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How to Read Nonprofit Financial Statements – Board Member Guide
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How to Read Nonprofit Financial Statements

A Comprehensive Guide for Board Members & Nonprofit Leaders

Nonprofit Board Roles & Responsibilities

Master the essential skills for effective nonprofit board governance and financial oversight

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Overview
Financial Position
Activities Statement
Cash Flow
Analysis Tools
Resources

Why Learning How to Read Nonprofit Financial Statements Matters

As a nonprofit board member, financial oversight is one of your most important responsibilities.

Understanding how to read nonprofit financial statements doesn’t require an accounting degree, but it does require knowing what to look for and which questions to ask. Financial statements tell the story of your organization’s financial health, resource allocation, and mission impact.

The Three Core Financial Statements

Learning how to read nonprofit financial statements begins with understanding the three main reports every nonprofit produces:

Statement of Financial Position

Shows what your organization owns (assets) and owes (liabilities) at a specific point in time. The difference is your net assets – your financial cushion.

Statement of Activities

Tracks revenue and expenses over a period. Shows whether you’re operating in surplus or deficit and how resources are allocated across programs.

Cash Flow Statement

Tracks how cash moves through the organization. Critical for understanding liquidity – whether you’ll have cash available when bills are due.

Key Principles for How to Read Nonprofit Financial Statements

💡 Look at Trends, Not Just Snapshots

Compare current statements to previous periods. Are revenues growing or declining? Are expenses increasing faster than income? Trends reveal the story behind the numbers.

🎯 Focus on Mission Alignment

A healthy nonprofit spends 70-80% of its budget on programs rather than overhead. Ensure resources align with your mission priorities.

❓ Ask Questions

Don’t just accept the numbers – dig deeper. Why did program expenses increase? Are revenue projections realistic? Staff should be able to explain changes in plain language.

🔍 Understand Context

Compare your organization to similar nonprofits in size and mission. Industry benchmarks help you understand whether your financial position is strong or needs improvement.

How to Read Nonprofit Financial Statements: Statement of Financial Position

The Statement of Financial Position (similar to a balance sheet) is your snapshot of organizational health. It shows what you own, what you owe, and what’s left over – your net assets.

Assets: What Your Organization Owns

  • Current Assets: Cash, investments you can quickly convert to cash, accounts receivable (money owed to you), and prepaid expenses. These support short-term operations.
  • Long-term Assets: Property, buildings, equipment, and long-term investments. These support your mission over years.
  • What to Look For: Is cash sufficient to cover 3-6 months of expenses? Are receivables aging (getting older without payment)?

Liabilities: What Your Organization Owes

  • Current Liabilities: Bills due within a year – accounts payable, accrued expenses, short-term loans. These need immediate attention.
  • Long-term Liabilities: Mortgages, bonds, or loans due after one year. These spread major expenses over time.
  • What to Look For: Can current assets cover current liabilities? Is debt manageable relative to revenues?

Net Assets: Your Financial Cushion

  • Without Donor Restrictions: Flexible funds the board can use for any mission-aligned purpose. Your financial safety net.
  • With Donor Restrictions: Funds restricted by donors for specific programs, purposes, or time periods. You can’t spend these on other needs.
  • What to Look For: Are unrestricted net assets growing or shrinking? Is the organization too dependent on restricted funding?
🎯 Key Ratio to Calculate: Current Ratio = Current Assets ÷ Current Liabilities. A ratio above 1.0 means you can cover short-term obligations. Above 2.0 is healthy; below 1.0 signals potential cash flow problems.

Sample Statement of Financial Position

Below is a realistic example from “Community Impact Nonprofit.” Focus your attention on the color-coded sections when learning how to read nonprofit financial statements.

Community Impact Nonprofit
Statement of Financial Position – December 31, 2024		 2024 2023
ASSETS
💰 Cash and Cash Equivalents $285,000 $230,000
💰 Accounts Receivable (Grants & Pledges) $125,000 $95,000
Prepaid Expenses $15,000 $12,000
Investments – Short Term $50,000 $25,000
Total Current Assets $475,000 $362,000
Property and Equipment (net of depreciation) $350,000 $285,000
Long-term Investments $200,000 $175,000
TOTAL ASSETS $1,025,000 $822,000
LIABILITIES
⚠️ Accounts Payable $45,000 $38,000
⚠️ Accrued Expenses (Payroll, Benefits) $32,000 $28,000
Deferred Revenue (Grants Received in Advance) $28,000 $15,000
Current Portion of Long-term Debt $18,000 $17,000
Total Current Liabilities $123,000 $98,000
Long-term Debt (Mortgage on Building) $162,000 $180,000
TOTAL LIABILITIES $285,000 $278,000
NET ASSETS
✓ Without Donor Restrictions $460,000 $344,000
✓ With Donor Restrictions $280,000 $200,000
TOTAL NET ASSETS $740,000 $544,000
TOTAL LIABILITIES & NET ASSETS $1,025,000 $822,000

