Explaining the nonprofit balance sheet

If you work for a nonprofit, your balance sheet is a key financial document.

It plays a crucial role in demonstrating fiscal responsibility and long-term sustainability, but what exactly is it, and how do you make the best use of it?

Learn more about what your nonprofit balance sheet should cover and what it’s used for with this comprehensive guide.

Here’s what we’ll cover

What is a nonprofit balance sheet?

A balance sheet, or nonprofit statement of financial position, is a formal financial statement that provides an overview of your organization’s financial health at a specific point in time.

This makes it different from your statement of activities, which outlines performance over a given period.

The balance sheet details your assets, liabilities, and net assets, the basic ingredients for evaluating financial stability and guiding future planning.

As a nonprofit, your focus is on sustainability and accountability rather than profit, and the balance sheet provides a straightforward way for you to check that these parameters are being met.

Here are the three main purposes of the document, highlighting how it guides proper nonprofit financial management:

1. Transparency

A balance sheet for nonprofit organizations reduces your financial activities to what you own (assets), what you owe (liabilities), and the net assets available to you.

The net assets are the most important part, because they represent your true financial position and measure how sustainable your operations are.

However, the liquidity of assets and your organization’s debt level add important context about its ability to continue operations.

An honest representation of this information is essential for building trust with donors, grant makers, and regulatory bodies, because it’s the best way to showcase your operational integrity.

2. Sustainability planning

By understanding your current assets and liabilities, you can assess liquidity and solvency and evaluate whether your nonprofit has enough resources to meet both short-term obligations and long-term goals.

This helps your leadership team plan for the future, making sure you have enough funds to continue operations, support programs, and pursue the organization’s mission over time.

3. Restricted and unrestricted funds

Restricted funds are allocated for specific purposes dictated by your donors, while unrestricted funds can be used for general operations.

 The balance sheet accurately tracks and reports these two sets of funds, helping you make sure you comply with donor restrictions and financial regulations.

Accounting methods for creating a nonprofit balance sheet  

Like most organizations, your nonprofit must decide whether to draft your balance sheet and other key financial statements using either the cash basis or accrual basis accounting.

The cash basis method records transactions when money changes hands, while the accrual method recognizes transactions when they are confirmed or incurred.

The accrual method is especially important if your nonprofit has restricted funds, as it allows you to record donations and grants in the correct period, even if the cash hasn’t been fully utilized yet.

It’s also the mandatory method for nonprofits that must adhere to Generally Accepted Accounting Principles (GAAP), such as those dependent on federal grants or those undergoing an audit.

Each method affects how revenue and expenses appear in your financial statements, so it’s important to choose the method that best reflects your operations.

What’s included in nonprofit financial statements?

Your nonprofit’s statement of financial position is based on numbers pulled from your chart of accounts—a detailed list of all your accounts and ledgers.

These numbers are then organized into three key sections: assets, liabilities, and net assets.

1. Assets

This section details what your nonprofit owns.

It includes items like cash, accounts receivable, property and equipment, long-term receivables, and prepaid expenses.

Assets are typically listed in order of liquidity (how easily they can be converted to cash).

Cash is the most liquid, so it comes first. Property and equipment, being harder to convert, come later.

2. Liabilities

This section summarizes what your organization owes.

It includes accounts payable, debt, and other expenses, such as amounts owed to employees, vendors, and contractors. Liabilities are usually organized by due date.

Short-term liabilities are due within one year, while long-term liabilities are payable over multiple years.

3. Net assets

Net assets represent the difference between your total assets (both current and non-current) and your total liabilities.

It helps stakeholders understand your organization’s financial sustainability.

It’s an absolute monetary figure showing your financial capacity to strengthen current programs, invest in new initiatives, or apply the funds to better operational efficiency.

However, your managers need to bear in mind that a proportion of this figure will be designated as restricted or temporarily restricted, affecting the timeline over which these resources can be used and their purpose.

Nonprofit balance sheet example

A sample nonprofit balance sheet should display your assets, liabilities, and net assets at one specific point in time, often comparing these figures with the prior quarter or the year-ago position.

Here is an example of the basic layout:

	Prior quarter	This quarter	Year so far
ASSETS
e.g. Cash
e.g. Investments
e.g. Property
Total	$$	$$	$$
LIABILITIES
Current
Long-term
Total	$$	$$	$$
NET ASSETS
Restricted
Unrestricted
Total	$$	$$	$$

Key differences between for-profit and nonprofit balance sheets

The primary difference between a nonprofit balance sheet and a for-profit one is in the equity section.

For-profits list owner’s equity or shareholder funds, while nonprofits show net assets (after liabilities are subtracted from assets).

This distinction is rooted in the fact that nonprofits don’t have owners or investors in the traditional business sense.

Your focus is on mission support, rather than profit distribution.

If your nonprofit operation becomes unviable, your remaining net assets will be distributed according to laws governing the nonprofit sector.

 The assets are typically distributed to another charitable cause.

Is it obligatory for nonprofits to publish their balance sheets?

Nonprofits are required to make their nonprofit financial reports available to the public, especially if they are tax-exempt 501(c)(3) organizations.

While it may not be mandatory to publish your balance sheet specifically, it is a key part of the financial statements included in your annual reporting.

Many nonprofits recognize that making the balance sheet available helps keep them transparent with donors, grant makers, and stakeholders, as well as facilitating compliance with financial regulations.

How to interpret a nonprofit balance sheet

Your nonprofit balance sheet offers a snapshot of your organization’s financial health.

Here’s four ways to interpret this information to understand your financial stability and long-term sustainability:

1. Understanding the structure

The balance sheet is organized into three main sections: assets, liabilities, and net assets.

