5 Important Non Profit Financial Statements

Non profit financial statements play a central role in how organizations manage resources, demonstrate accountability, and communicate impact. These reports help nonprofit leaders monitor revenue, expenses, liquidity, and long-term sustainability—key factors for making strategic decisions and maintaining transparency. Clear, accurate non profit financial statements may also help build donor trust, support grant requirements, and strengthen organizational stewardship.

At Capital Business Solutions, our team of nonprofit software consulting professionals understands how effective financial reporting supports mission-driven organizations. Below, we break down the most important non profit financial statements, what they include, and why each one matters.

1. Statement of Financial Position (Balance Sheet)

The Statement of Financial Position, also known as the Balance Sheet, is a non profit financial statement that provides a snapshot of an organization’s financial position at a specific point in time. A balance sheet is a crucial tool for non-profit organizations as it helps them track their assets, liabilities, and net assets. 

Whether you are new to accounting for non-profits or you are a seasoned non-profit accounting pro, it’s important to understand the value of balance sheets for non-profit organizations. 

Components of a Nonprofit Balance Sheet

The components of a non-profit balance sheet include three main categories: 

• Assets: Resources that the organization owns or controls, such as cash, investments, property, and equipment. 
• Liabilities: The organization’s financial obligations, such as loans, grants, and other payables. 
• Net Assets: The difference between assets and liabilities and represent the organization’s equity or net worth.

How to Interpret a Nonprofit Balance Sheet

A nonprofit’s total assets must equal its total liabilities plus net assets. Reviewing these components helps leaders understand:

• Liquidity and short-term financial stability
• The organization’s ability to meet obligations
• Trends in long-term sustainability
  Exposure to debt or restricted funds

Why the Statement of Financial Position Matters

This statement remains one of the most widely referenced non profit financial statements because it:

• Shows financial standing at a single point in time
• Offers transparency for donors, grantors, and auditors
• Helps leaders monitor long-term financial health
• Supports resource allocation and strategic planning
• Indicates liquidity and financial resiliency
• Ensures the accounting equation stays in balance

2. Statement of Activities (Income Statement)

The Statement of Activities, also known as the Income Statement, is used to report an organization’s revenue and expenses over a specific period of time and is one of the important non profit financial statements for accountants to consider when preparing financial documentation. An income statement is a critical tool for non-profit organizations as it helps them track their financial performance and understand their sources of revenue and expenses.

Components of the Nonprofit Income Statement

The components of a non-profit income statement include revenue, expenses, gains, and losses. 

• Revenue: Includes all sources of income for the organization, such as donations, grants, and program fees. 
• Expenses: Include all costs associated with running the organization, such as salaries, rent, and supplies. 
• Gains and Losses: Refer to any income or expenses that are not part of the organization’s normal operations, such as gains or losses on investments.

How to Interpret the Statement of Activities

Leaders evaluate:

• The relationship between revenue and expenses
• Financial sustainability over time
• Mission delivery efficiency through program-to-administrative ratios
• Whether revenue diversity supports long-term stability

Why the Statement of Activities Is Important

This statement is essential because it:

• Tracks financial performance across a reporting period
• Reveals where funding comes from and how it is spent
• Enables informed budgeting and resource allocation
• Enhances transparency for boards, donors, and grant makers
• Helps identify financial trends that guide long-term planning
• Summarizes performance in a format stakeholders can easily understand

3. Statement of Cash Flows

The Statement of Cash Flows reports an organization’s cash inflows and outflows over a specific period, making it one of the most important non profit financial statements to prepare. Preparing a cash flow statement is one of the challenges of non-profit accounting, as there can be a lot of complexity to the unique cash flow items of a particular organization. A cash flow statement is a critical tool for non-profit organizations as it helps them track their cash position and understand their sources and uses of cash.

Components of the Cash Flow Statement

The following is a breakdown of what to include on a cash flow statement for non-profit financial reporting: 

• Operating Activities: Includes cash received from the organization’s primary operations, such as program fees and donations.
• Investing Activities: Cash inflows from investing activities include cash received from the sale of investments or property. 
• Financing Activities: Include cash received from loans or grants.
• Cash Outflows: Include cash paid for expenses, investments, and financing activities, such as loan payments or grant distributions. 

How to Interpret a Cash Flow Statement

Key indicators include:

• Whether the organization generates sufficient cash to sustain operations
• Patterns of spending that may affect liquidity
• How investment and financing activities influence financial stability
• Whether cash flow aligns with mission priorities

Why Cash Flow Reporting Matters

Cash flow reporting is essential because it:

• Tracks cash inflows and outflows across a specific period
• Helps leaders anticipate short-term financial needs
• Improves decision-making around spending and reserves
• Supports transparency for board members and donors
• Identifies patterns that influence long-term cash planning
• Makes the organization better prepared for audits and compliance

4. Notes to Financial Statements

Notes to Financial Statements are additional disclosures that provide detailed information about an organization’s financial position, performance, and other important aspects of its operations. When considering how accounting for non-profits works, it’s vital for non-profit accountants to understand that the purpose of these notes is to provide transparency and clarity to stakeholders, such as donors, grantors, and other interested parties, about the organization’s financial activities.

