Nonprofit Statement of Financial Position: Understanding the Nonprofit Balance Sheet
Among the list of important finance documents your nonprofit organization has to create and use, the statement of financial position is one of the most important.
The nonprofit statement of financial position indicates the organization's assets, liabilities, and net assets at a specific point in time. It's functions as a snapshot of your organization's financial health.
But wait, why is it often referred to as a 'balance sheet' and how does it differ from a for-profit one? In this article, our goal is to provide you with details about the statement of financial position and how you can use it to improve the financial standing of your organization.
What is the Nonprofit Statement of Financial Position?
The nonprofit statement of financial position, or balance sheet as it's commonly known, is a vital document that provides a detailed snapshot of your organization's financial health by outlining its assets, liabilities, and net assets at a given point in time. This document is crucial in understanding the financial stability of your nonprofit, essentially acting as a financial report card.
Your nonprofit balance sheet comprises three main categories: assets, liabilities, and net assets. The assets represent everything your organization owns. This could include cash, property, and any other tangible or intangible items of value.
Liabilities, on the other hand, represent what your organization owes to others. This could be in the form of loans, wages payable, or other debts.
The net assets are essentially the difference between the assets and liabilities, representing the equity or 'value' of your nonprofit.
What's Included on the Statement of Financial Position?
When you look at a Nonprofit Statement of Financial Position, you'll see it divided into three main sections: assets, liabilities, and net assets. These components together give you the nonprofit accounting equation.
Let's break down each of these pieces to better understand their role and significance in the overall financial health of your nonprofit organization.
Assets
In evaluating your nonprofit's financial position, you'll find a variety of assets on the Statement of Financial Position, including everything from cash and pledged donations to property, equipment, and investments. Here's a closer look at what these assets entail:
Current Assets: These are assets you can convert into cash within a year. They include bank balances, accounts receivable, pledged donations, investments, and prepaid expenses.
Fixed Assets: These are long-term, tangible items like buildings, furniture, vehicles, and large equipment.
Accumulated Depreciation: This is a reduction in the value of fixed assets over time.
Non-Current Assets: These are assets that can't be converted into cash quickly, such as long-term investments and endowments.
Assets on the statement of financial position tend to be organized by order of liquidity, which is a term used for the speed of which an asset can be converted into cash. When analyzing this statement, make sure you consider the liquidity of your assets and how much cash and cash equivalents you have that can be used to pay off and short-term liabilities you have coming up.
Remember that assets basically represent everything your organization owns.
Liabilities
Liabilities are typically organized as current and non-current liabilities on the Statement of Financial Position. This is because, unlike assets, liabilities are ordered by their due date. The closer the liability’s due date is to the balance sheet day, the higher up on the liabilities section it will be.
Current liabilities, due within a year, encompass items like outstanding bills, accrued expenses, payroll, and payroll tax liabilities. They also include lines of credit and short-term loans.
On the other hand, non-current liabilities are those not due within the coming year, typically comprising mortgages and long-term loans.
Should this seem intricate, you might consider to outsource your accounting to ensure precision. Remember, a well-maintained nonprofit statement of financial position is a testament to sound accounting practices. Not to mention that accuracy is incredibly important. You’ll want to know that the information you are looking at is accurate so you can make informed decisions.
Net assets
Moving beyond liabilities, you'll find net assets on your nonprofit's Statement of Financial Position, which essentially represent the financial value of your organization. Net assets, otherwise known as equity, is calculated as the difference between what your organization owns (assets) and what it owes (liabilities).
Total Assets - Total Liabilities = Net Assets
Net assets answer the financial value question: 'What is my organization worth?'
For nonprofit organizations, net assets are divided based on the restrictions placed by the donors. This feature of the statement of financial position is helpful for managing donor-restricted funds and understanding what funds your organization has available for use. Donor restrictions are broken down into 3 primary categories:
Unrestricted Funds - The grants and donations can be used by the organization for any purpose.
Temporarily Restricted Funds - These funds can be used by the organization for specific purposes, usually set by the donor.
Permanently Restricted Funds - These funds are held as principal, but they accrue interest. The organization is only allowed to use the interest accrued.
