No matter your nonprofit’s exact mission statement or focus area, its general purpose is to address some pressing need in its community. But as your team pursues this goal, you need to remain accountable to those who make your work possible to secure their continued support. These include not only individual supporters, but also staff and board members, grantmakers, and the government (since the IRS granted your organization its tax-exempt status so that more of its resources could go toward its cause).
This is why accountability should be at the heart of all of your organization’s accounting activities, from developing your annual operating budget to recording and organizing transaction data. The area of nonprofit financial management where honesty and transparency are most essential, though, is reporting.
In this guide, we’ll discuss three categories of nonprofit financial reports so you can understand how they support external accountability and leverage them for more effective internal decision-making. Let’s get started!
1. Financial Statements
While “statement” is a common term in finance (your organization probably gets bank statements, credit card statements, and many other similar documents), the resources we’re referring to when we say “financial statements” are a set of standardized reports that nonprofits compile at the end of every fiscal year. These statements summarize and organize key data so it’s easier to derive actionable conclusions from it.
Here is a quick overview of what’s included on each of the four core nonprofit financial statements and how your organization can use them internally:
nonprofit financial report types_supplementary [alt text: A mind map of the four core nonprofit financial statements and the details they include, which are discussed below.]
- Statement of activities. The nonprofit equivalent of a for-profit income statement, this report details your organization’s annual revenue, expenses, and change in net assets. You can compare this report to your current operating budget to assess the difference between your projected and actual spending and fundraising numbers, then use those insights to develop more accurate future budgets.
- Statement of financial position. Also known as a balance sheet, this statement outlines your nonprofit’s assets, liabilities, and net assets. Using this information, you can determine your organization’s financial health—i.e., how prepared you are to recover from unexpected changes in your circumstances and whether you’re in a good place to plan for growth.
- Statement of cash flows. This report shows how cash moves in and out of your nonprofit through operating, investing, and financing activities. It’s generally recommended to compile this statement monthly along with creating a year-in-review version. That way, you can more effectively monitor cash flow throughout the year and keep your spending and fundraising on track with your budget.
- Statement of functional expenses. This statement breaks down your organization’s expenses into program, administrative, and fundraising cost categories. It’s the one financial statement unique to nonprofits because organizing expenses according to these functions shows how each of your expenditures furthers your mission and whether you could use your resources more efficiently to make a greater impact.
In addition to these internal decision-making purposes, financial statements support external accountability in several ways. For example, grantmakers may ask you to submit copies of these reports along with your applications to demonstrate that your nonprofit manages its funding wisely and will do the same with their grant should you win it.
Also, to promote transparency with donors, DonorSearch recommends using the data in your financial statements to create the charts and graphs in the financial overview section of your nonprofit’s annual report. Then, you can attach the full statements as appendices in case some readers want to dig deeper.
2. Tax Forms
Financial statements can also serve as reference documents for completing the tax forms your nonprofit has to file every year. Even though your organization is exempt from federal income tax (and often state taxes as well), you’re still required to submit an annual return to the IRS to demonstrate compliance with nonprofit regulations.
However, not every nonprofit has to file the exact same tax return. There are four versions of the form for exempt organizations, Form 990, which break down as follows:
- Form 990-N: An eight-question online form designed for small nonprofits whose annual gross receipts total less than $50,000.
- Form 990-EZ: A four-page document for mid-sized organizations with gross receipts totaling less than $200,000 and total assets valued at less than $500,000.
- Form 990 (full): A 12-page form for large nonprofits with gross receipts totaling $200,000 or more or total assets valued at $500,000 or more.
- Form 990-PF: A 13-page document that all private foundations have to complete, regardless of gross receipts or total assets.
Depending on the state in which your nonprofit operates, you might have to send a copy of your Form 990 to your state government or file a separate state tax return (well-known examples of state tax forms for nonprofits include Form 199 in California and Form CHAR500 in New York). Plus, as an employer, your organization has to issue individual W-2s to each employee on your payroll and 1099s to any contractors you may work with to report their compensation to the IRS.
The due dates for all of these forms vary:
- Form 990 (all versions): The 15th day of the fifth month after your nonprofit’s fiscal year ends—May 15 for organizations that use the calendar fiscal year.
- State tax forms: Often the same as Form 990, but not always, so check with your state government.
- W-2s and 1099s: January 31, regardless of your nonprofit’s fiscal year.
Create a calendar of these deadlines to ensure you’re prepared to complete them accurately and on time each year.
3. Grant Reports
After your nonprofit wins a grant, the funder will typically ask you to submit periodic reports detailing how you’ve used the grant and the progress you’re making with the initiative it’s funding. Grantmakers see awarding funding as investing in a good cause, so they want to know you’re using the funding as promised for a project or program that aligns with the funder’s values.
While there are many grant reporting best practices to be aware of, here are a few tips to get you started:
- Always know what type of grant you’re applying for. According to Jitasa’s nonprofit revenue recognition guide, grants can be unconditional (awarded all at once with no strings attached), conditional (provided in installments only if your nonprofit continues meeting funder stipulations), or reimbursable (paid after you’ve spent the money for an initiative up front). These categories will influence reporting requirements—e.g., you’ll need to provide detailed expense lists for reimbursable grants and demonstrate ongoing compliance for conditional grants.
- Separate grant revenue and expenses in your financial records. Your bookkeeping system should already organize revenue by source to align with your other financial reports and your budget, so record all grant funding in the “Grants” category. However, when you spend grant money, you also need to note that the expense was grant-related when recording it so you can easily pull spending data for your reports.
- Use grant management software. Dedicated grant management tools help your team create reporting calendars, delegate tasks, track progress, and format reports all in one place. If possible, integrate your grant management and accounting solutions to allow for seamless transfer of grant-related financial information.
Above all, make sure all of your grant reports follow that funder’s unique requirements. Submitting accurate, timely reports that show exactly what the grantmaker wants to see increases your nonprofit’s chances of securing additional funding from them in the future.
Now that you understand the various reports associated with nonprofit accounting, you can more effectively use them to strengthen your organization’s financial health. Use the tips above to get started, and don’t hesitate to reach out to an accountant who specializes in working with nonprofits if you need help or have any questions.
Jon Osterburg
Since joining Jitasa in 2010, Jon Osterburg has helped hundreds of nonprofits around the world effectively manage their finances through tailored, outsourced bookkeeping and accounting services. He currently serves as Jitasa’s Chief Operating Officer, is a member of two nonprofit boards, and has earned a certificate for Executive Education from the Yale School of Management.
This blog is an original work of the attributed author. It is shared with permission via Foundant Technologies’ website for informative purposes only as part of our educational content in the social good sector. This text’s views, thoughts, and opinions belong solely to the author and do not necessarily reflect Foundant’s stance on this topic.