Developing a robust financial plan is crucial for the success of your nonprofit, as it not only ensures sustainability but also drives the fulfillment of your mission. Unlike for-profit companies, nonprofits have unique financial goals, requiring accountability, transparency, and responsible stewardship of donor funds. To create an effective financial plan for your nonprofit, start with these fundamental steps:

Analyze your nonprofit’s financials

Look at your financials with the understanding that nonprofits use four main financial reporting statements:

• Statement of Financial Position (aka Balance Sheet)
• Statement of Activities (aka Income Statement)
• Statement of Cash Flows
• Statement of Functional Expenses

For simplicity, let’s break them down so they make more sense.

Statement of Financial Position

A Statement of Financial Position summarizes your nonprofit’s assets (cash, receivables, property, etc.), liabilities (payables, accruals, debt, etc.), and net assets (aka, equity), all as of a specific date. As an equation: assets – liabilities = net assets. Note that net assets break down further into two categories: Net Assets with Donor Restrictions and Net Assets without Donor Restrictions. Preparing your Statement of Financial Position will quickly show your organization’s financial health, define trends over time, and better prepare you for an audit, as this is an essential document for that process. 

Statement of Activities 

The Statement of Activities is the nonprofit parallel to the for-profit income statement. It’s also sometimes referred to as a profit-and-loss statement or income-and-expense report. It shows your organization’s revenue and expenses over time, giving you better visibility into your net assets. You’ll also see how your organization uses its funding to allocate resources and advance the mission, not to mention the sustainability of the organization’s finances. Nonprofits must compile their Statement of Activities to follow the generally accepted accounting principles (GAAP) and use it to file Form 990 with the IRS. (Fun fact: Your Form 990 can also be an excellent marketing tool.)

Statement of Cash Flows 

The Statement of Cash Flows is a monthly report that tracks how cash goes in and out of your organization. It’s broken down into three categories: operating activities, investing activities, and financing activities. The Statement of Cash Flows provides a quick overview of your nonprofit’s cash position and identifies areas where it may be overusing funds. 

A Statement of Functional Expenses

Nonprofit organizations must report their financial activities in two ways: a report of their natural and functional expenses. Natural expenses are reported by all businesses, whether nonprofit or for-profit. However, only nonprofits are required to file their functional expenses. Natural expenses refer to the reporting of expenditures by their nature. Classifications include salaries, insurance, office supplies, rent, utilities, and depreciation. Functional expenses describe the purpose of expenditures by their category. They are classified by function, like programs, fundraising, management, and administration. FASB requires every nonprofit to present expenses by function and nature in one place, so a Statement of Functional Expenses is imperative. 

By effectively managing your finances and leveraging the insights from these essential financial reports, you can drive the fulfillment of your mission, make a lasting impact in your community, and secure the long-term success of your nonprofit organization.

Need help with your nonprofit’s financial statements and planning? Our expert accounting professionals will not only help you create accurate financial reports, but we’ll also help you interpret and understand their findings. And since we only work with nonprofits, we have the unique ability to make your financials come alive, inspiring your donors and other key stakeholders to take action. Why wait? Schedule a free consultation with us today. 

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