Without an adequate understanding of the basic financial statements, nonprofit board members will struggle to make informed financial decisions that will significantly impact the organization’s operation. Plus, they will run the risk of misappropriating funds, leading to poor program implementation and management. Therefore, to maintain a healthy financial outlook, nonprofit boards must become familiar with financial statements to prevent bad financial management and build a thriving organization. In today’s podcast, Melisa Galasso From Galasso Learning Solutions and Stephen Halasnik from Financing Solutions discuss the importance of financial statement knowledge for nonprofit board members.
The Importance of Nonprofit Financial Statements Knowledge for Nonprofit Board Members
A nonprofit financial statement is a written record showing its financial activities and position over a specified period. A financial statement is very important in the management and operation of nonprofits because it provides comprehensive information about the financial status, performance, and changes in the organization’s financial position.
Moreover, it’s useful in making critical decisions concerning nonprofits, especially regarding financial decisions. As a result, financial statements should be made so that nonprofit board members can understand them and make a sound financial contribution during the budgeting process.
What Are Nonprofit Financial Statements?
Every organization that deals with money inflow and outflow must have financial records that account for these activities to have a clear view of their financial position. For nonprofits, the financial statements show a snapshot of the organization’s financial health. In other words, the financial statements help nonprofits measure their assets and liability to know whether the organization is growing.
Further, the financial statements help nonprofits board manage their financial resources and guide them through making informed decisions that will affect the bottom line. In addition, they provide the basis for board members to ask critical questions that will benefit the organization in the long term. For instance, it helps the nonprofit board understand how the organization is primarily funded and whether the funding sources are growing or shrinking. Plus, it helps throw light on how nonprofits can use the money realized to impact their communities.
What Financial Documents Does a Nonprofit Use
Board members of nonprofits should strive to know the following financial documents for them to make an effective decision:
- Balance sheet
- Statement of activities
- Statement of functional expenses
- Statement of cash flows
Balance sheet or statement of financial purpose
The balance provides an overview of your nonprofit’s finances, including assets and liability. Typically, a balance sheet is prepared at the end of the fiscal year. The asset section of the balance sheet includes items like cash on hand, account receivable, depreciable furnishings or equipment, prepaid expenses, and more. Additionally, assets are listed in order of the amount of time that it would take to be converted into cash. So, for example, cash is already liquid, so it comes first on the list.
Meanwhile, liability is concerned with account payable and grant due, among others. The liability section shows what your nonprofit owes, for example, loans, a line of credit, and more. This is where you itemize expenses owed to your employees, contractors, and any debt your nonprofit owes other organizations. You determine your net assets after you have subtracted your liabilities from your assets.
The account equation (Assets = Liabilities + Equity) shows that your nonprofit has enough money or cash equivalent to equal its outstanding debts.
Statement of activities or income statement
This aspect of the financial statements captures how your nonprofit net assets change over time. In other words, it shows whether your revenue increases or decreases as you make expenses. The income statement is also known as the profit and loss statement. And it summarizes all your nonprofit’s income and expenses over a given period.
The knowledge of income statements or the statement of activities is important for nonprofit board members because it shows how the organization’s financial performance is over a specified period. It contains all revenue and expenses for a set period so that members will know how money comes in and goes out.
From the income statement, you can determine whether your nonprofit is generating profit if it spends more than it gets when costs are highest and lowest, and how much it’s using for recurrent and capital expenditure. In addition, an income statement helps you to know how well your organization is doing concerning expected performance so that you’ll use the understanding to make a decision.
Statement of functional activities
This aspect of the nonprofit financial statement accounts for program, administrative, and fundraising expenses. Plus, it lists expenses such as salaries and benefits, rent, and utilities.
The essence of the statement of functional activities is to ensure that the management of a nonprofit strike a balance between funding programs and staff remunerations. In other words, administrative expenses shouldn’t be more than program financing. And administrative expenses shouldn’t be cut down so that you can not attract competent, qualified staff. Statement of functional activities ensures that costs are properly allocated for the efficient operation of nonprofit organizations.
Statement of cash flows
The cash flow statement provides a snapshot of money inflow and outflow over a given period ranging from one year, a quarter, or a month.
As one of the four major nonprofit financial statements, it measures how a nonprofit manages its financial resources. In other words, it tells how your organization generates funds to pay its debt obligation and finance its operating expenses.
Learn About Our Guest
Melisa is the CEO of Galasso Learning Solutions. Melisa founded GLS in 2016 to combine her passions for technical accounting and public speaking while making a difference in the profession. Melisa loves practical learning, engaged audiences, and interactive sessions that leverage the best of adult learning theory. Melisa is the author of Money Matters for Nonprofits: How Board Members Can Harness the Power of Financial Statements by Understanding Basic Accounting.
Learn About Stephen Halasnik
Stephen Halasnik is the host of the popular Nonprofit MBA Podcast. The Nonprofit MBA podcast’s purpose is to help nonprofit leaders and their teams. Stephen is the Co-founder and Managing Partner of Financing Solutions, a leading provider of loans for nonprofits in the form of a Line of Credit. Stephen is a best-selling Amazon author and is considered a leading authority on building great, purpose-driven businesses.
Stephen lives in New Jersey, and his top life mission is to raise his two sons, Michael and Maxwell, to be good men.