In this blog, we will discuss how to prepare a not-for-profit financial statement and the elements considered within it.
Many business owners have an idea of what a financial statement is, but fewer understand what preparation goes into producing a financial statement with insights into the health of your organization’s finances. In order to understand the preparation required, we must first revisit what a not-for-profit financial statement is, which we first discussed in our blog “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.
How to prepare for a not-for-profit financial statement – Elements
Every nonprofit financial statement will have three portions to the equation: Assets, Liabilities, and net assets. As a reminder:
Assets are things that your nonprofit owns.
Liabilities on a balance sheet make up what an organization owes.
Net assets are found by subtracting the difference between assets and liabilities.
So how can you keep track of all the elements that make up a financial statement?
There are four key documents to have that will help provide your organization with an in-depth look at your financial position.
How to prepare for a not-for-profit financial statement – Statements
Statement of Activities
A statement of activities is developed by subtracting total revenue from expenses incurred. This statement has a direct relationship with net assets, as depending on whether or not your statement of activities is positive or negative will result in either excess or deficiency in your net assets. Remember, nonprofit organizations have to live within a certain window with their net assets. They have to be categorized as either with or without restrictions, and this needs to be reflected in your statement of activities.
Included within the statement of activities can change in net assets. This document takes a look at the organization overall and attributes changes in net assets to an organization’s programming or internal support. If net assets are deficient, we can label whether a program or individual has any responsibility for the deficiency. The same can be said if there is an excess of net assets.
Statement of Financial Position
This is your balance sheet, a summation of all assets and liabilities. Balance sheets are used to reflect your organization’s financial position at a fixed point in time. This document can also be used to calculate your net worth or net loss, important indicators of your company’s financial standing.
Statement of functional expenses
Used to categorize organizational liabilities, a statement of functional expenses allows board directors to do a more granular assessment of where revenue is being directed. This statement may categorize expenses by administration, programming, fundraising, and more.
This statement is critical for a nonprofit, as it’s a required document in the circumstance of an audit and may ensure that an organization can maintain its 501C status.
Statement of Cash Flow
Managing cash flow is a critical element of your nonprofit, and a statement of cash flow helps manage that by calculating the difference between total cash received and total cash spent. Managing your cash flow ensures that your organization will be able to cover its operating expenses for the calculated period. Cash flow should be broken up into three categories for nonprofits, net cash from operations, investment, and finances.
Once all these statements have been put together, there are a few insights that can be gathered and used to better the financial health of your organization.
Regular outgoing funds – Line items like salaries or wages can be added up and provide a consistent monthly expense that is part of your baseline operating expenses. Fixed operational costs like mortgages or utilities can also be added to this category as they also address your organization’s baseline expenses for the year.
Flexible operating expenses – This category is devoted to line items that you will certainly see on your annual expense document, but their frequency and cost will vary. Items on this list may include equipment, office supplies, or printing services. If you have been tracking flexible expenses for a few years, you can observe previous reports to take an average and develop an estimation of what these costs might be for your current fiscal year.
Accessible versus non-accessible – Your net assets may not be available in their entirety to cover your bottom line, as some donors place restrictions on what donations can be used for. Understanding the true income you have to cover expenses is critical in keeping your organization healthy.
It’s up to you, until it’s not
Developing and implementing all these tracking procedures and statements can be challenging to those uninitiated in the world of accounting. When you’re feeling overwhelmed, MBSATA is here to help. We are experts in the field of nonprofit accounting and would love to learn more about your organization and its goals.
Sound interesting? Let’s chat.