11 Sep Understanding and Analyzing Net Assets in Financial Statements

Leaders, board members, and supporters who understand these basics can make informed decisions that contribute to the nonprofit’s mission and sustainability. Evaluating a nonprofit’s financial condition involves examining ratios that illuminate its operational effectiveness and fiscal soundness. These ratios provide a nuanced understanding of resource management and play a critical role in strategic planning and performance assessment. This information is provided for small and midsize nonprofit organizations for educational purposes only.

Understanding Nonprofit Fund Categories

For example, stipulations can restrict funds to investment principle or income. There may also be special reporting or tax requirements based on the type of gift and the specific restrictions placed by the donor. Review and understand these aspects carefully before you begin using the funds.

Nonprofit Net Assets: What They Are and Why They Matter

Among the categories, unrestricted net assets play a particularly versatile role in the financial operations of a nonprofit. Properly managing net assets with donor restrictions is crucial for maintaining trust between donors and the organization. It underscores the nonprofit’s commitment to its donors and its mission, ensuring that all funds are used effectively to make a positive impact on the community it serves. Donors and funders play a crucial role in the success of nonprofit organizations.

Types of Nonprofit Net Assets

Examples include bank balances, accounts receivable, pledged donations, investments, and prepaid expenses. Nonprofit leaders, finance professionals, and board members are encouraged to engage in continuous learning and professional development in financial management. The landscape of nonprofit finance is constantly evolving with new standards, technologies, and strategies emerging that https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ can enhance efficiency and transparency. A good goal for your nonprofit would be to identify a target range for each ratio and periodically reassess the target range to maximize how resources are used. To determine your organization’s target benchmark or goal, use a risk assessment, trend analysis or benchmarking with comparable organizations. The target profit margin would depend greatly on the organization’s nature, size, and goals and is generally determined during the organization’s budget process.

A positive change indicates that a nonprofit entity is prudently managing its resources. It is one of the more closely-watched numbers in the financial statements of a nonprofit entity. Temporarily restricted funds should be recognized in the non-profit’s accounting records as net assets with donor restrictions. When the restriction expires, either through the passage of time or fulfillment of purpose, these funds should be reclassified to unrestricted net assets. When non-profits receive contributions, they must immediately determine whether these are temporarily restricted, permanently restricted, or unrestricted. To do this effectively, organizations should configure their accounting software to create separate ledger accounts for each category.

• This liquidity metric ensures the nonprofit can manage day-to-day operations without financial strain.
• The Statement of Financial Position is the Balance Sheet of a nonprofit organization.
• (However, churches and some other nonprofit organizations are not required to file.) The title of Form 990 is Return of Organization Exempt From Income Tax.
• This would illustrate shifts within the net asset categories over the fiscal period.
• Here’s an example of a Statement of Activities that was a part of the organization’s audited financial statement in 2021 (page 5).
• This article shares what you should include in a nonprofit balance sheet and provides a sample of how to write your own.

What insights can nonprofits get from a balance sheet?

Organizations with healthy unrestricted reserves can pursue grant opportunities that require matching funds or The Key Benefits of Accounting Services for Nonprofit Organizations upfront investment. They can also weather delays in grant payments without compromising program delivery. The statement of activities shows changes in net assets over time, revealing growth trends and funding sustainability.

• Funders, on the other hand, are organizations or institutions that provide grants or sponsorships to fund specific programs or projects.
• Like a for-profit, net asset classifications appear in the equity section of the Statement of Financial Position (SOP).
• It shows the difference between the total assets and liabilities, indicating the organization’s overall financial position.
• A negative number (credit balance) in the assets section of a balance sheet is unusual and should be questioned and explained, except for Accumulated Depreciation.
• In nonprofit organizations, net assets serve as a fundamental indicator of financial health and operational capacity.

Assets – Liabilities = Net Assets

Understanding these elements is crucial for effective financial management within nonprofits. By accurately calculating and categorizing net assets, nonprofits can better allocate resources to sustain their operations and achieve their missions. Since nonprofit organizations don’t profit from the money they make, the accounting processes for nonprofits look somewhat different than for-profit companies.

• However, the account balances will be combined into a few amounts that are presented in the financial statements and IRS Form 990.
• These assets are not bound by donor-imposed restrictions, providing the organization with the flexibility to allocate resources where they are most needed.
• Assets are an important component of net assets as they contribute to the overall financial value of the organization.
• In addition to reporting restricted and unrestricted net assets separately, it’s important to consider them separately when creating your nonprofit’s annual operating budget.
• This statement compares the revenue and expenditures for a fiscal year and breaks down expenses by function.
• In other words, net assets are what remains when all debts and obligations are subtracted from the value of the organization’s assets.

Net assets are a more accurate measure of your nonprofit’s financial position than total assets because they reflect your obligations and commitments to external parties as well as your organization’s wealth. A listing of the accounts available in the accounting system in which to record entries. The chart of accounts consists of balance sheet accounts (assets, liabilities, stockholders’ equity) and income statement accounts (revenues, expenses, gains, losses). The chart of accounts can be expanded and tailored to reflect the operations of the company. If the nonprofit’s board of directors designates some of the nonprofit’s unrestricted assets for a specific purpose, those assets must continue to be reported as net assets without donor restrictions. The measure of operations excludes net investment return in excess of amounts made available for operations.

Statement of Functional Expenses

Examples of these nonprofits include social organizations, chambers of commerce, college fraternities and sororities, amateur sports clubs, employee organizations, and more. Your nonprofit’s Statement of Activities must include your organization’s revenue, expenses, and net assets. If you explored the calculators on this page, you probably have a list of ratios now in front of you regarding your nonprofit’s financial health. However, it can be challenging to understand exactly what you should do with all of these numbers.