Assets are what your organization owns, liabilities are what it owes, and net assets represent the difference between the two (essentially, your organization’s equity).

2. Nonprofit balance sheet insights

While the balance sheet itself presents the raw data, calculating and analyzing certain key metrics can reveal deeper insights:

Cash on hand

This refers to cash available for immediate use, such as physical cash and money in checking or savings accounts.

Having sufficient cash on hand helps a nonprofit avoid cash flow crises, which can disrupt service delivery or lead to financial distress.

Experts recommend that you maintain three to six months of cash reserves available to make sure you can continue functioning smoothly even during financial uncertainty.

Liquid Unrestricted Net Assets (LUNA)

The term unrestricted assets implies that funds in this category can be used flexibly and are not bound by conditions.

It doesn’t necessarily mean that they are immediately available for operational needs though.

By isolating the portion that is easily accessible, the LUNA figure reflects your ability to meet short-term obligations and operational costs, such as payroll, rent, and program expenses.

LUNA includes the cash on hand figure plus additional resources, representing a slightly longer-term view than cash alone.

Program efficiency ratio

This compares the amount of funds you allocate to your programs and services with the amount consumed by administrative or fundraising expenses.

It is the proportion of total expenses dedicated to your core activity.

It describes how effectively your organization is using its resources to fulfill the mission.

Current ratio

This describes your ability to pay off short-term liabilities (debts due within a year) with short-term assets (such as cash, receivables, and inventory).

It’s a simple calculation of current assets divided by current liabilities.

3. Analyzing trends

Don’t just look at a single balance sheet.

Comparing balance sheets over multiple points in time is essential for identifying trends.

Are assets growing? Are liabilities increasing or decreasing?

How are net assets changing over time?

Analyzing these trends provides a more dynamic view of your organization’s financial health.

4. Considering context

Interpret the numbers in context.

How do they compare to similar nonprofits?

Are there any external factors (e.g., economic conditions, changes in funding) that might be influencing the organization’s financial position?

Combining the balance sheet analysis with other financial statements and qualitative information (like program reports) will provide a more complete picture.

Tips to build a nonprofit balance sheet correctly

If you’re looking to help your accountant and accounting team build better nonprofit statements of financial position, here are six best practices to consider:

1. Categorize assets and liabilities properly

Correctly categorizing your current assets (e.g., cash, receivables) and long-term assets (e.g., property, equipment) is important, as is the correct separation of current liabilities (e.g., payables) and long-term liabilities.

This helps you provide an accurate representation of your organization’s financial position across any time horizon being planned.

2. Avoid overstating income

If you use the accrual method of accounting, you might record revenue before certain funds are actually received.

For example, to align spending with the timing of specific programs, or when mapping out multi-year grants and pledges.

While these practices are standard, they can sometimes lead to exaggerated revenue reporting if you’re not careful.

It’s essential that you adhere strictly to accounting principles to make sure your financial information is accurate and compliant at all times.

3. Designate funds as restricted or unrestricted

A truthful balance sheet depends on the correct allocation of restricted versus unrestricted funds, considering both the timing and purpose of each type.

4. Keep accurate records of in-kind donations

Make sure that non-cash contributions (e.g., donated goods or services) are calculated at fair market value and register them to correctly reflect their nature and purpose within your program.

For example, they may contribute directly to program beneficiaries, or they may function more as program service expenses supporting the mission.

5. Use a sample nonprofit balance sheet as a guide

Use well-structured templates or a customizable software solution to align with GAAP requirements and provide stakeholders with clear and professional financial reporting.

6. Adopt a dynamic accounting software tool

Use accounting software to improve your balance sheet accuracy and efficiency.

Automated features will streamline your data entry, calculations, and report generation, reducing errors and saving you time.

Common mistakes in reading nonprofit balance sheets

Accounting for nonprofits takes a different mindset compared to for-profit accounting, and there is scope for misinterpretation if undertaken by someone who doesn’t have the right skills and experience.

This can include mistakes in assessing your organization’s financial stability, fund management errors, a breakdown of relations with stakeholders, and difficulty in securing future funds.

Let’s look at some common causes of misinterpretation:

Confusing net assets with financial flexibility

A large net assets figure could give the impression that your organization has ample resources readily available.

But the reality might be that a significant portion of your net assets represent restricted funds that cannot be used for operational costs or immediate expenses.

Improper use of restricted assets

Your donors will have made it clear that these are designated for specific purposes and cannot be freely used.

Overestimating the liquidity or usability of non-cash contributions

Otherwise known as in-kind donations.

These may include goods, services, or volunteer time, and have to be recorded on the balance sheet based on their fair market value.

Misunderstanding the status of liabilities

This goes back to the definition of short-term liabilities (current liabilities) and long-term liabilities, such as loans, payables, or deferred revenue.

Misinterpreting these liabilities can lead to an inaccurate assessment of your immediate financial obligations.

Overlooking trend analysis

Don’t rely on a single balance sheet.

Comparing balance sheets over multiple periods reveals crucial trends.

A declining trend in unrestricted net assets, for example, might signal trouble, while growing program expenses alongside stable contributions could indicate positive momentum.

Final thoughts

The core purpose of your nonprofit balance sheet is to provide a clear understanding of your nonprofit’s financial health and your ability to deliver your mission.

You want to make sure that your financial position statement is a genuinely useful tool that delivers actionable insights into your organization’s sustainability, accountability, and current financial stability.

You can simplify the process of gathering the relevant data by using intuitive and powerful nonprofit accounting solutions.

With the right software in place, you’ll be able to easily pull the financial information you need and customize reports to more effectively highlight the metrics and insights that your organization depends on.