How to Read Non-Profit Financial Statements

Financial statements are easier to understand when you know the terminology.

In order to understand if a non-profit is accomplishing its goals and carefully managing its finances, leaders need to be able to read financial statements. A financial statement has several sections including a statement of activities and a statement of financial position. The purpose of the financial statement is to allow board members and leaders of the organization to analyze how funds are being spent and allocated, as well as to ensure there is enough money coming into the organization to sustain it.

Instructions

1. Review the statement of activities. The statement of activities is what a non-profit uses instead of an income statement (used by for-profit corporations) to focus on the total organization versus just its funds. The statement of activities includes revenues, which are generated by contributions, program fees, grants, investment income and membership dues where applicable. Expenses are also listed, and are categorized into fundraising efforts, major programs, management and general administration. Subtracting expenses from revenues shows the change in net assets.

2. Review the statement of financial position. The statement of financial position differs from the statement of activities in that it presents the total of the assets and liabilities of the nonprofit. An example of an asset that would be included in the statement of financial position would be cash or assets that are part of an endowment, where there are restrictions on the use of funds. Generally this section of a financial statement lists the assets as "unrestricted net assets," "temporarily restricted net assets," and "permanently restricted net assets."

3. Perform a break-even analysis to compare the statement of activities and financial position statement. This is where you calculate the amount of sales and revenue that is required for your organization to be solvent. Looking at fixed and variable expenses, you can determine if there are areas where costs can be reduced. Knowing the amount of revenue necessary for your non-profit's operation allows to structure your fundraising goals and activities to generate funds from donors and grantmaking organizations.

References

• All About Financial Management in Nonprofits
• Nonprofits Assistance Fund: Financial Management Resources