How to Read Not-for-Profit Financial Statements

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How to Read Not-for-Profit Financial Statements

Many not-for-profit organizations that we work with require a set of financial statements at the end of every month, including a statement of financial position, statement of operations, and statement of cash flow.

These financial reports are generally reviewed closely by the board of directors and senior management to develop an understanding of the organization’s ability to steward and manage resources provided by donors. They can also help the management team assess how its strategy is manifesting itself with user and stakeholder groups and can assist board members to assess risk areas and identify opportunities.

Having worked with various not-for-profit organizations over the years, we've found that many board members and non-financial senior management often find it challenging to translate the information provided in these statements into a clear picture of an organization’s performance and operational story. Below is a list of some considerations to take note of when reviewing financial statements.

Statement of Financial Position:

The statement of financial position often referred to as the 'balance sheet', is a report that outlines the assets, liabilities, and net assets of an organization on a given date.

Cash Position - Is adequate cash on hand (ie. available and not invested or subject to letters of credit or similar) to ensure both the day to day and long-term objectives of the organization can be met?

Accounts Receivable - Are there balances due from contributors and customers that have been outstanding for a significant amount of time?

Investments - Are the investments held in line with the organization’s investment policy? For example, if the organization’s investment policy includes an ethical investing provision, are any investments held that are not in line with those requirements?

Capital Assets - Are any of the organization’s capital assets fully amortized? This could suggest capital purchases will need to be budgeted for in the near future.

Liabilities - Are there roughly enough current assets (Cash, Accounts receivable, Short-term investments) to offset the current liabilities (Accounts payable, Accrued liabilities)?

Net Assets - Is the ending net asset position positive for the organization? If the organization uses the restricted fund method, is the ending net asset position positive for each fund?

Statement of Operations:

Similar to an income statement, the statement of operations outlines the organization's contributions and other income and the organization's expenses for a given period of time.

Contributions - Are the actual contributions consistent with the budget? What is the trend of the last three years of contributions?

Investment Income - What is the return on investments assets? Is the return consistent with the market performance for similar investments? If not, further information should be obtained to ensure effective management of the organization’s funds.

Administrative expenses - Is the cost structure in line with the budget? How do the administrative expenses compare with prior years?

Does the statement clearly communicate the activities of the organization over the period? Keep in mind that there is flexibility in how the statement presents the financial information.

Statement of Cash Flows:

The statement of cash flows offers insight into the generation and use of cash in an organization. These statements are often used as a basis for budgeting and business planning, as they showcase an organization’s operating, investing, and financing activities. The cash flow statement presents the overall change in the organization’s cash for the period that the statement was prepared.

Cash Flows from Operations - Did the organization generate positive cash from its operations? If not, is it a one time issue or is a trend starting to develop?

Cash Flows from Investments - Was the purchase and redemption of investments consistent with the organization's investment policy and strategy? Was there a significant redemption that was not reinvested?

Cash Flows from Financing - Does the organization hold debt? Are debt payments consistent with budget and supportable going forward with the current cash management strategy?

Financial statements can present an effective picture of an organization’s operations. By taking the time to understand the information within financial statements, board members and senior management are able to better assess the organization’s current financial position and results, allowing for more informed decision making and long-term success.

Enkel offers a range of bookkeeping services for not-for-profit organizations, including day-to-day bookkeeping tasks, payroll and accounts payable management, budgeting and other services. Get in touch today to see how our team can help!

Omar Visram
About Omar Visram
Omar Visram is the Co-founder and CEO of Enkel Backoffice Solutions Inc. Headquartered in Vancouver, Enkel provides bookkeeping, payroll, accounts payable and accounts receivable services to over 200 organizations Canada-wide.