3 Ways Financial Statements Can Inform Nonprofit Strategy

Your nonprofit team probably knows that you need to pull accounting documents on a regular basis. But do you really know why? For some organizations, pulling financial statements like your statement of activities or statement of financial position can seem like ticking a checkbox. It’s something that you need to have on hand to report to the IRS or in case of a financial audit.

However, these statements and reports are so much more than that! By diving deeper into these documents and reports, you can glean insights that will help you better plan your organization’s resources and prepare for the future.

In this guide, we’ll dive into some of the insights you can gain from examining your organization’s accounting statements, which statements provide those insights, and how they can improve your organization’s overall approach. Let’s get started.

Track Assets vs. Liabilities

Your organization’s assets are those resources that your organization owns. For example, your cash on hand, securities, property, and accounts receivable would all fall under the category of your assets. Meanwhile, your organization’s liabilities are those resources that your organization owes to someone else. For example, your accounts payable, debt, and other expenses would all fall under this category.

You can find all of this information in your organization’s statement of financial position (AKA the balance sheet). This is one of the staple statements in accounting for nonprofits that shows a snapshot of an organization’s health.

At the simplest level, if your organization’s liabilities outweigh your assets, you should vary your approach to finances. If this occurs, it means that your organization is in the red and will drain resources without a sustainable strategy to stick around for the long term.

When you look deeper, you can take this insight to a new level by calculating metrics like your:

• Months of LUNA: LUNA stands for Liquid Unrestricted Net Assets. You can calculate these metrics by subtracting your property and equipment assets from your total unrestricted net assets on your balance sheet, then dividing the difference by the average monthly expenses. This calculation is the best way to see the liquidity of your organization and the amount of risk you can potentially take on. Generally, you should have at least three months of LUNA on hand at any given time. When you have more, it means you could take on additional risk to grow your organization.
• Months of cash on hand: Determining your months of cash on hand is another way to measure your nonprofit’s potential to take on risk necessary for growth. You can calculate this metric by dividing your total cash and cash equivalents by your average monthly expenses. Ensuring you have between three and six months of cash on hand is a best practice for financial stability.

Generally, the months of LUNA tend to be a more accurate indicator of your nonprofit’s financial health because it discludes your nonprofit’s cash property and equipment assets. It’s a more accurate measure of the cash you have available to pay your expenses because it’s hard to convert property assets into cash when you’re in debt.

Consider, for example, if your organization owes $2,000 and your profit margin on your most recent fundraiser was only $1,500. If the funds from that fundraiser are the only liquid assets you have on hand to pay your debts, you could be in trouble. And if you have a car on hand worth $7,000, your months of cash on hand would show that you have $8,500 to pay your debts. This presents a challenge as you would need to sell that car in order to pay off what you owe.

Evaluate Revenue and Expenses

While assets and liabilities allow your organization to take into account the long-term investments and resources you own or debts you owe, revenue and expenses specifically refer to the money your organization makes and spends on a regular basis.

These numbers are recorded on your nonprofit’s Statement of Activities or income statement. This report helps your organization better understand where your fundraising dollars come from as well as where they seem to disappear.

From your statement of activities, your organization can draw conclusions such as:

• How much of your revenue comes from restricted vs. unrestricted funds. The columns of the statement of activities separate your restricted, unrestricted, and temporarily restricted funds. This helps you remain accountable to supporters who request their funds be restricted to specific causes or endowments.
• How much revenue comes from which revenue source. The rows in the revenue section of your statement of activities show how much of your funding comes from individual donations, grants, investments, and other revenue sources. This can show you the most fruitful fundraising opportunities for your organization.
• How much of your revenue is spent on program vs. administrative expenses. In the expense section of the statement of activities, your expenses are broken down into the following categories: program, administrative, and fundraising. This way, you can make sure the majority of your funds are spent on your cause rather than administrative costs.

These insights can be very helpful when preparing your strategy moving forward. For example, let’s say you find that most of your revenue comes from individual donations, but most of your time is spent on grant writing. In this case, you might consider changing your approach to spend more of your time on the more lucrative opportunities.

You can also use the information in your statement of activities to look back on your finances and fill out important documents like your budget, Form 990, and annual report.

The breakdown of your revenue from year to year provides a basis for your revenue predictions in your annual budget. Plus, the breakdown of your expenses in this report is categorized the same way they are on your Form 990. Finally, DonorSearch’s annual report guide recommends creating a separate annual report from your 990, making it more supporter-facing so that you can transparently communicate your financial information often found in the statement of activities and provide additional context (something not required on your IRS tax forms).

Analyze How Cash Moves at the Organization

While your statement of financial position and statement of activities primarily focus on your nonprofit’s financial performance, they leave out critical information about the cash transactions your nonprofit makes. This is where your statement of cash flows comes in. The statement of cash flows helps organizations analyze how cash moves in and out of the nonprofit.

Your nonprofit cash flows statement shows:

• How much cash you have on hand for operations. Your cash flows statement deals with your organization’s cash and cash equivalents, essentially meaning those assets that can be quickly turned into cash for transactions. This includes short-term investments, cash, and funder invoices, but discludes restricted funds and property assets. Therefore, when reviewing your statement, you’ll understand how much of your money can be quickly accessed for bills and other expenses.
• How your spending and earnings compare to previous years. When you pull your cash flows statement on a monthly or quarterly basis, you can compare the numbers from that same time period of the previous year. This way, you can compare your organization’s cash revenue and expenses from year to year, ensuring growth.

When you have access to more information about your nonprofit’s transactions and cash assets, you can better devise a budget that takes into account your cash options. You’d hate to sell a computer or a car to obtain the cash necessary to pay your bills, so analyzing cash and cash equivalents is essential for this aspect of planning.

You can use the information in your cash flows statement to better understand the fluctuations in revenue throughout the year as well. In Jitasa’s guide to how nonprofit’s make money, they name four main ways organizations to obtain revenue: earned income, individual contributions, grants, and investments. If you look at your cash flows statement from December and realize it’s much higher than the summer months, that’s a sign to set aside some of those year-end cash resources to cover your summer expenses.

Your nonprofit financial statements are necessary to maintain compliance with the generally accepted accounting principles (GAAP) and to pass financial audits. However, they serve a much greater purpose as well. These statements provide the information and insights that your organization needs to grow and evolve over time.