The Language of Nonprofit Accounting
The word “nonprofit” is self-evident. A nonprofit organization exists to serve the public good, not to make a profit for its stakeholders like a corporation or small business. This significant difference between the two types of organizations means there is different language, different reporting standards, and different best practices.
Profit vs Revenue
There are four standard financial statements for nonprofit organizations:
· Statement of Financial Position
· Statement of Activities
· Statement of Cash Flows
· Statement of Functional Expenses
While there are some parallels between these and for-profit accounting, each of these is unique to the nonprofit sector.
Statement of Financial Position vs Balance Sheet
Some of us may use the phrase “balance sheet” as a shorthand or generic term for this statement, but they are not the same. These statements are similar in that they list the values of all the assets held by the organization and the values of all the debt owed. but the Statement of Financial Position also reports the organization’s net assets, both restricted and unrestricted. These classifications are used to segregate funding based on any restriction(s) imposed by donors.
Statement of Activities vs Income Statement
This statement reports the change in permanently restricted, temporarily restricted, and unrestricted net assets. These changes are usually related to expenditures. An Income Statement, also known as a Profit and Loss Statement shows the company’s profits and losses for a specified period of time.
Statement of Cash Flows
This statement follows the same procedures used by for-profit companies. Simply put, it shows the inflow and outflow of cash. The current cash balance on this report will match the amount listed on the Statement of Financial Position.
Statement of Functional Expenses
This statement will detail the expenses incurred during the reported period and allocated to each program or support service. Program services are considered “direct costs” because they are mission related.
According to the National Councils of Nonprofits, having healthy financial reserves is a positive position for a nonprofit and shows the organization can “sustain itself in spite of very tough times”. As a rule, nonprofits should hold at least three to six months of operating costs in reserve. Two years' worth of operating expenses in the bank is ideal. The amount set aside is unique to each organization and the board of directors is responsible for adopting a “reserve policy.”
The Nonprofit Finance Fund reports that the majority of nonprofits have less than three months of operating reserves on hand. Almost ten percent have less than thirty days reserved funds. This means that many nonprofit organizations are in risky, precarious positions. Cash reserves are more than a “rainy day” fund. They can mean the difference between keeping the doors open or closing down. Our experience during the pandemic has taught us that difficult lesson.
Michelle Crim, CFRE
Dynamic Development Strategies can help. We offer coaching, grant writing, and fundraising services for our nonprofit clients. We specialize in small to mid-size organizations because we understand your challenges. Please contact us for more information.