INSIGHT

Simplifying nonprofit financial statements 

Shannon Winter • July 1, 2025

Industries: Nonprofit

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Many nonprofits find themselves overwhelmed by the unique reporting requirements and presentation of nonprofit financial statements that are specific to their industry. From deciphering the statement of financial position to tracking program expenses and donor restrictions, nonprofit leaders often face a steep learning curve.  

Without clear, accurate financial information, it’s difficult to make informed decisions, demonstrate accountability, or plan for the future. Today, we’ll break down the essentials of nonprofit financial statements—what they are, why they matter, and how they reflect your organization’s financial situation.  

Why financial statements matter for nonprofits 

Nonprofit organizations operate in a unique environment where financial transparency and accountability are essential for sustaining your mission and maintaining trust with the community you serve and your donors. Tax-exempt organizations must follow specific financial reporting requirements that reflect their responsibility to donors, grantmakers, and regulatory agencies. 

Building trust and securing funding 

Financial statements show how your organization manages its resources, how funds are allocated to program services, administrative costs, and fundraising expenses, and how effectively you are advancing your mission.  

Donors, grantors, and board members rely on these statements to evaluate your organization’s financial health and stewardship. Transparent, accurate reporting builds credibility, attracts new funding, and reassures existing supporters that their contributions are being used responsibly. 

Demonstrating accountability and supporting informed decisions 

Beyond regulatory compliance, your financial statements are powerful tools for internal decision-making. They provide critical data that helps leadership and board members assess the organization’s financial position, monitor program expenses, and plan for the future.  

Actionable financial information allows you to make data-driven decisions—whether it’s expanding a program, adjusting fundraising strategies, or managing cash flow to ensure sustainability. 

The four essential nonprofit financial statements 

Nonprofit organizations rely on four core financial statements to tell their financial story, demonstrate accountability, and support informed decision-making.  

1. Statement of financial position 

The statement of financial position – comparable to a balance sheet – provides a snapshot of your nonprofit’s financial situation at a specific point in time.  

It details what your organization owns (assets), what it owes (liabilities), and the net assets that remain after obligations are met.  

Key components include: 

• Assets: Cash, investments, accounts receivable, prepaid expenses, property, and equipment 
• Liabilities: Accounts payable, accrued expenses, loans, and other obligations 
• Net assets: The difference between assets and liabilities, categorized by donor restrictions (with or without donor restrictions) 

This statement helps you and your board assess liquidity, understand what resources are available, and identify any potential financial risks. A common misconception is that a positive net asset number always means financial strength; in reality, the composition and liquidity of those assets matter just as much. 

2. Statement of activities 

The statement of activities – comparable to an income statement – shows how your organization’s net assets change over a fiscal year. It highlights all sources of revenue—such as donations, grants, program fees, and investment income—alongside expenses, including program services, administrative costs, and fundraising expenses.  

Key elements include: 

• Revenue: Contributions, grants, program fees, investment, special events, and other income 
• Expenses: Program services expenses, management and general (administrative costs), fundraising expenses 
• Change in net assets: The surplus or deficit for the period 

This statement reveals whether your organization is operating within its means and advancing its mission efficiently.  

Nonprofit leaders sometimes assume that “breaking even” is the goal, but building reserves for future stability is also a sign of good financial management. 

3. Statement of cash flows 

The statement of cash flows tracks the movement of cash in and out of your organization, broken down by operating, investing, and financing activities.  

It shows how cash is generated and used, helping you monitor liquidity and plan for upcoming obligations.  

Key sections include: 

• Operating activities: Cash received from donations, grants, and program fees; cash paid for expenses like employee salaries, office supplies, and program costs 
• Investing activities: Cash used for or generated from the purchase or sale of assets, such as equipment or investments 
• Financing activities: Cash flows related to loans, interest paid, or other financing arrangements 

This statement is crucial for understanding whether your organization can meet its short-term commitments, even if the income statement looks healthy.  

A frequent question is why a nonprofit with a “surplus” on the statement of activities might still face cash flow challenges—timing differences and non-cash revenue can explain this disconnect. 

4. Statement of functional expenses 

Unique to nonprofit financial reporting, the statement of functional expenses breaks down total expenses by both their nature (such as salaries, rent, supplies) and function (program services, management and general, fundraising). This level of detail is vital for transparency and compliance. 

Key components include: 

• Program services expenses: Costs directly related to carrying out your mission and/or providing your services and programs 
• Management and general: Administrative costs necessary for operations 
• Fundraising expenses: Costs incurred to raise contributions 

This statement helps stakeholders see how efficiently resources are allocated to mission-driven activities versus overhead.  

Nonprofit leaders sometimes worry that high administrative costs will deter donors, but clear reporting and context can help explain necessary investments in infrastructure and capacity. 

Understanding these four financial statements gives your organization the tools to communicate financial health, demonstrate stewardship, and make informed decisions for the future.  

If you find these reports overwhelming or struggle to keep them accurate and timely, you’re not alone—many nonprofits turn to outsourced accounting solutions to ensure their financial information is reliable and actionable. 

Get accurate nonprofit financial statements with BPM 

Understanding nonprofit financial statements is essential for building trust, maintaining compliance, and driving your organization’s mission forward. Clear, accurate financial reporting doesn’t just satisfy regulatory requirements—it empowers your leadership, reassures your donors, and provides a roadmap for sustainable growth. 

Ready to strengthen your nonprofit’s financial health and unlock greater impact? Connect with BPM today for a conversation about how our people-first approach to nonprofit accounting can help your organization thrive.