As a nonprofit CEO or Executive Director, understanding the financial health of your organization is crucial for making informed decisions and demonstrating transparency to your stakeholders. One essential financial statement that provides valuable insights into your nonprofit’s activities and resources is the Statement of Activities. In this blog post, we will delve into what a Statement of Activities entails, what should be included in it, provide a practical example, discuss how it can be utilized, and answer some frequently asked questions. By the end, you’ll have a clear understanding of this important financial statement and its significance for your nonprofit’s financial management.
What is a Statement of Activities?
The Statement of Activities, an essential tool for any nonprofit organization, is akin to an Income Statement or Profit and Loss Statement in the for-profit business realm. It’s one of the four primary financial statements mandated by the Generally Accepted Accounting Principles (GAAP) for nonprofits, alongside the Balance Sheet (or Statement of Financial Position), Cash Flow Statement, and Statement of Functional Expenses.
The Statement of Activities offers a meticulous account of your nonprofit’s revenues, expenses, gains, and losses over a specific period – often reviewed monthly, quarterly, and/or annually by your Board of Directors. Its detailed breakdown offers valuable insights into the organization’s financial performance and health. Put simply, it provides a picture of where your funds come from (revenues) and where they go (expenses). This revenue can stem from a variety of sources, such as donations, private & government grants, fundraising events, and membership dues. Expenses often cover areas like program services, fundraising, and administrative costs and are tracked against funds with donor restrictions and funds without donor restrictions.
Moreover, the Statement of Activities often forms a crucial part of grant applications and funding requests, as potential donors and grant-makers need an accurate reflection of your organization’s financial performance to make informed funding decisions. It also provides a basis for regulatory bodies to ascertain whether the organization is maintaining its financial responsibility and operating within the prescribed legal parameters.
What Should Be Included in a Statement of Activities?
This section outlines the various sources of income your nonprofit receives and should at the very least break it down by public support, earned revenues, and other revenues. Public support includes categories such as contributions/donations, donated goods, private grants, government grants, and indirect contributions.
Earned revenue includes categories such as contract revenue, program service fees, membership dues, and special event income. Other revenue includes investment income such as unrealized gains and losses. It is crucial to categorize revenue types to make it easier to gain insights into the sustainability of funding sources both for internal purposes and external stakeholders.
This section outlines the various sources of income your nonprofit receives, such as donations, grants, program service fees, membership dues, and investment income. It is crucial to categorize revenue types to gain insights into the sustainability of funding sources.
Donations and Contributions
Donations and contributions include funds or assets voluntarily given to your nonprofit by individuals, corporations, foundations, or other organizations. These contributions can be in the form of cash, securities, property, or in-kind donations, and they play a significant role in supporting your nonprofit’s activities and programs.
Grant income refers to funds received from government agencies, foundations, other nonprofits, or other grant-making entities to support specific projects or initiatives. Grants or federal funding typically have specific requirements and restrictions on how the funds should be used, and they often play a vital role in financing programmatic activities or expanding the reach of your nonprofit’s mission.
Earned revenue is money that your nonprofit collects from program service fees, membership dues, and special event income. This revenue is usually associated with programs or services that directly fulfill your organization’s mission. It can include charges for educational workshops, training sessions, counseling services, or other direct program-related activities as well.
Expenses represent the costs incurred by your nonprofit in carrying out its activities and operations.
Program expenses represent the direct costs associated with delivering your nonprofit’s mission-related programs and services. This section highlights the resources allocated to fulfill your organization’s core activities, such as salaries, program materials, and direct program-related expenses.
Supporting expenses encompass administrative and general costs necessary to keep your nonprofit running smoothly. Examples include rent, utilities, office supplies, salaries of non-program staff, and professional fees.
Fundraising expenses cover the costs incurred to raise funds for your nonprofit’s operations and programs. It includes expenses associated with events, marketing, solicitations, and donor management systems.
To help you grasp the concept, let’s consider a hypothetical nonprofit organization. Here’s an example of what their Statement of Activities might look like.
How Can You Use a Statement of Activities?
- Assess Financial Performance: By analyzing the Statement of Activities, you can evaluate your nonprofit’s financial health and performance. It helps you determine if your revenues are sufficient to cover expenses, identify areas of financial strength or weakness, and make strategic decisions to improve financial sustainability.
- Track Funding Sources: The statement allows you to monitor the sources of revenue for your organization. This helps you identify which funding streams are the most significant and make informed decisions regarding resource allocation and fundraising strategies.
