Understanding nonprofit financial statements and reporting

When you run a nonprofit, you’ve got to make sure every dollar counts. 

After all, your mission depends on it. 

Whether you’re helping people, funding community projects, rehoming animals, or supporting schools, every bit of money needs to be tracked and used wisely. 

A good nonprofit financial statement provides the right visibility into your performance so you can make informed stewardship decisions and maintain donor trust and confidence. 

Your work changes lives, so let’s make sure your financial statements help you make an even bigger impact.

Here’s what we’ll cover

Key takeaways:

• Nonprofit financial statements provide crucial visibility into an organization’s financial health and performance.
• Financial statements help in making informed decisions, long-term planning, and risk management.
• Key components of these statements include the Statement of Financial Position, Statement of Activities, Statement of Cash Flow, and Statement of Functional Expenses.
• Effective financial reporting includes detailed analysis, donor highlights, program impact stories, and budget vs. actual performance comparisons.
• Accurate financial reporting ensures transparency, accountability, and compliance with legal requirements.
• Nonprofit financial reports differ from for-profit reports in purpose, methods, and taxation.
• Regular audits and adherence to GAAP are essential for maintaining credibility and accuracy in financial reporting.
• Strong financial oversight by the board and transparent reporting practices enhances organizational governance and donor confidence.

What are nonprofit organization financial statements?

A nonprofit financial statement is a snapshot of how your nonprofit has been doing with its money over a certain period, like a year or a quarter. 

It shows how well you’re managing funds to support your mission. 

This statement includes different reports and disclosures that give stakeholders a good understanding of how funds are used.

In a financial statement for a nonprofit, you’ll find a few key components: 

• The Statement of Financial Position: shows what you own and owe 
• The Statement of Activities: breaks down income and expenses
• The Statement of Cash Flow: shows where cash is coming from and going
• The Statement of Functional Expenses: details how money is spent on different activities). 

Sometimes, there are extra reports, too.

Why are nonprofit financial reports important?

Nonprofit financial reports are essential for demonstrating transparency and accountability.

They allow donors, grantors, board members, and the public to see that funds are managed responsibly.

These reports also ensure:

• compliance with legal requirements
• help secure grants
• provide valuable insights for your team to make informed decisions.

Nonprofit financial reports ensure that your nonprofit is financially healthy and focused on its mission.

According to a recent Independent Sector study, nonprofits are still among the most trusted institutions in America, with 57% of people saying they have “high trust” in them. 

However, 63% of people want to see proof that nonprofits follow a set of guidelines and ethical principles.

In other words, donors want assurance that their contributions make a meaningful impact. 

Sharing your financial statements offers a transparent view of how funds are used and demonstrate responsible management. 

Here’s how

Improve financial decision making

Knowing the ins and outs of your nonprofit’s finances helps you make better decisions. 

For instance, if you notice you’re overspending on in-person fundraising events, you might think about investing in tools to make virtual events easier and more cost-effective. 

When attending in-person isn’t possible, donors and supporters may appreciate a virtual event. 

By hosting virtual events, you’re able to cut down on expensive venues and catering while still bringing in funds. 

It’s all about monitoring your spending so you can make more informed decisions.

Aid long-term financial planning

A nonprofit financial statement helps long-term financial planning by providing a clear picture of the organization’s financial health, including revenue streams, expenses, assets, and liabilities. 

A detailed insight enables the nonprofit to assess its financial sustainability, identify trends, allocate resources effectively, and plan for future funding needs and projects. 

This also helps set realistic financial goals, ensure compliance, and build trust with donors and stakeholders by demonstrating fiscal responsibility.

1. Support risk management

Nonprofit financial reports support risk management by offering a comprehensive view of the organization’s financial position.

They highlight potential vulnerabilities such as cash flow issues, dependency on specific funding sources, and budget variances. 

By analyzing these statements, nonprofits can identify financial risks early, implement mitigation strategies, and make informed decisions to ensure long-term stability and resilience. 