Understanding the nuances between these types of funds is what makes nonprofit accounting challenging. It is important to make sure that you are categorizing these properly so that your organization stays compliant. An accountant can help you categorize these funds and provide you with accurate information as to how much your organization has available to use for future projects, fundraisers, charity events, etc.
Why is it Called a Statement of Financial Position and not a Balance Sheet?
You might wonder why it's referred to as a Statement of Financial Position instead of a Balance Sheet when dealing with nonprofit organizations. This difference in the name isn't just for show. It's tied directly to the distinct ways nonprofits handle their finances.
The primary reason for this differentiation is the concept of fund accounting, a system nonprofits employ to keep track of revenue sources that are earmarked for specific uses. This method, which we discussed previously with the donor-restricted funds, necessitates that organizations maintain accurate records of these funds and represent them on their Statement of Financial Position.
The Statement of Financial Position, therefore, contains additional lines detailing restricted assets. These lines help answer a critical question: 'Can I use the money I have to pay off my debts?' Remember, these are funds that can only be used in predefined ways.
What Information can you get from a Nonprofit Statement of Financial Position?
From your nonprofit's statement of financial position, you can derive crucial data like Liquid Unrestricted Net Assets (LUNA) and cash on hand. These figures help you gauge your organization's current liquidity and the financial ability to meet unexpected expenses or undertake expansion.
Liquid Unrestricted Net Assets (LUNA)
In evaluating a nonprofit's financial position, understanding Liquid Unrestricted Net Assets (LUNA) can provide insights into the organization's liquidity and potential risk capacity. It's a measure of how many months your organization can cover its expenses with the liquid assets on hand. Calculating LUNA involves subtracting property and equipment assets from total unrestricted net assets, then dividing by average monthly expenses.
Here's what the results mean:
LUNA < 0 months: Your organization lacks sufficient cash on hand to cover current expenses, requiring immediate attention.
0 < LUNA < 3 months: Worth monitoring, especially if it persists for multiple years.
LUNA = 3 months: Indicates strong financial health and stability.
LUNA > 3 months: Provides additional flexibility and growth opportunities.
Understanding LUNA helps ensure your organization maintains financial stability.
Cash on Hand
Another crucial metric to grasp when analyzing a nonprofit's Statement of Financial Position is the 'Cash on Hand' calculation, which offers a straightforward assessment of your organization's liquidity. This simple equation, found by dividing your average monthly expenses by your total cash and cash equivalents, doesn't consider asset restrictions like the LUNA calculation does. Yet, it provides a clear snapshot of your financial health.
Typically, having between three and six months of cash on hand is indicative of a financially stable and healthy organization, however it can also be beneficial to have more on hand depending on the operations of the nonprofit. Understanding this metric can help you gauge how well your organization can meet its short-term obligations, thus ensuring stability and sustainability in your nonprofit's operations.
Nonprofit Statement of Financial Position Template
Utilizing a template for your nonprofit's statement of financial position can streamline the process, although it's crucial to ensure accuracy to avoid misrepresenting your organization's financial health. A template will provide a structured format and guide you through what needs to be included, but remember that filling it out incorrectly can imply improper financial management.
Here's a simple nonprofit statement of financial position template:
While a template can make this job easier, it's recommended to seek the help of an accountant to ensure accuracy. A well-prepared statement of financial position can offer insights into your nonprofit's financial health and help your organization stay compliant with donors and regulations.
Need Help Managing Your Organization's Accounting?
Managing the day-to-day accounting tasks to create such a report can be a significant challenge. You may find your team spending countless hours entering receipts, invoicing, running payroll, and reconciling books before you can even start generating the necessary reports to guide your operations.
If these tasks seem overwhelming, it's worth considering outsourcing your nonprofit accounting to a professional service like RP Finance. We can automate your bookkeeping processes, freeing up considerable time for your team. Our expert accounting team can also help you navigate complex tasks such as fund accounting and functional expense reporting, ensuring your books are always audit-ready.
The advantage of outsourcing isn't just in the time saved but also in the accuracy and timeliness of your financial reports. A well-managed accounting system is crucial for the transparent and efficient operation of your nonprofit. So, if you're struggling with the accounting workload, consider outsourcing. It could be the solution you need to manage your nonprofit's finances effectively.
