What are the Most Important Nonprofit Financial Statements

Nonprofits are required to provide an analysis of their expenses by nature and function. They can choose to do this on the face of their Statement of Activities, as a schedule in the notes attached to the full set of documents, or in a separate financial statement—the Statement of Functional Expenses. The administrative cost ratio examines the proportion of total expenses used for administrative support, including salaries, office expenses, and general management. This metric helps determine whether the nonprofit is balancing mission-driven spending with necessary operational support.

Why do nonprofits need financial statements?

• The Statement of Financial Position, also known as the balance sheet, provides an overview of an organization’s assets, liabilities, and net assets at a specific point in time.
• The Statement of Cash Flows shows the cash inflows and outflows from operating, investing, and financing activities of a nonprofit organization over a specific period.
• A nonprofit financial statement summarizes financial information for a given year.
• Reviewed financial statements involve limited procedures for moderate assurance, while compiled financial statements are prepared based on information provided by the organization without any assurance.
• Regular financial education sessions and collaboration with nonprofit finance professionals can further enhance governance and decision-making.
• Its purpose is to provide detailed information about your organization’s transactions, showing how your expense allocation and revenue generation further your mission.

The key components of nonprofit financial statements include the Statement of Activities (Income Statement), Statement of Financial Position (Balance Sheet), Statement of Functional Expenses, and Statement of Cash Flow. To comprehend financial reviews for nonprofit organizations, it is crucial to first grasp the concept of reviews and compilations in the broader context of financial statement services. The Leukemia & Lymphoma Society (LLS) shares its audited financial statements for the past five years on its website. Each report comes with a note from the independent auditor stating that they conducted the audit according to the Generally Accepted Auditing Standards (GAAS) to ensure that each document is free from any misstatement. While assembling your nonprofit financial statements can seem like a mundane checkbox to mark off every year, they can be highly useful resources for refining your budget, enhancing your fundraising results, and more. The best way to create financial statements is to prepare them within your accounting software.

Common Challenges in Nonprofit Financial Reporting

Both nonprofits and for-profits generate financial statements, but they Top Benefits of Accounting Services for Nonprofit Organizations You Should Know have different names and details. Clear financial reporting helps maintain transparency and trust with stakeholders, reducing reputational risk. The components of a non-profit income statement include revenue, expenses, gains, and losses. For-profit businesses use off-the-shelf accounting software, a one-size-fits-all solution. However, this does not meet the nonprofit fund and functional accounting requirements. Remember, you must take an extra step to export all your data into spreadsheets to generate financials.

State Law Nonprofit Audit Requirements

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Prepare for audits

• The Leukemia & Lymphoma Society (LLS) shares its audited financial statements for the past five years on its website.
• Conversely, a negative change in net assets highlights that expenses were higher than revenue, signaling potential financial challenges that may require adjustment in budgeting or fundraising efforts.
• Audit procedures involve selectively examining evidence, and upon completion, the CPA issues an opinion that can be categorized as “unqualified,” “qualified,” “disclaimer of opinion,” or “adverse,” depending on the findings.
• And secondly, if you fail to file a 990 for 3 consecutive years, you’ll automatically lose your tax-exempt status.
• For nonprofits, the accounting methods differ in accountability and compliance.
• It guides the way, showing where the organization is going and what obstacles might be ahead.
• YPTC is not a CPA firm, and provides no attestation services with regard to financial reports.

In addition to these statements, nonprofit financial reporting may also include notes to the financial statements. These notes provide additional information and explanations about specific items in the financial statements, significant accounting policies, and other disclosures. It’s important to note that nonprofit financial statements are not just for internal use.

Audited financial statements for nonprofits are comprehensive financial records that have been examined and verified by an independent auditor. They ensure the accuracy, completeness, and compliance of the financial information with accounting standards and regulations. By assessing risk carefully and developing a plan for addressing it, nonprofits can help protect against errors or misstatements while also maintaining their reputation with donors who trust them with their donations.

• Budgeting is also complicated when sources of support are not secured at the time the budget is prepared for the upcoming year.
• To avoid this, nonprofits should ensure proper categorization of unrestricted, temporarily restricted, and permanently restricted funds.
• It gives insight into the organization’s financial performance and whether it is generating enough revenue to cover its expenses.
• Using two columns provides immediate transparency regarding which assets are both current and without restriction.
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• This content may include information about products, features, and/or services that may only be available through SoFi’s affiliates and is intended to be educational in nature.
• A compilation involves the preparation of financial statements by a CPA based on information provided by the nonprofit organization’s management.

Common Financial Metrics and Ratios for Nonprofits

Financial transparency is the backbone of every successful nonprofit organization. So it’s very important that you learn to read the IRS 990 and understand what it says about the financial health and governance of your organization. The Statement of Activities summarizes the money you’ve received (revenues) and the money you’ve spent (expenses) during a given period. If a grant-maker or a donor gives you money that is dedicated for specific programs, or that you need to use by a specific date, it’s still an asset. It is completely ok and acceptable to have multiple versions of your financial reports. The key here is to make sure the information is presented in an accurate and useful way.