Mastering Nonprofit Financial Statements: A Step-by-Step Guide (+ template)

Here's what you need to know about nonprofit financial statements:

1. They're crucial for transparency, compliance, and decision-making
2. There are 4 key statements:
   • Statement of Financial Position
   • Statement of Activities
   • Statement of Cash Flows
   • Statement of Functional Expenses
3. They differ from for-profit statements in focus and categorization
4. Creating them involves collecting data, following GAAP rules, and using the right software
5. Good practices include consistency, clarity, and following IRS guidelines
6. Use them to improve your nonprofit's performance and build donor trust

This guide will walk you through creating each statement, offer best practices, and provide a template to get you started.

Quick Comparison: Nonprofit vs. For-Profit Financial Statements

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Nonprofit vs. For-Profit Financial Statements

Nonprofits and for-profits have different goals, and it shows in their financial statements.

The main difference? Nonprofits focus on mission and accountability. For-profits aim for profit.

Here's a quick comparison:

Nonprofits use fund accounting to track money use. They categorize funds based on donor restrictions. For-profits? They use money as they see fit.

4 Key Nonprofit Financial Statements

1. Statement of Financial Position

Like a balance sheet. Shows what the nonprofit owns and owes.

2. Statement of Activities

Similar to an income statement. Shows revenue and expenses.

3. Statement of Cash Flows

Tracks cash movement in and out of the organization.

4. Statement of Functional Expenses

Unique to nonprofits. Breaks down expenses by program, administration, and fundraising.

For-profits typically use the first three, with different names.

A big difference? How they classify net assets. Nonprofits use two categories:

• Net Assets Without Donor Restrictions
• Net Assets With Donor Restrictions

This shows which funds are free to use and which have specific donor-set purposes.

Nonprofits must follow GAAP and IRS rules. Why? To keep their financial documents clear and trustworthy for donors, lenders, and grantors.

How to Create Nonprofit Financial Statements

Creating nonprofit financial statements doesn't have to be a headache. Here's how to do it:

1. Collect Financial Data

First, gather all your financial records. This includes bank statements, donation records, expense receipts, grant docs, and payroll info.

Pro tip: Use accounting software like QuickBooks or Aplos. It'll make your life WAY easier.

2. Make the Statement of Financial Position

This statement shows what you own and owe. Here's the breakdown:

1. List assets (most liquid first)
2. List liabilities
3. Calculate net assets (assets minus liabilities)

3. Write the Statement of Activities

This one's all about revenue and expenses:

1. List revenue sources
2. List all expenses
3. Calculate the change in net assets

Don't forget to separate items into "with donor restrictions" and "without donor restrictions" categories.

4. Build the Statement of Cash Flows

Track that cash movement:

1. Start with net income from the Statement of Activities
2. Adjust for non-cash items
3. Account for working capital changes
4. Add cash flows from investing and financing

Organize into operating, investing, and financing activities.

5. Prepare the Statement of Functional Expenses

Break down expenses by function:

1. List all expenses
2. Categorize as program, management, or fundraising
3. Calculate totals for each category

6. Review and Finalize

Before you hit submit:

1. Double-check for accuracy
2. Ensure consistency across statements
3. Get a second pair of eyes on it
4. Consider an external audit for extra credibility

And there you have it! You're now ready to create rock-solid nonprofit financial statements.

Good Practices for Financial Reporting

Keep Reporting Methods the Same

Stick to one accounting method. It's that simple. Why? It helps people understand your finances better over time.

Think about it: if you suddenly change how you count expenses, it might look like your costs dropped out of nowhere. That's confusing for everyone.

"Create a financial policies document. Review it yearly. It's your roadmap for consistent accounting."

Make Reports Clear and Open

Clear reports = trust. Here's how to do it:

• Break down big categories
• Use simple words
• Explain complex stuff

Look at this cash breakdown:

Way better than just saying "Cash: $255,000", right?

Follow GAAP and IRS Rules

GAAP and IRS rules aren't optional. They're a MUST. Why?

1. Keeps your reporting accurate
2. Protects your tax-exempt status
3. Makes donors trust you more

GAAP says to split net assets two ways:

1. Without Donor Restrictions
2. With Donor Restrictions

Do it. It's important.

Remember: Form 990 is public. Donors look at it. Get it right.

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Using Financial Statements to Improve Your Nonprofit

Financial statements aren't just boring paperwork. They're powerful tools to boost your nonprofit's performance. Here's how to make them work for you:

Make Better Decisions with Financial Data

Your financial statements are a goldmine of insights. Use them to:

1. Set smart goals

Look at your Statement of Activities. It shows what you've achieved before. Use it to set realistic targets.

Let's say your donor retention was 35% last year. Aim for 40% this year. Check your progress every month to stay on track.

