61% of donors claim to choose which nonprofits to support based on how “well” the organization utilizes its funding – Source
Donors and stakeholders want to know that their contributions are being used effectively to further the organization’s mission. To achieve this transparency, nonprofits rely on a variety of financial statements, one of the most crucial being the statement of Financial Position, also known as the balance sheet.
We are here to help mission-centric leaders like you better understand the statement of financial position or balance sheet that your nonprofit organization should be keeping. It provides a snapshot of what your nonprofit owns and owes at a specific point in time, serving as a financial guide for informed decision-making and showcasing your dedication to financial stewardship.
As a nonprofit organization, you do not have owner’s equity, so the balance sheet encompasses
- Net Assets
For a nonprofit balance sheet, you use this equation – assets = liabilities + net assets. Let’s break this down into simpler terms.
Assets encompass the possessions and resources owned by your nonprofit organization. Within this category, you find a diverse range of items, including:
Tangible Assets – These include physical items such as furniture, office supplies, event materials, and equipment used in your programs.
Financial Assets – This category comprises various forms of monetary resources, including cash on hand, donations, general funds, accumulated funds, grants, and special funds such as prize funds or match funds.
Assets are typically arranged in order of liquidity, which reflects their ability to be readily converted into cash.
Cash – This is your Holy Grail, the most liquid asset. It sits atop the list, ready for action whenever you need it.
Near-cash Assets – Right beneath cash, you’ll find near-cash assets like gift cards and grants receivable. Gift cards are like your secret stash of magic spells, and grants receivable are the promises of support yet to be fulfilled.
Long-term Assets – At the base of this financial pyramid stand your long-term assets. They’re like the steadfast guardians of your nonprofit’s legacy, including properties and equipment. While not as easily convertible to cash, they are indispensable for your organization’s enduring operations and programs.
But wait, there’s more! You may also possess intangible assets like copyrights, trademarks, or patents.
By arranging assets in this manner, you can gain a clear understanding of the liquidity and accessibility of the resources, aiding in financial planning and decision-making.
In stark contrast to assets, which signify what your organization owns, liabilities represent what it owes. Liabilities encompass various financial obligations, including:
Accounts Payable – Outstanding payments, such as fees to a consultant or service bills, that your organization needs to settle.
Debt – Liabilities also encompass any outstanding loans or borrowed funds that your nonprofit is committed to repaying.
Grants Payable – If your nonprofit extends grants to other organizations or individuals, the obligations to disburse these funds also fall under liabilities.
Liabilities are classified by the duration of the obligation. Current liabilities, such as accounts payable, cover short-term payments, usually within a year. For instance, bills for items like champagne used at fundraising events fall into this category.
In contrast, long-term liabilities involve commitments spanning years, including items like car loans and mortgages with extended payment periods.
This categorization assists in managing financial obligations, distinguishing between short-term and long-term commitments for effective financial planning. Undoubtedly, it is crucial for nonprofit bookkeeping.
Net assets are the nonprofit’s residual interest in its assets after deducting liabilities. So, what exactly can be included in net assets? Anything that holds value. For example, cash, investments, fixed assets, prepaid expenses, and accounts receivable all hold value.
It’s essential to understand that net assets aren’t itemized individually on the balance sheet. Instead, net assets consider the source and purpose of these items by categorizing assets based on whether they come with donor-imposed restrictions or not.
In some instances, the assets your organization holds may come with specific limitations, such as restrictions on their use until a designated date. Any asset received with such restrictions should be classified under “donor-restricted,” while assets without such restrictions are categorized as “without donor restrictions.”
Let’s consider cash, which we mentioned earlier in the discussion of assets. The origin of this cash can vary, often stemming from donor contributions. A closer examination of these donations is necessary to differentiate between those with restrictions and those without. This differentiation ensures accurate accounting and aligns the use of funds with donor intentions.
Balance Sheet of Nonprofit in Action
Imagine a nonprofit dedicated to educating underprivileged children. As its fiscal year ends, it compiles a Statement of Financial Position:
Assets include $500,000 cash, $300,000 investments, $1,000,000 in buildings, and $50,000 receivables—vital for education and facilities.
Liabilities comprise $100,000 accounts payable, $200,000 short-term loans, and $50,000 deferred revenue (for upcoming program fees).
Net Assets encompass $1,200,000 unrestricted, $150,000 temporarily restricted (donor-designated), and $500,000 permanently restricted (for scholarships).
In this scenario, the Statement of Financial Position reveals that the nonprofit has a strong financial position, allowing the nonprofit to sustain its educational initiatives, meet donor requirements, and ensure stability for future growth. What’s the secret to maximizing mission impact? Discover in the pro tip!
Pro Tip – “Outsourcing accounting is the secret to streamline your financial reporting, saving up to 10 hours a week and thereby maximizing mission impact. With experts managing your books, your statement of financial position remains accurate and up to date, allowing you to focus on your mission and drive impact. Over time, this will boost your understanding and better decision-making for your organization.”
Congratulations! You have made it through your first financial statement!