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Understanding Financial Reporting for Non-profit Entities

Financial reporting is an important part of all business operations, not only profit-seeking organizations. Proper financial reporting also plays a role in increasing transparency and raising the degree of accountability for non-profit entities' financial activities. Understand that financial reporting for non-profit entities isn't at all the same as it is with for-profit organizations.

Understanding Financial Reporting for Non-profit Entities

A business plan may just be another box to tick in the bureaucratic process for those running a non-profit organization, but it is an essential planning tool by which they can lead and guide their strategizing. One example is a carefully written non profit business plan template that draws up an actionable roadmap. It can provide definitions for objectives, point in the direction of where to go, and outline how you will get there. It can help solve problems, allocate resources, and plan for sustainable development. We strongly encourage you to examine a non-profit business plan template--to take your organization up the scale of strategic effectiveness and effectivity.

1. Comprehending Non-Profit Entities

Its very nature is one of the most important differences between non-profit entities and for-profit entities. By definition, non-profits must serve the public good. Revenues earned by non-profits return to the organization's programs and serve its mission. Knowing this nature is important in financial reporting. It determines what kind of financial statements should be drawn up and how they should be accounted for.

2. Non-Profit Financial Statements

Non-profit entities are required to prepare three essential financial statements: Balance sheet, income statement, and cash flow. The statement of financial position provides details on assets, liabilities, and net asset values. The statement of activities describes the entity's revenues, expenses, gains, and losses. The statement of cash flows reports on the entity's sources and use of cash.

3. Non-Profit Organizations Accounting Principles

Financial statements of non-profit organizations are prepared using GAAP. The objectives of these principles are to provide a unified principle for financial reporting that institutions can use and compare with one another. In addition, all nonprofit institutions must also adhere to the Financial Accounting Standards Board (FASB) regulations. FASB guidelines provide a great deal of detail on how various items should be accounted for and reported.

4. Regulatory Compliance for Non-Profits

Various rules and regulations, including tax laws, state standards of regulation for non-profit organizations, and the control exercised through representative governing bodies by the federal government. All non-profit organizations are required by tax regulations to complete a yearly return, and their books must be properly set. But they will also have to abide by state regulations--which vary from one state to the next. Ultimately, because non-profit organizations are governed by federal regulations, they have to adhere to the Sarbanes-Oxley Act (the financial scandal law) which protects investors from fraud.

5. Non-Profit Financial Reporting

Reporting is one of the mechanisms by which non-profit organizations can demonstrate their openness and accountability to stakeholders. Hence, such stakeholders as donors and volunteers make non-profit organizations the means to their own end. The purpose of financial reporting is to give stakeholders a basis for making their decision on whether or not they will support the organization. Moreover, financial reporting allows non-profit entities to pinpoint the areas of possible risk and ensure that their operations are complete in every respect.

Indispensable weapons Three major kinds of financial statements are the norm for nonprofit organizations.

  • Statement of Financial Position: Sometimes called a Balance Sheet, this statement is like taking a photo of the nonprofit's financial situation at any one moment. It includes everything from assets and liabilities to net asset values (the difference between the former two). With this statement, one can analyze the liquidity and financial soundness of an organization.

  • Statement of Activities: The statement of activities, like the Profit and Loss Statement in for-profit businesses, reflects revenue (contribution income, membership dues program revenues) as well as expense over a given time; it may use either financial terms or percentages. This statement is used to gauge trends and also determines whether the nonprofit has been able to manage within its budget.

  • Statement of Cash Flows: From this statement, we can see how shifts in the Balance Sheet and income affect cash and cash equivalents, as well as operational activities, investing intensity, and financing needs. It reveals how cash is inflowing and outflowing, which provides information on the organization's ability to make ends meet.

Together, these statements offer an all-around look at a nonprofit's financial condition and help the leadership in making decisions or strategic planning.

To sum up, financial reporting is a method for non-profit groups to share their performance with stakeholders. Knowing non-profit entities' nature, important financial statements, accounting principles, and regulations may also be required for reporting finances. Moreover, non-profit organizations must adhere to a host of regulations and there are drastic repercussions for failure. Through proper management and financial reporting, these non-profit organizations can continue to grow in order to fulfill their mission.

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