Clear financial reporting helps maintain transparency and trust with stakeholders, reducing reputational risk.

2. Attract more new funds

Not-for-profit financial reporting shows potential donors that you’re a solid organization with a track record of success. 

You can show donors how you’ve used past donations, what you’ve achieved, and how you plan to use new funds. 

When you’re open and transparent, donors are more likely to contribute to your cause. 

3. Facilitate board financial oversight

Your board members need to keep an eye on your nonprofit’s finances, but they don’t have to become finance pros to do this. 

Instead, they just need a clear view of the financial situation to make sure things are running well.

Financial statements allow the board see how well you’re sticking to the budget and if everything follows accounting rules. 

It also lets them spot any potential issues early on, so they can step in and help steer the ship in the right direction before any problems snowball. 

4. Build stronger corporate partnerships

Companies are getting more into philanthropy these days, with corporations giving over $21 billion to nonprofits in 2022 alone through matching gifts, volunteering grants, fundraising matches, and more. 

To convince these businesses that supporting your nonprofit is a smart move, you need to show them your financial statements.

Sharing your financial reports gives companies a clear view of how well you manage your funds and what kind of impact you’ve had. 

This transparency can make businesses feel more confident about partnering with you.

The differences between for-profit and not-for-profit financial statements

Now, all organizations have financial statements. However, for-profits and nonprofits use them in different ways. 

Here’s a quick rundown of the main differences.

Purpose

Nonprofits are all about supporting a cause that benefits society.

They need to be clear about where every dollar goes—whether it’s directly supporting their mission or covering operations costs.

On the other hand, for-profits need to generate revenue for their owners. 

Methods

Nonprofits have to be more specific about how they use their money.

If someone donates for a particular cause, like a scholarship or research, that money has to go exactly where it’s intended.

Nonprofits keep track of these funds separately.

For-profits don’t have to worry about that. They can spend their revenue however they want.

Statements and reporting

Both nonprofits and for-profits generate financial statements, but they have different names and details.

Nonprofit statements show how donations are used and how the organization is making a difference.

For-profit statements focus more on profitability and financial performance.

Taxation

Nonprofits benefit from perks like tax-exempt status, meaning they don’t have to pay federal income tax on money they raise for their mission.

They can also receive tax-deductible donations, encouraging more people to give.

However, Nonprofits must still follow special rules to keep these perks, like aligning their activities with their charitable purpose.

They might also have to handle some of the same taxes as for-profits, as payroll taxes, and local tax rules can vary.

So, while both types of organizations keep track of their finances, they report and use that money differently.

The 4 essential nonprofit financial statements

You now know what nonprofit financial statements are, and why they’re so brilliant (and necessary) to have. So, let’s talk about the four reports that’ll help you keep track of your nonprofit’s finances.

1. Statement of activities 

This report shows how much money a nonprofit made and spent over a specific period. 

Here’s an overview of what you’ll find in a nonprofit income statement:

Operating revenue

This is the money you make from your main activities.

For a nonprofit, this would be donations, grants, or any service fees. It’s all about the core activities you’re doing to support your mission.

Non-operating revenue

This includes cash from non-core activities.

Think of it as extra income that’s not directly related to your main mission.

Examples include interest earned from savings or investments, rent from leasing out property, any special partnerships or royalties, and income from ads or sponsorships.

Other income

This is money from things like selling a big asset, such as a building or equipment. It’s one-off cash that doesn’t come from your regular operations.

The main goal of the not-for-profit income statement is to show how well your nonprofit is doing financially. 

It helps you see if you’re making more money than you’re spending and how your financial health is trending over time.

2. Statement of functional expenses

Sometimes rolled into the income statement, this focuses specifically on spending. 

It details where your money is going—whether it’s for programs, administrative costs, or fundraising efforts. It helps you keep track of how efficiently you’re using your resources.

Now you’ve got two types of expenses:

Primary expenses

These are the costs that keep your nonprofit running day-to-day. 

