Why Financial Statements Matter for Every Nonprofit Leader
Whether you lead a small community nonprofit or manage a multi-million-dollar organization, your financial statements tell your mission’s story in numbers.
Understanding how to read them isn’t just your accountant’s job — it’s critical for making informed decisions, securing funding, and communicating transparency to donors and your board.
Let’s break down the three key financial statements every Executive Director should know — in plain English.
🧾 1. The Statement of Financial Position (Balance Sheet)
The Statement of Financial Position is the nonprofit version of a balance sheet.
It shows what your organization owns, owes, and what’s left over — or, in accounting terms:
Assets = Liabilities + Net Assets
What It Tells You:
- Assets: Cash, investments, receivables, equipment, and property.
- Liabilities: Payables, credit cards, loans, or deferred revenue.
- Net Assets: The difference between assets and liabilities — broken into three categories:
- Without donor restrictions
- With donor restrictions (time or purpose)
Why It Matters:
- Reveals your nonprofit’s financial health at a single point in time.
- Shows whether your nonprofit has enough liquidity to cover short-term obligations.
- Helps board members and funders assess financial stability and reserve strength.
Pro Tip: Always review your current ratio — total current assets divided by current liabilities. A ratio above 1.0 means you have enough short-term assets to meet obligations.
📈 2. The Statement of Activities (Income Statement)
The Statement of Activities is like a profit and loss statement for nonprofits — except instead of profit, it shows how your organization supports its mission through revenue and expenses.
Key Sections:
- Revenue (Support): Contributions, grants, membership dues, and program income.
- Expenses: Program services, management & general, and fundraising.
- Change in Net Assets: The “bottom line” — whether your organization operated at a surplus or deficit during the period.
Why It Matters:
- Reveals whether your nonprofit is financially sustainable.
- Helps you evaluate program effectiveness — are funds going where they should?
- Shows donors and boards that your organization uses resources efficiently and transparently.
💬 Example:
If 80-85% of your expenses are going toward program services, that’s a strong indicator of mission alignment — and something donors love to see.
3. The Statement of Functional Expenses
The Statement of Functional Expenses is unique to nonprofits.
It breaks down each expense by both its nature and function, showing exactly how resources are being used.
What It Includes:
- Rows (by nature): Salaries, rent, supplies, professional services, etc.
- Columns (by function):
- Program Services – direct mission work
- Management & General – administrative operations
- Fundraising – development and donor relations
Why It Matters:
- Shows funders that you’re using resources efficiently.
- Required by IRS Form 990 and GAAP (ASC 958) for financial reporting.
- Helps identify areas to improve cost allocation and transparency.
How These Statements Work Together
| Statement | Purpose | Key Question Answered |
|---|---|---|
| Financial Position | Snapshot of assets, liabilities, and net assets | “What do we own and owe?” |
| Activities | Shows revenues and expenses over time | “Did we operate at a surplus or deficit?” |
| Functional Expenses | Details how money was spent by category | “Are we using funds efficiently?” |
Together, these statements paint a full picture of your nonprofit’s financial story — from how you earn revenue to how you use it to drive impact.
Tips for Executive Directors
✅ Review monthly, not annually. Don’t wait until audit season.
✅ Ask questions. If something doesn’t make sense, your accountant should explain it in plain terms.
✅ Connect finance to mission. Use these reports to tell a story — not just about dollars, but about impact.
✅ Leverage dashboards. A visual dashboard can simplify trends in revenue, expenses, and cash flow for quick decision-making.
Final Thoughts
You don’t need to be an accountant to understand your nonprofit’s financials — you just need the right guidance.
By learning how to read your statements, you’ll make stronger strategic decisions, impress funders, and lead your organization with confidence.
At SSY Accounting Solutions, we specialize in outsourced nonprofit accounting and fractional CFO services that help mission-driven leaders understand their numbers and tell a powerful financial story.
Learn more at www.ssyaccounting.com