Edgar de Wit
Non-Profit organizations, just like any organization, must have an overview at all times of their financial position, both actuals and compared to budget.
This is important for budgeting, planning, decision-making, and accountability to the donors.
In order to achieve this, Non-Profit organizations must generate a set of Financial Statements that accurately show their financial performance and position.
Non-Profit organizations also have to deal with funding restrictions. This means they must be able to allocate funds correctly to projects and report how funds has been spent.
In this article, I will explain the five most important Financial Statements and what you should pay attention to when creating these statements.
The Balance Sheet (also referred to as Statement of Financial Position) is the first section in the Financial Statements for Non-Profit organizations and it shows the assets, liabilities, and net assets (also known as equity).
Determining net assets can be a reporting challenge.
A Non-Profit organization must properly allocate its restricted and non-restricted funds and classify that on the Balance Sheet.
The Income Statement is the second section in the Financial Statements and gives insight into income, expenses, and gains and losses.
This statement reports all sources of income such as grants, donations, legacies, and fundraising activities. And of course it reports the expenses, often divided into functional categories like salaries, rent, utilities, and fundraising costs.
The Cash Flow Statement shows how cash has been generated and used during a period of time.
It categorizes cash flow into three activities: operating, investing, and financing activities.
A positive cash flow from operating activities indicates that the organization is generating enough income to cover its operating expenses. A negative cash flow from operating activities may indicate financial difficulties or over-spending.
Investing activities encompass decisions regarding long-term investments in assets or securities.
As Non-Profit organizations rely on donations and grants, strategic decision-making when investing is important to secure long-term prospects and maximize resources.
Financing activities reflect income and expenses from additional funding sources such as loans, leases, or fundraising efforts. This contains interest payments and financial loans.
The third section is the Statement of Functional Expenses and is the most particular one.
This statement categorized expenses to program services, management and general, and fundraising.
Program services refer to costs spent directly on core initiatives and projects.
Management and general expenses encompass overhead costs related to governance and administration functions essential for smooth operations.
The last section is the Statement of Restricted Funds.
Fund tracking is an essential task of Non-Profits organizations to maintain accurate administration and accountability of how funds are being used.
There are three main types of funding:
Unrestricted funding enable Non-Profit organizations to use the funds across all programmes and purposes of the organization. These donations have no explicit restrictions attached.
Donations, legacies, or grants can also be made with specific restrictions on how the funds may be used. For example, a grant given solely for funding research initiatives related to cancer treatment within two years.
These types of restriction necessitate careful administration and planning, and administrative processes to track the funds, both when they are being used, as well as tracking unspent amounts still held in reserve.
Major donors often require a periodic reporting on how their funds are being used. The funding may be restricted or unrestricted, but the donor wants full visibility on the use of their funds.
If there are just a few donors, this type of reporting could possible be done manually with some extra effort. But when there are many donors with multiple restrictions or conditions, a more robust reporting solution is required.
Initially, Excel can be an excellent tool. But if an organization is growing or has many restricted funding, then a solution such as XLReporting is important.
In this article we have explained the five most important Financial Statements.
It is important to be able to generate these timely and effectively. Many Non-Profit organizations still do this with spreadsheets.
But we notice that the increased pressure of public scrutiny, regulations, and more complex issues are causing issues, especially for growing Non-Profit organizations.
Many Non-Profit organizations use an online accounting system such as Xero, Quickbooks, or Exact Online. But that is not sufficient to provide all the necessary reports.
That is why Non-Profit organizations are looking for solutions such as XLReporting, which connects to many accounting systems to imports the actuals, and automatically creates these five important Financial Reports.← Back to home