This chapter introduces the generic structures or formats of three main financial statements: the income statement, the balance sheet, and the statement of cash flow. This chapter explores the principles and procedures used to develop various financial statements and links them to the legal financial reporting requirements for a nonprofit organization. The reader will gain experience with the basic terminology and tools to read nonprofit and public financial statements.
WHAT IS A FINANCIAL STATEMENT?
Nonprofit organizations receive their contributions from the public through various forms, which encompass, but are not limited to, individual donations, corporate donations, grants from private and/or public institutions, bequests, and trusts. Unlike in the for-profit sector, when individuals, groups, or institutions contribute to a nonprofit organization, they do not expect dividends or a return on investment directly to them. However, they expect that nonprofit organizations that receive their contributions or donations are accountable to them. One of the ways that nonprofit organizations can document their accountability is by developing and publishing financial statements that are available for public consultation.
A financial statement is a monthly, quarterly, or yearly written report that describes the financial situation or condition of a for-profit or nonprofit entity. For example, financial statements provide information about the revenues generated and expenses incurred by a nonprofit organization, as well as the assets and liabilities. These concepts will be defined further in this chapter. In the case of nonprofit organizations, financial statements are essential to the development of a financial management system, the preparation of the 1RS (Internal Revenue Service) Form 990, the maintenance of a culture of accountability to the public, and to conduct effective fund-raising activities. The most common financial statements are the income statement, the balance sheet, and the statement of cash flow.
Nonprofit organizations exist to provide one or several community services to individuals who may not have been able to afford such services if they had to receive them from a for-profit entity. In other words, services provided by nonprofit organizations incur costs that are for the most part supported by the generous contributions of donors or funding agencies. Therefore, nonprofit organizations generate revenues or income, which enable them to make expenses for activities that support the fulfillment of their vision and mission. The revenues or income generated and the expenses or expenditures made in implementing their activities are reported to various stakeholders, through the income statement or the statement of activities. The income statement shows an organization's financial health or net worth over time. The income statement includes three major sections:
1. The income or revenues
2. The expenses or expenditures
3. The balance or summary
Income or Revenues
Income or revenues generated by a nonprofit organization will vary, based on the fund-raising strategies adopted by any given nonprofit entity. Some of the most common sources of income or revenues include, but are not limited to, membership dues, special gifts, individual donations, corporate donations, government grants, private grants, sales, and other revenues.
Membership revenues are generated through board member contributions and/or the annual contributions of members. Some nonprofit organizations have only a board and do not have other members. Therefore, they have only one type of membership revenue.
In addition to annual or regular contributions from members, some nonprofit organizations receive special gifts from either members or nonmembers who want to support the mission and vision of an entity in a very specific way. A special gift tends to be a one-time amount or an asset that is cash convertible.
Individual donations come from random individuals who want to support the cause of a nonprofit organization. Individual donations can be a one-time donation or a regular monthly, quarterly, or annual donation.
Many for-profit corporations adopt the principle of corporate social responsibility, which is the contribution of a fraction of their net profit to the community in which they conduct business. Corporate donations can be solicited or unsolicited. A nonprofit organization may solicit a monetary request from a for-profit business entity for the support of a particular initiative. The request can be successful or unsuccessful. On the other hand, some for-profit corporations make their donations through a grant process managed by their own foundation (corporate foundation).
Government grants are grant funding received from a government entity at the local (city, county), state (state agency), or federal (federal agency) level.
Private grants are grants received from private foundations or other nonprofit entities. Sometimes, large nonprofit organizations receive large grants, which they have to manage in the form of subawards to smaller nonprofit organizations.
Some nonprofit organizations maintain a social enterprise or provide fee-based services that are managed like a for-profit entity; the profit then goes to support the programs or activities of the nonprofit organization.
Some nonprofit organizations have financial instruments (e.g., stocks, bonds, or other financial instruments) that produce additional income.
Uncategorized or irregular contributions received by a nonprofit entity are often listed under the "other revenues" section.