What is a nonprofit statement of financial position report and how can it determine if a nonprofit is healthy financially?
In a previous blog we explained what Net Assets are on a nonprofit’s statement of financial position (commonly referred to a Balance Sheet) and what they represent, but what about the rest of the statement? Now we will cover how to read and interpret a statement of financial position and tell if a nonprofit is healthy financially.
Nonprofit Statement of Financial Position Breakdown
The statement of the nonprofit financial position report provides an overview of what an organization is worth. Depending on whether you use cash versus accrual accounting for nonprofits, the statement breaks it down into three categories:
- Assets
- Liabilities
- Net Assets
Assets Section
The assets section is categorized by current, fixed and other assets.
Current Assets contain cash, investments, accounts receivable, and prepaid expenses.
Fixed Assets contain buildings, vehicles, furniture and large equipment and their accumulated depreciation, which helps you determine the net value of your fixed assets.
And other assets, which include long term receivables.
Liabilities Section
The liabilities section is also categorized by current and long term liabilities.
Current liabilities contain your payables, accrued expenses, payroll tax liabilities and short term loans.
Long term liabilities contain the long term payables, such as mortgages, or loans.
Essentially assets are what your organization owns and liabilities are what your organization owes.
Net Assets Section
And the difference between your assets and liabilities are your Net Assets, or the net worth of your organization.
The Net Assets amount is also calculated by the cumulative difference between revenue and expenses over the course of your organization’s life. But, the nature of nonprofit revenue requires that revenue be classified as either unrestricted, or with donor restrictions or designations.
So the net asset section of your statement of financial position will have unrestricted net assets, or funds that can be used for the general benefit of the organization and Designated Net Assets which are funds that must be used in compliance with the restrictions placed on the revenue by the donor.
Final Thoughts
So, when reading a statement of financial position a healthy nonprofit will have assets that are greater than their liabilities and their net assets will have a large surplus to be used to achieve its goals in the future.
As a nonprofit, your mission is your main goal, however a net asset surplus is key to the growth and sustainability of the organization.
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