Nonprofits, just like any other organization, have financial activity. It’s very important for administrators to understand how financial reports are prepared and what reports are required. Additionally, there are different requirements surrounding reporting for non-profit financial statements. Whether an in-house bookkeeper or an accounting firm handles the preparation, key administrative members should have an understanding of the process in order to be compliant with all laws and be able to present an accurate picture of their organization’s finances to the board. Here is a useful overview of common financial statements and how they are prepared.
Basic Nonprofit Financial Reports
One reason financial reports are important for nonprofits is that they are an easy way to show your board the financial state the organization is in. Whether it is doing well or poorly, that is important for your board to be aware of. Some reports may also be a requirement when applying for grant funds. Here are a few common financial reports nonprofits need to be able to prepare:
• Balance sheet: This report gives a comprehensive overview of the financial state of a nonprofit organization. It will show liabilities and assets, as well as net assets.
• Cash flow statement: The cash flow statement gives a summary of incoming money and how it was used.
• Functional expenses statement: The functional expense statement summarizes all expenses and shows whether they were related to administration of the organization’s program or supporting activities.
• Statement of activities: This document shows financial activities and presents the total income, subtracting the expenses over a specified period.
Public Disclosure Regulations
As a nonprofit, your organization is required to disclose financial information to the public. Here is a brief summary of your obligations. If you are a 501(c)(3) nonprofit, you have to hand over financial statements, which contain information like salaries, to the IRS, and also make them available for the public to review at their convenience. People may also be able to request copies of these documents or view them on other websites.
Quick Overview of Preparing Statements
If your organization is small, you may be able to successfully prepare financial documents in-house with the help of accounting software. Even if you choose to do this, the expert eye of a professional accountant can be helpful in making sure you did everything correctly. Larger organizations may need to hire a professional to prepare all the statements and ensure reports are accurate and complete. After you prepare statements or have them prepared by someone else, you may choose to include them in the annual report you put out to the public or in the financial information in orientation materials for board members.
Basics of Getting an Audit
Depending on your organization’s financial history and practices, it may be a good idea to consider getting an independent audit. This can actually be a requirement in some cases. An audit is a good way to learn more about how effective your organization’s accounting practices are and whether you may need to consider making some changes.
State and federal laws may also make an audit mandatory. Some situations that may require an audit, depending on the state include:
• If you receive donations that exceed a specific threshold
• If you spend at least $500,000 in federal money per year
• If you are applying for certain government programs
While some may be required to get an audit, it can be a smart choice to get one even if it is not mandatory. Audits help you understand the strength of your finances and see where change may be needed.
Even if you are not the one preparing financial statements, this overview should give you a good idea of what they entail and why they are important. Use this to help you increase your knowledge of the financial side of your nonprofit, so you can impart that information to board members and possible funders.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.