They’re directly related to what you’re trying to achieve. For example:

• Program costs
• Salaries and wages
• Office Supplies and utilities

Secondary expenses

These are the costs that aren’t directly tied to your core mission but still part of your overall spending. 

They include:

• Interest on loans or debts
• Losses from selling assets

The expenses statement helps you see how well you’re managing your resources and whether your spending aligns with your mission. 

It’s like a financial check-up to make sure you’re using your funds wisely.

3. Cash flow statement

The cash flow statement (CFS) shows how cash moves in and out of your nonprofit. 

It works alongside the balance sheet and income statement to give a complete picture of your finances. 

The CFS helps you see how well your nonprofit is running. 

It shows where the cash is coming from and where it’s going. It also tells you if your nonprofit is financially healthy.

Here’s a quick run-through of the three main parts of the CFS:

Operating activities

This part covers cash from your everyday activities, like running your programs and services.

It includes money coming in from donations, grants, and sales, as well as cash going out for things like salaries, rent, and supplies. Basically, it tracks the cash flow from your regular operations.

Investing activities

This section shows cash spent or received from long-term investments. It includes buying or selling big assets like buildings, equipment, or land.

It also covers loans made to or received from others and any cash involved in mergers or acquisitions. It’s all about how your nonprofit is investing in its future.

Financing activities

Here you’ll see cash from your funding sources and how you’re handling it.

This includes money from donors, loans from banks, and cash paid out for things like loan repayments or distributing funds to your projects.

It shows how you’re managing your financial resources and obligations.

4. Statement of financial position

This report provides an overview of your nonprofit’s financial health at a particular moment. 

It lists your assets (what you own), liabilities (what you owe), and net assets (the difference between the two). 

Here’s a more detailed look at what you’ll list in your balance sheet:

Assets:

• Cash and cash equivalents: This is the cash on hand and things that are just as good as cash, like Treasury bills or certificates of deposit. It’s the money ready for immediate use.
• Accounts receivable: Your accounts receivable is the cash due to your nonprofit from donors, grants, or contracts that have yet to be paid.
• Inventory: For nonprofits, this might include items you have on hand for your programs or services, like supplies or goods you plan to distribute. It could be finished items, stuff still being prepared, or raw materials.
• Prepaid expenses: These are expenses you’ve paid for in advance, such as annual insurance premiums or service contracts. They’re recorded as assets because you haven’t yet used the benefit.
• Property, plant, and equipment: This includes long-term assets like buildings, vehicles, or office equipment your nonprofit uses to run its operations. It’s the durable stuff that helps you carry out your mission.

Liabilities:

• Accounts payable: This is the money your nonprofit owes for bills, such as utility bills, rent, or supplies. It’s your list of unpaid invoices.
• Wages payable: This includes the salaries or wages you owe to employees for work they’ve already done but haven’t been paid for yet.
• Notes payable: These are formal debts or loans your nonprofit has taken on, including repayment terms. It’s like a record of what you owe and when you need to pay it.
• Dividends payable: Not usually applicable to nonprofits, but if you’re dealing with any type of distributions or financial obligations to stakeholders, they would be listed here.

Net assets:

• Net assets: This is what’s left after subtracting all liabilities from your assets. It represents the net worth of your nonprofit and shows how much is available for your programs and services.
• Unrestricted net assets: This portion of your net assets can be used for any purpose and is not restricted by donors. 
• Temporarily restricted net assets: These are funds donated for specific purposes or periods, which must be used as specified by the donor.
• Permanently restricted net assets: These are endowments or funds where the principal amount must be maintained intact, but the income can be used for specific purposes.

What to include in a sample financial report for nonprofit organizations

When you’re putting together a financial report for your nonprofit, you want it to be more than just numbers. 

Here are the not-for-profit financial reporting requirements to make your report both useful and engaging.

1. Executive summary

Start with a brief overview of your nonprofit’s financial health. 

This summary should highlight key points from the financial statements, like major changes in revenue or expenses, and any significant achievements or challenges.

