Nonprofit organizations are unique in the sense that they do not generate profit for shareholders or owners. This allows these organizations to focus on fulfilling their mission, rather than making money.
However, this does not mean that nonprofits don’t have to keep track of finances. In fact, nonprofits need to be especially diligent in managing and reporting nonprofit financials, including tracking income and expenses, as well as assets and liabilities. This article will provide an overview of the three main financial statements that nonprofits need to prepare: income statement, balance sheet, and cash flow statement.
What Is An Income Statement?
An income statement is a record of the revenue and expenses of a nonprofit organization over a period of time. This statement provides insights into whether or not the nonprofit is generating more income than it is spending. The income statement can be prepared on a monthly, quarterly, or yearly basis.
How To Create An Income Statement
The income statement begins with the donations received. This is the money that the nonprofit has garnered from its activities. Examples of donations include individual donations, grants, and money earned from fundraising events.
After donations, the expenses are subtracted. These are the costs associated with running a nonprofit. Examples of expenses include salaries, rent, and office supplies.
The difference between donations and expenses is the net income (or net loss). If donations are greater than expenses, the nonprofit has a net income. If expenses are greater than the donations, the nonprofit has a net loss.
Example Of An Income Statement
Below is an example of a typical income statement. This statement shows that the organization had $30,000 in donations and $20,000 in expenses, resulting in a net income of $10,000.
Income Statement
Donations
Individual Donations: $10,000
Grants: $15,000
Events: $5,000
Total Revenue: $30,000
Expenses
Salaries: $10,000
Rent: $5,000
Office Supplies: $2,500
Total Expenses: $20,000
Net Income (or Net Loss): $10,000
What Is A Balance Sheet?
The balance sheet is a snapshot of the assets and liabilities of a nonprofit organization at a specific point in time. This statement provides insights into the financial health of the nonprofit. The balance sheet can be prepared on a monthly, quarterly, or yearly basis.
How To Create A Balance Sheet
The balance sheet begins with assets. These are the items that the nonprofit owns and that have value. Examples of assets include cash, investments, and property.
After assets, liabilities are subtracted. These are the debts that the nonprofit owes. Examples of liabilities include loans and real estate debt.
The difference between assets and liabilities is the net assets (or net liabilities). If assets are greater than liabilities, the nonprofit has net assets. If liabilities are greater than assets, the nonprofit has net liabilities.
Example Of A Balance Sheet
Below is an example of a typical balance sheet. This statement shows that the organization had $50,000 in assets and $30,000 in liabilities, resulting in net assets of $20,000.
Balance Sheet
Assets
Cash: $10,000
Investments: $20,000
Property: $20,000
Total Assets: $50,000
Liabilities
Loans: $15,000
Real Estate Debt: $15,000
Total Liabilities: $30
What Is A Cash Flow Statement?
The cash flow statement is a record of the cash that is flowing in and out of a nonprofit over a period of time. This statement provides insights into whether or not the nonprofit has enough cash on hand to cover its expenses. The cash flow statement can be prepared on a monthly, quarterly, or yearly basis.
How To Create A Cash Flow Statement
The cash flow statement begins with cash inflows. These are the sources of cash that the nonprofit may have. Examples of cash inflows include donations and grants.
After cash inflows, cash outflows are subtracted. These are the expenses that the nonprofit has. Examples of cash outflows include salaries and rent.
The difference between cash inflows and cash outflows is the net cash flow. If cash inflows are greater than cash outflows, the nonprofit has a positive net cash flow. If cash outflows are greater than cash inflows, the nonprofit has a negative net cash flow.
Example Of A Cash Flow Statement
Below is an example of a typical cash flow statement. This statement shows that the organization had $10,000 in cash inflows and $15,000 in cash outflows, resulting in a negative net cash flow of $5,000.
Cash Flow Statement
Cash Inflows
Donations: $5,000
Grants: $5,000
Total Cash Inflows: $10,000
Cash Outflows
Salaries: $5,000
Rent: $5,000
Office Supplies: $2,500
Total Cash Outflows: $15,000
Net Cash Flow: ($5,000)
Conclusion
Nonprofit organizations must prepare financial statements to show the financial position of the organization. The three main types of financial statements are the income statement, balance sheet, and cash flow statement. Hopefully, you now have a better understanding of each type of statement and how to prepare them.