In this blog, we will discuss what to know before your first not-for-profit financial statement and other insights into what this document might contain.
When most people decide that they want to pursue the process of turning their organization into a not-for-profit, accounting is usually not the first thing on their minds. Successful accounting is, however, one of the most important elements in keeping your nonprofit operational. So much of nonprofit cash flow is procured through the process of donor development, grant application, and the awareness of how tax law favors those of us who which to dedicate a service or product to the great good. The reality is that most individuals running a 501C unfortunately are unaware of how these elements can obscure the overview of the actual financial health of their organization. One way to clarify these muddy waters is through the consistent and accurate use of a balance sheet, and how its use can give you insights into your organization’s financial position through this statement.
There are multiple elements of a nonprofit balance sheet that need to be taken into consideration, so let’s review what to know before your first not-for-profit financial statement.
What is a not-for-profit financial statement?
According to the Webster dictionary, a financial statement is “a statement of one’s status with regard to money or wealth”. A little vague I’d agree, but that vagueness could be intentional as financial statements can take many different forms depending on the type of business or individual. For the purposes of this blog, we will be deriving our financial statements from a nonprofit balance sheet, which looks slightly different in its formula than your standard LLC.
For a business, a balance sheet formula looks something like this: assets = liabilities + owner’s equity
For a nonprofit, the balance sheet formula looks something like this: assets = liabilities + net assets
This is one of the first major elements in what to know before your first not-for-profit financial statement, as nonprofit organizations have no owner equity. Now let’s look at the three parts that make up this slightly different equation.
What to know before your first not-for-profit financial statement – Assets
Assets are things that your nonprofit owns. This is a huge range, anything from a massive state-provided grant to the pack of pencils sitting on your co-worker’s desk. Assets provide value to your nonprofit and are best analyzed by their liquidity.
Liquidity is the ease and ability with which something can be converted to cash. The most liquid asset is cash, while less liquid assets include things such as real estate, art, equipment, etc.
It is important to recognize the liquidity in your assets. For example, your nonprofit is hit with a huge expense of 200,000 dollars that needs to be paid off in the next 30 days. Your financial statement reflects that you have 400,000 dollars in assets, but depending on what those assets are can influence if you will have to get a bank involved. If that 400,000 dollars is a cash asset, then there is no issue, but what if that 400,000 is locked up in property? In this circumstance, making the deadline to pay off your organization’s debt might entirely be dependent on the asset class.
What to know before your first not-for-profit financial statement – Liabilities
Liabilities on a balance sheet make up what an organization owes. Similar to assets, this could be a lot of different things, from paying off equipment to mortgages to fees for catering your upcoming gala. Liabilities always have to be considered when looking at the net worth of your organization, and it’s here where balance sheets provide much more than a bank feed.
Liabilities on balance sheets are categorized by the length and format of paying the debt off. For example, paying for custodial services in your office might incur bi-weekly payments, but the mortgage on your property is going to be paid monthly, and unfortunately, that’s not the kind of liability that can be removed from a balance sheet at will when you’re in a pinch. Keeping track of these long-term liabilities on a balance sheet gives you a much better oversight of your finances, and helps prevent missing irregular payments.
What to know before your first not-for-profit financial statement – Net assets
Net assets are where things differ from company balance sheets, and you can’t figure out what your net assets are without first knowing what your assets and liabilities are. That’s because, and you guessed it, your net assets are found simply by subtracting the difference between assets and liabilities. If you’re operating with a healthy margin, then a lot of your net assets may be made up from previous years. Net assets are another important element of how to gauge the financial health of your organization.
One major factor that can change what your net assets include is if any of your assets have donor restrictions applied. These restrictions can be limited to where and when a donation can be used to restricted in perpetuity, which is usually done for the purpose of generating investment income for an organization.
This might mean that a certain allotment of cash assets can only be used towards a certain program and can’t be used to bail out an organization experiencing a financial crisis.
Benefits of a nonprofit financial statement
Having all this financial insight at your fingertips makes a major difference in how programming is developed within your organization. By using your balance sheet, it is possible to analyze the amount of time your organization has on hand to stay afloat with the current assets available. This means that if your organization has six months of assets available after factoring in monthly expenses, your organization has the flexibility to take risks in your programming that might not be advisable with an organization that has two months’ worth of assets to float them. The nonprofit world doesn’t allow for wealth hoarding within organizations, and by having the insights of a financial statement your organization can make more educated decisions on the risk levels it has the ability to navigate with the assets it needs to make available in services. If audits are on your radar, check out MBSATA’s free nonprofit audit-ready checklist.
The best not-for-profit is a financially viable one
Even though the nonprofit industry is not in the business of making money, organizations in this sector still need to prove their financial literacy and prowess in order to win grants and donor money. There is a lot of competition in the nonprofit sector, and proving that your organization is the best at serving its chosen community starts from the ground up of your practices and processes. It’s important to invest time into implementing strategies for financial health, and when you don’t have time to do that you can always reach out to MBSATA. Our experience working with nonprofits separates us from the rest, from audit preparation to bookkeeping catch-up to advisory on the next steps of your organization’s financial success.
Want to learn more about us? Let’s chat.