2. Detailed analysis of financial statements

Impressive numbers are good to show donors, but what counts is drawing meaningful insights from that data. 

Since most donors aren’t financial experts, they might not understand financial jargon or complex reports. 

Creating accurate 501c3 financial reports requires meticulous attention to detail and adherence to accounting standards, such as Generally Accepted Accounting Principles (GAAP). 

Following these standards ensures your reports are precise and compliant, providing a reliable foundation for analysis.

Start by breaking down the big numbers. 

Don’t just present totals—explain what they mean. 

For instance, if donations have increased, share which campaigns or events contributed to that growth. Comparing current numbers with past data helps to tell a story over time. 

If donations are up from last year, highlight the strategies that led to that improvement. 

If expenses have risen, explain the reasons and how they align with your mission and plans. 

Use simple ratios and metrics to capture your financial health quickly. 

Ratios like the program expenses to total expenses can help donors understand how much of their money directly supports your mission. 

By keeping these explanations straightforward, donors can see how effectively you’re using their contributions. 

Financial management software can simplify this whole process. 

With automated tracking and analysis, you can generate easy-to-read reports and visual charts. This allows you to focus on what truly matters: making a positive impact in advancing your nonprofit’s mission. 

3. Donor and fundraising highlights

Donor and fundraising highlights are all about shouting out your biggest supporters and most successful events. 

This part of your financial report should celebrate the top fundraising efforts and praise your major donors. 

It’s not just about showing off impressive numbers, but also about showing genuine gratitude.

For example, if a big donor gave a huge amount of money, make sure to mention it and explain what their donation helped achieve. 

Did it fund a new community program or support a major event?

Let everyone know how their contributions made a difference.

Think of it as a thank-you note but with actual data. Show how the money was used and what it accomplished. This way, donors see the real impact of their support and feel appreciated for their generosity.

4. Program impact and success stories

According to the Stanford Graduate School of Business, stories are remembered up to 22 times more than facts alone. 

Apart from insightful data, this section is all about telling real-life impact stories that happen thanks to your funding.

So, share how donations have helped with specific projects or services. 

If you raised money for a new playground, show pictures of kids having a great time. Or, if you raised money for a new animal shelter, share some adorable pics of the fluffy friends that you helped get adopted. 

Connect the dots between the funds and the good stuff happening on the ground. 

This makes your financial report more than just figures. It’s a story of how you’re making a difference and changing lives.

5. Budget vs. actual performance

Here you get to show how your spending and income stack up against what you planned, whether you nailed your targets or where things might’ve gone a bit off-track.

If you spent more than planned on a project or if donations came in higher than expected, explain why. 

Maybe you had to spend extra on a last-minute need, or you got a surprise donation boost. Just be honest about the big swings and let everyone know how you’re handling them. 

It’s a great way to show you’re on top of your finances and ready to adapt.

6. Compliance and governance information

This part is all about showing your work to ensure everyone knows you’re doing things right. 

Include details on how you’re meeting regulatory requirements and adhering to best practices. For example, you might have updated your financial policies or are following new accounting standards.

Letting people know you’re on top of compliance shows you’re committed to running things properly and transparently.

7. Contact information

Don’t forget to add contact details for someone who can answer questions about the report. 

This could be your finance expert or another team member who’s in the know.

Make it easy for readers to contact you if they have questions or need more information. 

It’s all about being approachable and making sure everyone feels comfortable reaching out if they need to.

Financial report template for nonprofit organizations

This basic nonprofit financial report template covers the essential components, ensuring clarity and transparency for stakeholders. 

The template can be edited or adjusted as needed for your organization.

