to pay salaries and buy office supplies) and revenue from contributions.
• Investing activities This includes things like interest earned on investments, the purchase of long-term investments, and payments on long-term investments (such as buildings, land, or equipment).
• Financing activities This includes earnings and expenses from financial activities, such as interest earned from savings or interest or fees paid on loans.
The above breakdown allows you to see exactly where your nonprofit has extra cash, and where your organization may be spending too much cash.
4. Functional Expenses Statement
Unique to nonprofits, this statement shows how expenses are incurred for each functional area of the business. Functional areas of the organization often include programs, fundraising, and management. The expenses listed in this statement are broken down further into exact expenses, including salaries, events, and administrative costs.
One of the reasons nonprofits track expenses is to report on the percentage of its funds that go toward programs compared to funds spent on administration costs, such as employee salaries. Donors often want to see how expenses are being distributed. The IRS also asks for some of the information in this statement when you file your Form 990.
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5. Annual Report
An annual report is a document sent to your donor base letting them know how your organization has grown and changed over the past year. These reports are typically designed to highlight the organization’s major accomplishments, thank both donors and volunteers, as well as (hopefully) inspire other potential donors to contribute to your nonprofit’s success.
Nonprofit annual report often include:
• Financial statements
• Accomplishments
• Impact stories
• Mission statements
• Donor spotlights (such as major donors and recurring donors)
Though nonprofits are not required to create an annual report, many organizations compile and release one every year, as it can be an invaluable fundraising tool.
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Example of Financial Position Document
Here’s an example of a fictional nonprofit organization’s financial statement (a.k.a. nonprofit balance sheet).
| Assets | 2023 | 2024 |
|---|---|---|
| Cash | $300,000 | $250,000 |
| Accounts /Contributions Receivable | $25,000 | $30,000 |
| Property | $60,000 | $50,000 |
| Prepaid expenses | $2,000 | $2,000 |
| Prepaid expenses | $2,000 | $2,000 |
| Total Assets | $387,000 | $332,000 |
| Liabilities | ||
| Accounts payable | $95,000 | $115,000 |
| Short-term debt | $30,000 | $20,000 |
| Total Liabilities | $125,000 | $135,000 |
| Net Assets | ||
| Without Donor Restrictions | $100,000 | $90,000 |
| With Donor Restrictions | $60,000 | $50,000 |
| Total Net Assets | $160,000 | $140,000 |
| Total Liabilities and Net Assets | $285,000 | $275,000 |
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The Takeaway
Nonprofit organizations are required to file financial statements with the IRS to follow compliance laws. However, that is not the only reason why you would want to compile these reports. Preparing detailed financial statements can give you important insights into your organization. It also provides transparency to donors and, in turn, opens up opportunities to solicit significant gifts. You’ll also need financial statements if your organization ever decides to take out a loan from a bank or online lender.
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FAQ
Are nonprofit financial statements available to the public?
All nonprofits with gross receipts above $50,000 are required to file an IRS Form 990. This form includes a nonprofit’s figures for revenue, expenses, assets, and liabilities, as well as the salaries of the directors, officers, and executives of the corporation. An organization’s 990 form is publicly available and may be found on their website or on a nonprofit database such as GuideStar.
What is a nonprofit income statement called?
A nonprofit’s version of an income statement is called a statement of activities.
How do you prepare a nonprofit balance sheet?
For a nonprofit balance sheet, you use the equation: Assets = Liabilities + Net Assets (instead of Owner’s Equity).
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