Financial transparency isn’t just about compliance, it’s about building trust and ensuring your nonprofit’s sustainability. As stewards of public funds and charitable contributions, nonprofits must maintain clear, accurate financial records that demonstrate accountability to stakeholders.
New to nonprofit finance? Here’s what you need to know about the key components and requirements:
Core Nonprofit Financial Statements required by Generally Accepted Accounting Principles (GAAP).
- Statement of Financial Position
- Provides a financial snapshot at a specific moment in time
- Shows assets, liabilities, and net assets
- Separates net assets into two categories: with and without donor restrictions
- Provides information about an entity’s liquidity and financial flexibility
- Statement of Activities
- Reports major categories of revenue and support and total expenses by program and supporting services
- Demonstrates how an entity’s resources are used in fulfilling its mission
- Distinguishes between contributions that contain donor-imposed restrictions and those that do not
- Helps stakeholders assess whether an entity is generating enough revenue to sustain its operations
- Statement of Cash Flows
- Shows the sources and uses of cash during a specific period
- Classifies cash receipts and payments as operating, investing, or financing activities
- Helps assess whether an entity has sufficient cash to pay bills and manage short-term obligations
Additionally, nonprofits are required to report expenses by both their natural classification (like payroll, rent, and supplies) and functional classification.
Functional Classification of Nonprofit Expenses:
- Program services (such as goods and services provided to program beneficiaries)
- Management and general (supporting activities like business management costs, human resources, and the salaries of the Executive Director and supporting staff)
- Fundraising (like expenses involved in conducting fundraising campaigns or events, and activities involved with soliciting for contributions)
This transparency helps donors and regulators assess your operational efficiency.
Understanding these components is crucial for:
- Building donor confidence
- Securing funding opportunities
- Maintaining tax-exempt status
- Supporting strategic decision-making
The need for proper classification with auditable supporting documentation to fulfill nonprofit reporting requirements is complex. However, by maintaining accurate financial records and understanding these reporting requirements, your nonprofit can better demonstrate its impact and ensure long-term success. Remember, proper financial management isn’t just about following rules – it’s about maximizing your organization’s ability to fulfill its mission.
Check out YPTC’s webinar Financial Reports Challenge: Test Your Knowledge!, where we challenge your knowledge of nonprofit accounting principles and best practices.
