Effective financial management equips you to make the most of your nonprofit’s limited resources. To produce meaningful reports to help you do this, you must track all financial activity and ideally compare it to your budget, or your financial representation of what you think you’ll pursue during the year.Â
There are four core reports, known as financial statements, that nonprofits should create to review financial data and activities. Let’s take a closer look at each of these documents and how your nonprofit can compile them.
Four Main Financial Statements for Nonprofits
1. Statement of Activities
The Statement of Activities, similar to the for-profit income statement, details a nonprofit’s revenue sources and expenses. This document subtracts total expenses from total revenue to let you know if your organization is bringing in more money than it is spending.
While the specific details you record here depend on your nonprofit’s unique financial situation, this report is typically broken down into the following sections:
- Revenue, including your various funding sources, such as monetary donations, in-kind gifts, and grants
- Expenses according to the mission-centric function they serve, including program, administrative, and fundraising costs
- Change in net assets, which is the same thing as net income or loss in for-profit terminology
The line items in your Statement of Activities should reflect your organization’s operating budget for the fiscal year. This allows you to compare your planned versus actual financial activities and evaluate how closely your organization was able to stick to its budget.
2. Statement of Financial Position
The change in net assets calculated in the previous document should be listed in further detail in your Statement of Financial Position. This report, similar to the for-profit balance sheet, lists all your assets and liabilities, such as:
- Assets: Cash and cash equivalents, contributions receivable, prepaid expenses, and property and equipment
- Liabilities: Accounts payable and accrued expenses
When calculating net assets for the Statement of Financial Position, you’ll need to separate restricted net assets from unrestricted net assets. This means distinctly separating net assets with donor restrictions, such as grant funding, from those without donor restrictions to better understand the liquidity of your resources.
3. Statement of Cash Flow
The Statement of Cash Flow details the inflow and outflow of cash, revealing how much cash is available to cover your nonprofit’s expenses. This statement categorizes cash flows according to their sources. For example, it might list cash flows from:
- Operating expenses, which encompasses cash received and paid
- Investing activities, such as equipment purchases
- Financing activities, like loan payments or establishing endowment funds
While the Statement of Activities and Statement of Financial Position are based on data from an entire fiscal year, the Statement of Cash Flow covers transactions on a regular basis, meaning it can be created monthly.
4. Statement of Functional Expenses
The Statement of Functional Expenses reports in detail on your nonprofit’s expenditures. This document is a requirement for annual audits and categorizes your nonprofit’s costs based on their function according to your mission.
There are typically three categories these expenses could fall under:
- Program (or cause-related) expenses, such as the costs an animal shelter incurs while administering medical treatment to rescued animals
- Administration, which includes your day-to-day costs, like salaries and paying for office supplies
- Fundraising costs, like the cost of buying fundraising software or marketing a specific campaign
If your nonprofit is required to file the full Form 990 each year or if you have an audit requirement, you’ll need to create a Statement of Functional Expenses.
How to Create Nonprofit Financial Statements
When the time comes to compile your financial data into organized reports, there are a few steps you must follow:
1. Gather Financial Data
Collect all your nonprofit’s essential financial information, including:
- Income
- Expenses
- Assets
- Liabilities
- Details on restrictions
This data should ideally already be stored and readily available in your accounting software. Your bookkeeping practices throughout the fiscal year matter. An organized record-keeping system ensures your nonprofit can easily access key financial data when the time comes to compile your financial statements.
2. Compile Data in a Financial Statement Template
After compiling your data, organize it into the proper financial statements using the explanation of each statement discussed in this guide. If you are using fund accounting software built for nonprofits, these reports will be native in your system. You can run them with just a few clicks, and easily add columns for budget to actual, balances, and activity year-over-year.
If your accounting software doesn’t include these reports, there are templates available to help you create them, such as the Statement of Activities template in the Chazin & Company’s nonprofit accounting guide.
Keep in mind that even with a template, your nonprofit will need to customize its financial statements to match your unique data. For example, you’ll need to add line items to the above template to account for your nonprofit’s unique revenue sources.
3. Consult a Professional Accountant
Gathering data and properly categorizing it in each financial statement can be time-consuming, especially if you’ve never done it before. Because staffing is a common issue for nonprofits, and many don’t have in-house accountants, outsourcing the task can streamline the process and ensure your financial statements are accurate.
Consider hiring a professional accountant to help your team organize its data or relieve your nonprofit of the task altogether. When researching accountants, look for one with:
- Nonprofit-specific expertise: You’ll need an accountant who knows the ins and outs of nonprofit finances, such as donor-restricted funds and grant reporting.
- Familiarity with compliance requirements: A professional who knows the relevant compliance requirements will keep those regulations in mind while creating compliant financial reports.
- Ample experience: Years of experience in nonprofit accounting signals a professional’s familiarity with the process. Hiring an accountant with plenty of experience means they’ll be equipped to streamline the process and handle any hiccups your organization may face.
While a nonprofit accountant can be helpful for financial statement preparation, they can also support your financial activity on an ongoing basis. From budget assistance to audit preparation to grant tracking, a professional can take over many of the complex tasks associated with your nonprofit’s finances to relieve the burden from your staff and ensure you maintain compliance.
Your nonprofit’s financial statements are only as accurate as the financial data you input. To produce effective financial statements, reconcile your accounts and review your data throughout the fiscal year to catch errors before compiling reports. Put in the effort to organize your financial data and improve your nonprofit’s approach to accounting now to make financial statements a breeze when it’s time to create them.
Having the right fund accounting software with sub-fund capabilities makes creating these reports simple and easy. Check out the Blackbaud Financial Edge NXT on-demand product tour to learn more.