2. Spot trends and act fast

Your Statement of Cash Flows is like a financial weather report. It shows where money flows in and out. Use it to:

• Find donation patterns
• Cut costs when things are slow
• Plan for big expenses

3. Balance your budget

The Statement of Functional Expenses helps you spend wisely. Aim for this mix:

Tweak these based on what your nonprofit needs.

Show Donors Their Impact

Donors want to know their money matters. Here's how to prove it:

1. Make reports crystal clear

Turn complex data into easy-to-get info. Use charts and graphs to show:

• How you use donations
• How well your programs work
• How you've grown year over year

2. Tell stories with numbers

Mix financial data with real impact. Like this:

"We raised 20% more this year. That meant 1,000 extra meals for homeless folks in our city."

3. Be honest about tough times

If money's tight, say so. But also share your plan to fix it. Honesty builds trust.

Build Trust, Raise More

When donors trust you, they give more. Here's how to earn that trust:

1. Keep donors in the loop

Send out financial updates every few months. Include:

• Key numbers (like how much you spend on programs)
• Recent wins
• What's coming up next

2. Show it all on your website

Put a dashboard on your site. Update it monthly with:

• Total donations
• People you've helped
• Progress on your goals

3. Mix numbers and stories

Take a tip from GiveCampus: pair financial data with stories about the people you help. It shows donors their real impact.

4. Ask what donors want to know

Send out surveys. Ask donors what financial info they care about. Then give it to them.

Clear, honest financial reports make donors confident. And confident donors give more.

Financial Statement Template for Nonprofits

Want to simplify your nonprofit's financial reporting? We've got a template that'll do the trick.

Using and Customizing the Template

Our template covers the four key nonprofit financial statements:

1. Statement of Financial Position
2. Statement of Activities
3. Statement of Cash Flows
4. Statement of Functional Expenses

Here's how to use it:

1. Get the template: Download our free template [link to template download].

2. Choose your software: Works with Google Sheets or Excel.

3. Input your data: Replace sample numbers with your org's figures.

4. Adjust as needed: Modify categories to fit your structure.

5. Review thoroughly: Ensure all calculations are correct.

Let's look at each statement:

Statement of Financial Position

Shows what you own and owe:

Statement of Activities

Tracks income and expenses:

Statement of Cash Flows

Displays money movement:

• Cash from operations
• Cash from investments
• Cash from financing

Statement of Functional Expenses

Breaks down costs by function:

Tip: Use this to track expenses by project or location. It'll boost your budgeting game.

Clear financial reports build donor trust. As Jitasa Group puts it:

"Donors rely on this data to make informed decisions about your nonprofit."

Conclusion

Creating and managing nonprofit financial statements isn't just about crunching numbers. It's about telling your organization's financial story accurately and clearly.

Here's what you need to do:

1. Gather your financial data (and make sure it's accurate)
2. Create your four main statements:
   • Statement of Financial Position
   • Statement of Activities
   • Statement of Cash Flows
   • Statement of Functional Expenses
3. Double-check everything
4. Use these statements to guide your decisions

But don't stop there. Keep improving your financial game:

• Stick to consistent reporting methods
• Be clear and transparent
• Follow the rules (GAAP and IRS)
• Regularly check your financial performance
• Plan for the long-term
• Set clear policies
• Use good financial software
• Get better at budgeting
• Do internal audits

Why does all this matter? It's not just about following rules. It's about building trust with your donors and making the most of every dollar to achieve your mission.

As Propel Nonprofits puts it:

"Financial policies clarify the roles, authority, and responsibilities for essential financial management activities and decisions."

In other words: Good financial management helps everyone know what they're supposed to do. And that's key to running a successful nonprofit.

FAQs

How to prepare financial statements for a non-profit organization?

Here's how to prep financial statements for your non-profit:

1. Gather all your financial data

2. Create these key statements:

• Statement of Financial Position
• Statement of Activities
• Statement of Cash Flows
• Statement of Functional Expenses

3. Double-check everything

4. Make sure you're following GAAP and IRS rules

These statements aren't just for the taxman. They're your financial story - use them to make smarter decisions and show donors you're trustworthy.

What are the four basic financial statements for a nonprofit?

Nonprofits use these four financial statements:

Together, these paint a full picture of your nonprofit's financial health.

What do nonprofit financial statements look like?

Nonprofit financials are similar to for-profit ones, with a few twists:

• "Net assets" replaces "equity"
• "Support" or "contributions" often used instead of "revenue"
• Expenses grouped by function (program, management, fundraising)

The Statement of Functional Expenses is unique to nonprofits. It shows how you're spending money to fulfill your mission, broken down by both function and type of expense.

Related posts

• 7 Key Metrics Every Nonprofit Should Track in Their Sponsorship Campaigns
• Donor Acquisition 101: Strategies for Growing Your Sponsor Base
• The Future of Nonprofit Sponsorships: Trends and Predictions
• Donor Stewardship on a Budget: Cost-Effective Strategies for Small Nonprofits