Cover page

• Organization name
• Report title
• Date of report
• Prepared by
• Contact information

Table of contents

• Executive summary
• Statement of financial position (balance sheet)
• Statement of activities (income statement)
• Statement of cash flows
• Statement of functional expenses
• Notes to the financial statements
• Auditor’s report (if applicable)
• Appendices

Executive summary

• Introduction

• Overview of mission and programs
• Summary of financial performance and position

• Highlights

• Key financial achievements and challenges
• Significant events or changes

Statement of financial position (balance sheet)

As of December 31, 2023

Assets
Current assets	$XXX,XXX
Noncurrent assets	$XXX,XXX
Total assets	$XXX,XXX

Liabilities and net assets

• Current liabilities | $XXX,XXX 
• Noncurrent liabilities | $XXX,XXX
• Total liabilities | $XXX,XXX
• Net assets | $XXX,XXX
• Total liabilities and net assets | $XXX,XXX

Statement of activities (income statement)

For the Year Ending December 31, 2023

Revenues	$XXX,XXX
Expenses	$XXX,XXX
Change in net assets	$XXX,XXX
Net assets, beginning of year	$XXX,XXX
Net assets, end of year	$XXX,XXX

Statement of cash flows

For the Year Ending December 31, 2023

• Cash flows from operating activities | $XXX,XXX
• Cash flows from investing activities | ($XXX,XXX)
• Cash flows from financing activities | $XXX,XXX
• Net increase in cash | $XXX,XXX
• Cash, beginning of year | $XXX,XXX
• Cash, end of year | $XXX,XXX

Statement of functional expenses

For the Year Ending December 31, 2023

Expense Category	Program	Management	Fundraising	Total
Salaries/wages	$XXX,XXX	$XXX,XXX	$XXX,XXX	$XXX,XXX
Other expenses	$XXX,XXX	$XXX,XXX	$XXX,XXX	$XXX,XXX
Total expenses	$XXX,XXX	$XXX,XXX	$XXX,XXX	$XXX,XXX

Notes to the financial statements

• Organization and activities: Description of the organization
• Significant accounting policies: Explanation of accounting methods
• Additional details: Contributions, investments, property, liabilities, and net assets

Auditor’s report (if applicable)

• Auditor’s opinion: summary of the auditor’s findings

Appendices

• Supporting schedules: additional financial details

Best practices for nonprofit financial reporting

To ensure your nonprofit’s financial reports are both accurate and effective, adopting these best practices is essential: 

Maintain transparency

Transparency is key to building trust. Document all sources of income and expenses, and present financial statements in an understandable format that anyone involved with the organization can access and interpret. 

Prepare for audits

Regular internal audits help identify discrepancies and ensure financial records are well-prepared for external audits.

Stay compliant with GAAP

Adherence to GAAP is critical for producing standardized and credible financial reports.

GAAP compliance ensures that reports meet the legal requirements and align with industry standards. 

Automate when possible

Using nonprofit accounting profits can help streamline financial reporting processes, minimize error, and ensure consistency across reports.

Unlock the secret to creating successful nonprofit financial statements

Our complete guide to nonprofit financial statements has everything you need to ace these reports. 

We’ve covered what they are, why you need them, and what to include to get them right.

But when it comes to financial analysis and reporting to prepare your statements, nonprofit leaders often face challenges due to manual processes, lack of automation and efficiency, disparate systems and lack of real-time visibility into key metrics. 

Fortunately, with nonprofit accounting software, your nonprofits can reduce or eliminate these challenges. 

From real-time data visibility, reporting automation, intuitive dashboards, and seamless integration with your business systems, our modern cloud accounting solutions ensure more accurate reporting, better collaboration, and time savings. 

Now, nonprofit financial leaders can focus on long-term strategic planning that drives more social impacts. 

FAQs about nonprofit financial statements

What are nonprofit financials?

Nonprofit financials are reports that detail the financial health and performance of a nonprofit organization. 

They include statements such as the balance sheet, income statement, and cash flow statement to track assets, liabilities, revenues, and expenses.

What is a nonprofit profit and loss statement?

A nonprofit profit and loss statement, also known as a statement of activities, outlines the organization’s revenues and expenses over a specific period. 

It shows the financial performance by detailing income sources and how funds are spent, highlighting any surplus or deficit.