How to Understand a Nonprofit's Statement of Financial Position

How to Understand a Nonprofit’s Statement of Financial Position

Like many of you, I serve on several boards of directors of charitable, not-for-profit organizations and depend on their financial statements. These statements can be quite confusing, but with today’s increased scrutiny, it has never been more important to have a basic understanding of their key components.

Following is a brief overview of some of the main principles in understanding the net financial position of an organization:

Net assets are very simply the assets minus the liabilities. However, this is where the simplicity ends. Net assets are broken down into three main parts: (1) permanently restricted, (2) temporarily restricted, and (3) unrestricted. These parts provide valuable insight into the overall financial position and health of the organization.

In general, restrictions (whether permanent or temporary) can only be imposed by external parties such as individual donors or institutional grantors. Restricted balances can only be spent in accordance with the terms placed on them by the donor or grantor. Therefore, be aware that these funds are not available to finance the general operations of the organization.

Permanently restricted net assets must be maintained in perpetuity. They usually consist of endowment funds, with the earnings from the invested principal used solely to fund the donor’s stated purpose. Examples would be scholarships or maintenance of a facility that is named in someone’s memory.

Temporarily restricted net assets, in contrast, are subject to restrictions set by the donor, including the timing or purpose for their use. These funds can be fully spent, but only in accordance with the donor’s wishes.

Unrestricted net assets are the funds available for management to spend on its daily operations, subject to the board’s approval of an annual budget. This balance can be “designated” by the board for specific uses such as reserves, but it essentially represents the resources available for future operations. It often represents the truest financial health of the organization.

In summary, these balances can communicate significant information for a board member or prospective donor to help evaluate the financial health of the organization. Board members bear legal and fiduciary responsibilities to the nonprofit they serve.  Having an accurate picture of the organization’s financial position helps them perform better oversight. In today’s world, this information is more critical than ever.  

James E. Hazel, Jr., CPA is the Charlotte Managing Shareholder of Elliott Davis, PLLC, a Corporate Sustainer of the Center. Jim serves clients in a variety of industries in addition to providing management oversight assistance for the firm’s throughout the Southeast.  He can be reached at jhazel@elliottdavis.com.

Comments

Is there an "optimum" Expense to Revenue ratio percentage for non-profits?

A - Fundraising

B- Operating

C- Overall

 

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