Key Insights from This Statement

💰 Cash & Liquidity Analysis:

  • Cash increased from $230,000 to $285,000 – Good trend showing improved cash management
  • Current Ratio: $475,000 ÷ $123,000 = 3.86 – Excellent! Well above the healthy 2.0 threshold
  • Accounts Receivable grew to $125,000 – Ask: Are these current or aging? What’s the collection timeline?

⚠️ Liability Monitoring:

  • Current liabilities increased from $98,000 to $123,000 – Ask why (growth, timing, or problems?)
  • Deferred revenue up to $28,000 – Good! Shows grants received in advance
  • Long-term debt decreased from $180,000 to $162,000 – Paying down mortgage as planned

✓ Net Assets Growth:

  • Total net assets grew from $544,000 to $740,000 – Excellent $196,000 increase!
  • Unrestricted net assets: $460,000 – Provides 5.5 months of operating reserves (assuming ~$84,000 monthly expenses)
  • Restricted net assets: $280,000 – Healthy balance of flexibility vs. donor-designated funds

Questions to Ask About This Statement

Board Discussion Points

  • What drove the $55,000 increase in cash? Was this from operations, fundraising, or borrowing?
  • Why did accounts receivable increase by $30,000? Are these new grants or slow collections?
  • The $196,000 growth in net assets is excellent – what were the main drivers?
  • Is our current ratio of 3.86 appropriate, or should we invest excess cash in mission programs?
  • How does our debt-to-assets ratio (28%) compare to similar organizations?

How to Read Nonprofit Financial Statements: Statement of Activities

The Statement of Activities shows the flow of money in and out over a specific period.

Think of it as your organization’s report card – did you bring in more than you spent? Are resources allocated effectively across programs? This statement reveals operational health and mission focus.

Revenue: Money Coming In

  • Contributions: Individual donations, corporate gifts, foundation grants
  • Program Service Revenue: Fees for services, membership dues, tuition
  • Investment Income: Interest, dividends, investment gains
  • Special Events: Fundraising events (net of direct costs)
  • Other Revenue: Rental income, miscellaneous sources

Expenses: Mission vs. Overhead

  • Program Expenses (70-80% target): Direct costs of delivering programs and services
  • Management & General (10-20%): Administrative costs, executive salaries, office expenses
  • Fundraising (10-20%): Costs of generating contributions and grants

Sample Statement of Activities

This comprehensive example shows how Community Impact Nonprofit performed during 2024. Pay special attention to the color-coded sections showing revenue diversification and expense allocation.

Community Impact Nonprofit
Statement of Activities – Year Ended December 31, 2024		 Without Donor Restrictions With Donor Restrictions 2024 Total 2023 Total
REVENUE AND SUPPORT
🎯 Individual Contributions $245,000 $40,000 $285,000 $265,000
🎯 Foundation Grants $100,000 $220,000 $320,000 $280,000
🎯 Government Grants $50,000 $130,000 $180,000 $195,000
Corporate Sponsorships $45,000 $25,000 $70,000 $55,000
Program Service Fees $85,000 $10,000 $95,000 $78,000
Special Events (net) $42,000 $0 $42,000 $38,000
Investment Income $8,000 $0 $8,000 $5,000
Net Assets Released from Restrictions $135,000 ($135,000) $0 $0
TOTAL REVENUE $710,000 $290,000 $1,000,000 $916,000
EXPENSES
Program Services:
✓ Youth Development Program $320,000 $0 $320,000 $285,000
✓ Family Support Services $240,000 $0 $240,000 $220,000
✓ Community Education $125,000 $0 $125,000 $108,000
📊 Total Program Expenses $685,000 $0 $685,000 $613,000
Supporting Services:
⚖️ Management and General $125,000 $0 $125,000 $118,000
⚖️ Fundraising $85,000 $0 $85,000 $78,000
Total Supporting Services $210,000 $0 $210,000 $196,000
TOTAL EXPENSES $895,000 $0 $895,000 $809,000
💰 CHANGE IN NET ASSETS ($185,000) $290,000 $105,000 $107,000
Net Assets – Beginning of Year $344,000 $200,000 $544,000 $437,000
NET ASSETS – END OF YEAR $159,000 $490,000 $649,000 $544,000

