Beyond the Basics: 5 Questions Your Nonprofit’s Financial Reports Should Help You Answer
Nonprofit leaders regularly rely on financial reports to understand the organization’s financial position and performance. But not every report answers the same question, and some of the most useful information may be found in the reports leaders look at less often.
The Statement of Financial Position and Statement of Activities provide an essential view of where an organization stands and how it is performing. Cash-flow reporting and budget-to-actual analysis can provide another layer of insight, helping leadership understand what is happening beneath the surface.
Accurate financial reporting provides the foundation, but the real value comes from understanding what the numbers mean and using that insight to guide decisions about operations, programs, funding, and future.
As SMB Partner Chris Myers, CPA explains, “Of the financial reports nonprofits regularly use, the statement of cash flows and budget-to-actual analysis are often the most underrated. They can give leadership a much clearer picture of what’s happening now and where adjustments may be needed.”
In this article, we’ll look at five key financial reports and, more importantly, the questions they can help nonprofit leaders and boards answer. We’ve also included downloadable templates for each report to give you a practical starting point for putting that information to work.
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How Much of Our Financial Resources Are Actually Available?
A nonprofit can look financially healthy on paper and still have less money available for day-to-day operations than you might expect.
That’s because not every dollar on the Statement of Financial Position is available to spend however the organization needs. Some funds may be restricted by donors, designated by the board, or invested in assets that aren’t readily available for operating expenses.
Looking at cash in the bank or total assets doesn’t always tell the full story. It’s important to understand which resources are actually available to support operations and which have limitations on how they can be used.
What to look at:
- Cash available for day-to-day operations
- Net assets with and without donor restrictions
- Board-designated reserves
- Receivables and other assets that may not be immediately available
- Liabilities and upcoming obligations
Taken together, these measures give leadership a clearer picture of what’s available to support current operations, and whether there’s enough flexibility to meet upcoming needs.
Download the Statement of Financial Position Template
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Are Our Current Results Sustainable?
The Statement of Activities shows what happened during a particular period, but a surplus or deficit doesn’t tell the whole story.
For example, a nonprofit might show a surplus because a large grant came in during the period, even though its regular operating revenue isn’t keeping pace with the expenses. On the other hand, a deficit might reflect the timing of a grant or a planned investment rather than an immediate financial concern.
The important thing is to understand what’s behind the numbers and whether the trend is something the organization can sustain.
A closer look can help you understand:
- Which revenue sources are growing, declining, or becoming less predictable
- Whether unrestricted revenue is keeping pace with core operating expenses
- How program and administrative costs are changing
- Whether one-time revenue or expenses are affecting the current period
- How current performance compares with prior years and the organization’s plans
Over time, these comparisons can help you tell the difference between a temporary change and a trend that may need attention.
Download the Statement of Activities Template
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Will We Have the Cash We Need When We Need It?
A nonprofit can have sufficient revenue for the year and still experience a cash crunch.
The timing of grants, pledges, fundraising, program revenue, payroll, property and equipment purchases and other expenses can create periods when cash is tighter than the organization’s overall financial picture suggests.
That’s why the Statement of Cash Flows is important. For day-to-day management, many organizations also benefit from forward-looking cash-flow projections.
Looking at cash flow over the coming months can help answer questions like:
- What cash flow was created from operations?
- Where did our created cash flow go?
- How much cash will we have in the coming months?
- When are our largest expenses due?
- When do we expect major grants or other revenue to arrive?
- Are there predictable periods when cash will be tight?
- Do we have sufficient working capital or reserves to manage those periods?
Cash-flow projections don’t have to predict the future perfectly. They help leadership see what’s coming early enough to plan for it.
Download the Statement of Cash Flow Template
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Where Are We Off Plan and Does It Matter?
A budget is a plan. Your actual financial results tell you what is happening. Looking at the two together is where the information becomes useful.
A Budget vs. Actual report shows where your revenue and expenses are tracking differently than planned. But seeing a difference doesn’t necessarily mean something has gone wrong. Sometimes there’s a good reason for it – perhaps a grant came in later than expected, a program grew, or an expense was intentionally moved forward.
The real value is understanding what’s behind the difference and whether it changes what you need to do next.
For example:
- Is a program running over budget because costs increased or because participation increased?
- Is revenue below budget because a grant was delayed or because fundraising expectations aren’t being met?
- Are expenses temporarily high because of a planned investment?
- If current trends continue, will the organization still meet its year-end goals?
- Should the board approve a revised budget to take into consideration new trends and/or goals?
The sooner you spot a meaningful difference, the more options you have for responding to it. Good financial reporting helps you see what changed, understand why, and decide whether you need to act.
Download the Budget vs. Actual Template
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How Are We Using Our Resources Across the Organization?
The Statement of Functional Expenses provides detail about how an organization’s expenses are allocated across its different functions, including program services, management and general activities, and fundraising.
This report helps nonprofit leaders and boards see how resources are being used across the organization. Donors and other stakeholders may also look at it to understand how the organization is putting its resources to work.
What to look at:
- How does your program spending compare with nonprofit industry expectations such as 70-85% of expenditures being program expenses vs support (admin/fundraising)?
- How expenses are distributed across program, administrative, and fundraising activities and is it a fair representation of your organization and where you want to be
- Significant changes in those expenses over time
- Whether changes in spending correspond with changes in programs, staffing, or other organizational activity
Looking at these expenses in context gives leadership a clearer picture of how resources are being used and can make conversations with the board, donors, and other stakeholders more productive.
Download the Statement of Functional Expenses Template
Financial Reporting Is Most Valuable When It Provides Insight
Financial reporting is most valuable when it helps nonprofit leaders understand what is happening, see what’s coming, and make decisions with confidence.
The right reports can help leadership and the board answer some important questions:
- Where do we stand today?
- What resources are available, and what obligations are coming up?
- What’s changing?
- Are revenue, expenses, cash flow, or programs moving in a different direction than expected?
- What should we be thinking about next?
- Do current results point to a decision, an adjustment, or simply something worth watching?
At SMB CPAs, we help nonprofit organizations navigate accounting, financial reporting, compliance, and advisory needs with clarity and confidence. Our team works alongside nonprofit leaders to make financial information easier to understand, put it in context, and use it to plan ahead and make informed decisions.
If you’re looking for more clarity around your nonprofit’s financials, contact us to learn how we can help.
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Find Nonprofit Resources
Looking for more insights and resources for your nonprofit? Visit our Nonprofit Accounting page for a full collection of resources, and check out the articles below.