Accounting reports help you draw valuable insights about your organization’s finances. Learn more about these three key statements and what they’re used for.
By Jon Osterburg
When your nonprofit compiles your annual/impact report at the end of the year, you include some information about your fundraising revenue and other financial information. This transparency helps build stronger relationships with your donors who want to be sure you’re using their contributions in an ethical and effective way.
However, throughout the year, your nonprofit pulls several additional internal reports that also serve that same purpose: ensuring your organization is using finances effectively and efficiently to support your cause.
Effective financial management requires your nonprofit to keep an eye on how your nonprofit earns, manages, and allocates its funding.
The reports you create internally will help you analyze your own financial performance, ensure effective management, and draw conclusions that you can use to continually improve and grow. In this guide, we’ll cover which financial statements will help your organization to:
- Review and categorize revenue and expenses.
- See how cash flows in and out of your nonprofit.
- Measure the health of your nonprofit.
When you have effective financial management throughout the entire year, your nonprofit will be better suited to report back to your supporters with strong financial information in your annual/impact report. Let’s dive in.
1. Review and categorize revenue and expenses.
You should never feel like your finances are getting away from you. By planning out your finances ahead of time in an effective budget, you’ll be better prepared to fund your various programs and spend the money necessary to create impactful fundraising campaigns.
However, after the financial planning stage is done, your organization needs a way to review your progress, ensuring your revenue and expenses throughout the year are in line with your organization’s overarching budget.
If your spending is significantly under budget, it might be a great opportunity to provide expansion opportunities like event discounts to entice new supporters to get involved. If your spending is over budget, it might be time to cut back on some expenses to get back on track or to look for new ways to secure additional funding.
Whatever you choose to do, be sure it helps maximize your organization’s activities and keeps you on track. Failing to accurately track your revenue and expenses can lead to unexplained expenses and waste, which you never want to report back to your supporters. You’d rather show them all your accomplishments in your annual/impact report.
The statement you’ll use to review and categorize your revenue and expenses will be your nonprofit statement of activities.
Statement of Activities
Your nonprofit statement of activities provides a detailed view of your revenue and expenses. This important report is split into two sections:
- Revenue: This section is further divided into the sources of revenue your organization received. This may include the following:
- Cash contributions
- Program fees
- Donated non-monetary materials
- Investment returns
- Expenses: Your expenses are generally broken down into three main categories. These categories also happen to be the same ones used on your nonprofit’s annual Form 990, making this a great resource while you file. The categories include:
- Program services
- General and administrative
The revenue section of this report is split into restricted and unrestricted funds so your organization can separate the two. If you have an endowment fund of $50,000 for a scholarship, you won’t be able to use that money to fund your next fundraiser. Therefore, it should be kept separate.
At the end of this statement, you’ll see a section that shows your organization’s net assets. This too is split into restricted and unrestricted funds so your organization can see your net unrestricted assets, restricted assets, and total assets.
2. See how cash flows in and out of your nonprofit.
Your nonprofit has regular expenses to pay. You need to pay your staff members on time, pay your bills, make rent, and continue funding your mission. However, your cash flow tends to fluctuate throughout the year.
For example, some studies show that nonprofits bring in less than 5% of their annual fundraising revenue during July and August. While you’re not bringing as much money in, your organization still needs to keep up with your monthly expenses! After all, you never want to miss a bill payment or have to delay a paycheck to your staff members (compensation experts would cringe at the very idea).
It’s much better to have an understanding of when you’ll raise the most, when you might have some slowdowns, and when expenses may fluctuate throughout the year. That way, you can plan ahead for slowdowns.
The accounting report that will help you keep an eye on how cash moves at your organization is your nonprofit statement of cash flows.
Statement of Cash Flows
Your nonprofit statement of cash flows is designed to show your team how cash flows in and flows out of your organization regularly.
This report is organized into three distinct sections, each of which shows both revenue and expenses within that category. The three sections include:
- Operating activities. Operating activities will include the revenue your organization receives from contracts and contributions and expenses such as employee compensation and monthly rent costs.
- Investing activities. Nonprofits can invest their funds! If you invest in property, equipment, or even stock, the details of these investments are included in this section.
- Financing activities. Any money owed on credit cards or loans should be recorded in your organization’s financing activities.
Your nonprofit can choose to either use the direct or indirect method of reviewing your cash flows.
The direct method tends to be more time-consuming, but also more accurate than the indirect method. It also doesn’t take appreciation or depreciation into account but uses the actual transactions made by your organization. More common is the indirect method, which uses your organization’s net income as a basis, then calculates net assets and liabilities to determine cash flows.
3. Measure the health of your nonprofit.
Do you know if your nonprofit is financially healthy? You might think it is, but how can you know for sure?
Financial health is important to understand with a high level of certainty because this is what you review before determining if it’s a good idea to invest in growth initiatives. If your nonprofit is healthy and in a good financial position, you might decide to:
- Launch a new program
- Hire additional team members
- Invest in external data to expand your donor acquisition processes
Meanwhile, if you find that your organization is in a less healthy spot, you might instead decide to cut back on expenses where possible and consider new and efficient ways to increase your revenue.
No matter the outcome, you’ll take action depending on the financial health that is clearly defined and determined based on hard metrics. The report you’ll use to accurately reflect on the financial health of your nonprofit is your statement of financial position.
Statement of Financial Position
Your nonprofit’s statement of financial position lists your organization’s assets, liabilities, and net assets in a single document for your organization to review.
Your organization’s assets will include line items like:
- Cash on hand
- Accounts receivable
- Property and investments
- Prepaid expenses
These assets are listed in the order of most liquid to least liquid. For example, your organization’s cash is the most liquid, so it’s usually listed first in this section of the report. Property and investments are less liquid, so they would fall later in this section.
Your organization’s liabilities will include line items like:
- Accounts payable
- Other expenses
Similar to your statement of activities, this document is also listed by restricted and unrestricted assets. Therefore, you can calculate things like your net assets with and without restrictions (usually located at the bottom of the report).
You can also use the metrics in this report to pull other information such as your organization’s months of cash on hand and months of unrestricted net assets. These show you how many months of expenses your organization has covered given your assets.
Your statement of financial position is a helpful document to develop presentations for stakeholders and board members because it can help you build a case for growth and expansion in your organization’s strategic plan.
When your nonprofit has a concrete understanding of how you’re using your financial resources, you can communicate that information back to your supporters and increase their trust in your organization. While these three core accounting reports will be used internally, they can help you provide material for your annual/impact report and help your nonprofit reach new heights.
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to nonprofit organizations.