Nonprofit Financials – What You Need to Know

We all know that fundraising is about relationships, but let’s be honest, it’s also about money. You don’t need an MBA or a CPA to be a great development officer, but you do need to understand your organization’s financial story.

My advice? See what your donor sees. Become familiar with the documents you provide to prospects and donors and know the story these documents tell about your organization’s financial history and current financial position.

Balance Sheet (aka Statement of Financial Position)

financial statement

The balance sheet provides a snapshot of your organization’s finances at a specific point in time. A balance sheet shows three things about your organization:  1) what it owns (assets), 2) what it owes (liabilities), and 3) its net worth (assets minus liabilities). Already love balance sheets? Read more about the difference between nonprofit and for-profit balance sheets.

          Why Donors Care:  A balance sheet paints a picture of the health of your organization. Donors can assess the kinds of risks and opportunities your organization faces as it works to meet its mission. A balance sheet can help donors answer questions like:

  • Does this organization have access to cash to meet its operating needs?

  • Does this organization have access to flexible funds that will enable it to make adjustments to its activities if needed?

  • Does this organization have access to funds that will help it weather downturns or leverage unforeseen opportunities over the long term?

Income Statement

The income statement shows your organization’s financial activity over a defined period of time - a month, a year, or something in between. Income statements have three main parts:  1) revenue (cash in), 2) expenses (cash out), and 3) net income (revenues minus expenses).

           Why Donors Care:  By reviewing your annual income statement, a donor can tell what your nonprofit’s major expenses are and when they occur (if broken out by month), and where the money comes from. An income statement outlines how well your organization matches expenses to revenues and how money is allocated. Donations received (also called Contributions) are visible in the revenue section.

The expense section lists all costs associated with running your programs, including administrative expenses, aka “overhead,” (a line item often scrutinized by prospects and donors). If you haven’t yet seen it, check out Dan Pallotta’s TED Talk on why we should be paying LESS attention – not more – to nonprofit overhead rates.

Here are definitions for some of the other terms used on a nonprofit income statement.

Annual Operating Budget

Your annual budget shows your organization’s projected costs of running your programs for a year. It also shows your organization’s best guess on how it will earn income and/or seek donated funds – enough to at least cover costs.

          Why Donors Care:  When a donor compares your annual operating budget to your income statement, they’ll get a sense for how your organization’s financial needs are growing (or shrinking) from year to year. They can also see how closely your budget reflects the reality of your income and expenses over the year. Is your budget reasonable? Or just a pipe dream that’s contradicted by actual revenue and expenses born out in the income statement?

Signs of strong financial management and good budgeting give donors confidence that their donations, too, would be well stewarded by your organization.

If you can’t answer a donor’s questions about your organization’s finances, bring in the experts! Your colleagues on the finance team know these documents like the back of their hand and can likely help.

What questions do you hear about your organization’s financial documents? Please share in the Comments box below.

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