Key Insights from This Statement

🎯 Revenue Analysis – Excellent Diversification:

  • Individual Contributions: $285,000 (28.5%) – Healthy individual donor base
  • Foundation Grants: $320,000 (32%) – Largest source but not over-dependent
  • Government Grants: $180,000 (18%) – Good diversification, down slightly from 2023
  • Total Revenue Growth: $1M vs. $916K – Strong 9.2% increase year-over-year

✓ Program Expense Analysis – Excellent Mission Focus:

  • Program Expense Ratio: $685,000 ÷ $895,000 = 76.5% – Excellent! Above 70% benchmark
  • Youth Development: $320K (46.7% of programs) – Largest program investment
  • Family Support: $240K (35% of programs) – Second priority area
  • All programs grew vs. 2023 – Expanding mission delivery capacity

⚖️ Supporting Services – Well Controlled:

  • Management & General: 14% of total expenses – Within healthy 10-20% range
  • Fundraising: 9.5% of total expenses – Efficient fundraising operation
  • Total Overhead: 23.5% – Excellent balance of low overhead with adequate infrastructure

💰 Net Assets Strategy – Planned Growth:

  • Unrestricted deficit of $185K – Planned use of reserves to expand programs
  • Restricted growth of $290K – Strong new grant funding for future
  • Net overall growth: $105K – Healthy balance of growth vs. mission investment

Critical Questions for Board Discussion

Strategic & Operational Questions

  • Is our 76.5% program expense ratio appropriate, or should we invest more in infrastructure?
  • The $185K unrestricted deficit – was this planned? What’s our strategy for rebuilding reserves?
  • With $490K in restricted net assets, what programs are these designated for?
  • Government grants decreased – is this a concern or expected?
  • All three programs expanded significantly – are we maintaining quality while scaling?
  • How sustainable is our current growth rate given our funding mix?

How to Read Nonprofit Financial Statements: Cash Flow Statement

The Cash Flow Statement tracks the actual movement of cash – when money comes in and goes out. An organization can be profitable on paper but still face cash shortages if timing doesn’t align.

Operating Activities: Day-to-Day Cash Flow

  • Cash received from donors, grants, and program fees
  • Cash paid for salaries, supplies, and operating expenses
  • Adjustments for non-cash items like depreciation
  • What to Look For: Positive cash flow from operations shows healthy, sustainable operations

Investing Activities: Long-term Asset Changes

  • Purchase or sale of property, buildings, or equipment
  • Investments in securities or investment accounts
  • Collection of loans made to others
  • What to Look For: Large capital purchases should be planned and funded appropriately

Financing Activities: Debt and Donor Restrictions

  • Proceeds from new loans or repayment of debt
  • Receipt of donor-restricted contributions for specific purposes
  • Release of restrictions as purposes are met
  • What to Look For: Excessive borrowing or inability to meet donor restrictions
🔑 Key Insight: Many nonprofits receive large grants quarterly but pay expenses monthly. This creates timing gaps where cash flow statements reveal temporary shortages that don’t indicate organizational problems – just timing issues.

Sample Statement of Cash Flows

This detailed example shows how cash moved through Community Impact Nonprofit during 2024. Focus on the color-coded sections to understand how operating, investing, and financing activities affected cash position.

Community Impact Nonprofit
Statement of Cash Flows – Year Ended December 31, 2024		 2024 2023
CASH FLOWS FROM OPERATING ACTIVITIES
✓ Change in Net Assets $105,000 $107,000
Adjustments to reconcile change in net assets to cash:
✓ Depreciation and Amortization $28,000 $25,000
Bad Debt Expense $2,000 $1,500
Changes in operating assets and liabilities:
⚠️ (Increase) in Accounts Receivable ($30,000) ($15,000)
(Increase) in Prepaid Expenses ($3,000) ($2,000)
✓ Increase in Accounts Payable $7,000 $4,000
✓ Increase in Accrued Expenses $4,000 $3,500
✓ Increase in Deferred Revenue $13,000 $8,000
💚 Net Cash from Operating Activities $126,000 $132,000
CASH FLOWS FROM INVESTING ACTIVITIES
🏗️ Purchase of Equipment ($93,000) ($45,000)
🏗️ Purchase of Short-term Investments ($25,000) ($10,000)
Purchase of Long-term Investments ($25,000) ($15,000)
Net Cash from Investing Activities ($143,000) ($70,000)
CASH FLOWS FROM FINANCING ACTIVITIES
⚡ Proceeds from Line of Credit $50,000 $25,000
⚡ Repayment of Line of Credit ($25,000) ($10,000)
Repayment of Mortgage Principal ($18,000) ($17,000)
⚡ Contributions Restricted for Capital $65,000 $40,000
Net Cash from Financing Activities $72,000 $38,000
💰 NET INCREASE IN CASH $55,000 $100,000
Cash – Beginning of Year $230,000 $130,000
CASH – END OF YEAR $285,000 $230,000
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid for Interest $12,000 $13,500
Equipment Purchased with Restricted Contributions $65,000 $40,000