What Notes to the Financial Statements Typically Include

The components of notes to financial statements for nonprofits may include information on:

• Accounting Policies: These can include information on how the organization recognizes revenue and expenses. 
• Significant Accounting Estimates: Including information on the fair value of investments or the useful life of property and equipment. 
• Contingencies: These may include information on legal or environmental liabilities, while related-party transactions may include information on transactions with board members or other insiders.
• Related Party Transactions: Refers to financial transactions between an organization and parties that are related to the organization, such as board members, executives, or their immediate family members. 

Why Notes Are Critical for Nonprofit Transparency

Notes enhance the usefulness of non profit financial statements by:

• Providing clarity and necessary disclosures for auditors and donors
• Explaining complex transactions that affect financial position
• Highlighting risks or uncertainties
• Informing leadership decisions on financial management
• Ensuring compliance with industry standards and regulations
• Offering stakeholders a deeper understanding of organizational performance

5. Statement of Functional Expenses

The Statement of Functional Expenses is a nonprofit financial statement that categorizes expenses both by their function (program, management, and fundraising) and by their nature (salaries, occupancy, supplies, etc.). While not required for every organization, this statement is essential for federally regulated nonprofits and is widely used to demonstrate how efficiently funds are being deployed toward mission-driven activities.

Components of the Statement of Functional Expenses

The Statement of Functional Expenses includes two key dimensions of reporting.

Functional Categories

These categories show why the expenses were incurred: 

• Program Services: Costs directly tied to mission delivery, such as program staff, materials, and outreach.
• Management and General: Administrative expenses like governance, finance, human resources, and office operations.
• Fundraising: Costs associated with securing contributions, including donor communications, events, and development staff.

Natural Expense Classifications

These categories show what the money was spent on. Examples include:

• Salaries and benefits
• Professional services
• Occupancy and utilities
• Supplies and equipment
• Travel and training
• Depreciation
• Insurance and technology costs

How to Interpret the Statement of Functional Expenses

Leaders assess the Statement of Functional Expenses by reviewing:

• The percentage of expenses allocated to program services
• Trends in administrative and fundraising costs
• Whether spending aligns with mission priorities
• Cost efficiencies or inefficiencies across departments
• Compliance with funder or regulatory reporting requirements

Why the Statement of Functional Expenses Matters

This nonprofit financial statement is valuable because it:

• Demonstrates how effectively the organization allocates funding
• Provides transparency for donors and grant makers evaluating stewardship
• Supports Form 990 reporting and compliance with federal requirements
• Helps identify patterns in cost management and investment in mission delivery
• Enhances accountability by clearly separating administrative and program-related spending
• Offers insight that supports budgeting, forecasting, and long-term strategy

Nonprofit Software Solutions for Preparing Financial Statements

For many nonprofits, general accounting tools simply don’t meet the complexity and reporting demands of fund accounting, grant management, or restricted-fund stewardship. Blackbaud’s Financial Edge NXT was designed specifically for nonprofits and mission-driven organizations—making it a strong choice when seeking to produce and interpret non profit financial statements. 

Key Capabilities of Financial Edge NXT 

• Fund accounting and general ledger built for nonprofits
• Comprehensive financial reporting and budgeting
• Grant and fund management with transparency
• Streamlined accounts payable, receivable, and expense Management
• Real-time reporting, dashboards, and drill-down analytics
• Scalability and integration with fundraising/CRM systems

Benefits of Financial Edge NXT for Nonprofits Teams

Using nonprofit financial software like Blackbaud’s Financial Edge NXT offers nonprofits an efficient way to produce high-quality non profit financial statements while simplifying complex fund management. 

It helps ensure:

• Transparency and accountability to donors, grantors, and board members
• Consistent, audit-ready financial reporting
• Clear allocation and tracking of restricted funds and grants
• Reduced risk of errors, duplicative entries, or compliance issues
• Better data for strategic decision-making and long-term financial planning

At Capital Business Solutions, we often recommend Financial Edge NXT—paired with nonprofit financial consulting—for organizations that need a robust, flexible, and scalable accounting foundation.

Contact Our Nonprofit Financial Software Consultants Today

If preparing your non profit financial statements feels overwhelming, our team can help. Capital Business Solutions provides nonprofit financial consulting and software training designed to improve accuracy, transparency, and long-term financial performance

Reach out today to learn how our team can support your organization’s financial reporting needs by calling  (888) 249-6008 or filling out our contact form to get started.