Key Insights from This Cash Flow Statement

💚 Operating Cash Flow – Strong Foundation:

  • $126,000 positive operating cash flow – Excellent! Day-to-day operations generate cash
  • Depreciation adds back $28,000 – Non-cash expense that reduces reported income but not cash
  • Deferred revenue increased $13,000 – Good! Grants received ahead of program delivery
  • Working capital changes net to +$24,000 – Healthy operational cash management

⚠️ Accounts Receivable Impact:

  • $30,000 increase in receivables – Cash impact! Revenue earned but not yet received
  • This is often normal for nonprofits with grant reimbursements
  • Board should ask: What’s the aging of these receivables? When will they be collected?

🏗️ Investing Activities – Strategic Capital Investment:

  • $143,000 invested in growth – Equipment ($93K) + Investments ($50K)
  • Equipment purchases doubled vs. 2023 – Major capacity expansion
  • This matches the equipment funded by restricted contributions (see supplemental info)
  • Question: How will this new equipment enhance program delivery?

⚡ Financing Activities – Strategic Funding:

  • $72,000 net positive financing – Successfully funded capital investments
  • $65,000 in capital-restricted contributions – Donors specifically funded equipment purchases
  • Line of credit usage: $50K drawn, $25K repaid – Smart cash flow management tool
  • Mortgage payments on schedule – $18K principal reduction as planned

💰 Net Result – Healthy Cash Growth:

  • Cash grew from $230,000 to $285,000 – $55,000 increase despite major investments
  • Operating activities funded most of the growth – Sustainable cash generation
  • Strategic use of financing to fund capital improvements without depleting reserves

Understanding Cash Flow Patterns

Common Nonprofit Cash Flow Challenges

  • Grant Timing: Reimbursement grants create gaps between expenses and cash receipts
  • Seasonal Revenue: Annual campaigns concentrate cash inflows in certain months
  • Growth Funding: Expanding programs faster than cash reserves can support
  • Receivables Management: Slow-paying government agencies or corporate sponsors

Cash Flow Management Solutions

  • Build operating reserves equal to 3-6 months of expenses
  • Establish a line of credit for temporary cash needs (as shown in this example)
  • Invoice grants and contracts promptly; follow up on overdue receivables
  • Negotiate advance payments or monthly distributions from major funders
  • Time major purchases to align with expected cash inflows

Critical Questions for Board Discussion

Board Oversight Questions

  • Is our $126K operating cash flow sustainable? What happens if grant funding decreases?
  • The $30K increase in receivables – what’s our collection timeline and aging report?
  • We invested $143K in equipment and investments – what’s the expected ROI on programs?
  • Our line of credit usage ($25K net) – what’s our credit limit and terms?
  • How do our cash flow patterns vary throughout the year? When are our vulnerable periods?
  • Do we have contingency plans if a major funder delays payment?

Financial Ratio Calculator

Use these tools to analyze your organization’s financial health when learning how to read nonprofit financial statements.

Calculate Key Financial Ratios

Nonprofit Financial Resources

These trusted resources provide additional guidance on how to read nonprofit financial statements, board financial oversight, and nonprofit accounting best practices.

National Council of Nonprofits – Financial Management

Comprehensive resources on financial management, budgeting, and board financial oversight for nonprofits.

Visit Resource →

BoardSource – Financial Responsibilities

Expert guidance on board financial oversight, understanding financial statements, and fulfilling fiduciary duties.

Visit Resource →

FASB – Nonprofit Accounting Standards

Authoritative guidance on nonprofit accounting standards and financial reporting requirements.

Visit Resource →
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