- Demonstrate Accountability: Transparent financial reporting is vital for building trust with stakeholders, including donors, board members, and grantors. The Statement of Activities provides a concise overview of how resources are utilized and demonstrates your commitment to financial accountability.
- Inform Strategic Decision-Making: The Statement of Activities serves as a valuable resource for making strategic decisions within your nonprofit. By analyzing the financial data presented, you can identify areas of financial strength or weakness, assess the impact of different revenue streams, and allocate resources strategically to support your mission and organizational goals. It helps guide budgeting, program planning, and resource allocation decisions.
- Facilitate External Reporting Requirements: The Statement of Activities is often required by external entities, such as regulatory authorities, grantors, and donors. Having a well-prepared and accurate statement enables you to meet these reporting obligations promptly and efficiently. It ensures compliance with reporting standards and demonstrates your commitment to transparency and accountability to external stakeholders.
- Support Grant Applications and Funding Requests: When applying for grants or seeking additional funding, the Statement of Activities can be a powerful tool to showcase your financial stability and the impact of your programs. By presenting a clear picture of your revenue sources, expenses, and net assets, you provide potential funders with the necessary information to evaluate the feasibility and alignment of their funding with your organization’s objectives.
- Identify Trends and Patterns: Regularly reviewing the Statement of Activities over multiple periods allows you to identify trends and patterns in your nonprofit’s financial performance. By comparing year-over-year data, you can assess the effectiveness of your financial management strategies, detect areas of improvement, and make data-driven decisions to enhance your nonprofit’s financial sustainability.
- Enhance Board and Stakeholder Engagement: The Statement of Activities can be a valuable communication tool for engaging board members, staff, donors, and other stakeholders. By presenting financial information in a clear and understandable manner, you foster greater engagement and participation in financial discussions. It allows stakeholders to have meaningful conversations about resource allocation, financial goals, and long-term planning, strengthening their connection to your nonprofit’s mission.
The Statement of Activities is more than just an account of an organization’s revenues and expenses – it’s a dynamic document that should be reviewed regularly, preferably in conjunction with other financial statements, to gain a comprehensive understanding of your nonprofit’s financial position. By providing a clear and comprehensive picture of financial performance, it allows stakeholders to evaluate financial sustainability, effectively utilize its resources towards its stated goals and objectives, and make informed decisions.
Tips for Improving Financial Transparency and Accountability
Financial transparency and accountability are vital for nonprofit organizations to build trust with stakeholders, maintain compliance, and demonstrate responsible stewardship of resources. Here are some key tips to enhance financial transparency and accountability within your nonprofit:
- Clear and Accessible Financial Reporting: Ensure that your financial reports, including the Statement of Activities and other key financial statements, are accurate, clear, and easily understandable. Use plain language and avoid excessive jargon to make financial information accessible to stakeholders with limited accounting knowledge. Provide detailed explanations of revenue sources, expenses, and financial ratios to help stakeholders interpret the information effectively.
- Regular Board and Staff Financial Training: Invest in financial training for your board members and staff, especially those involved in financial decision-making. By improving their financial literacy, you empower them to understand and analyze financial reports, ask informed questions, and provide valuable input during financial discussions. This enhances the overall financial competence and accountability of your organization.
- Establish Internal Controls: Implement strong internal controls to safeguard your nonprofit’s assets, prevent fraud, and ensure accurate financial reporting. This includes segregating financial duties, conducting regular independent reviews or audits, implementing approval processes for expenditures, and maintaining proper documentation and record-keeping practices. Internal controls promote transparency, accountability, and the responsible management of financial resources.
- Engage an Independent Audit or Review: Consider engaging an independent auditor or reviewer to conduct a thorough examination of your nonprofit’s financial statements. An external audit or review adds credibility to your financial reporting and provides an objective assessment of your organization’s financial practices. The resulting audit or review report can be shared with potential funders to demonstrate your commitment to transparency and accountability.
- Publish Annual Reports and Impact Statements: Create annual reports or impact statements that summarize your nonprofit’s achievements, financial results, and impact on the community. These reports provide a comprehensive overview of your organization’s activities and allow stakeholders to understand how their support contributes to your mission. Incorporate key financial information and narratives that highlight the use of resources, program outcomes, and the overall effectiveness of your nonprofit.
- Embrace Technology: Leverage technology to streamline financial processes, improve accuracy, and enhance transparency. Utilize accounting software that generates accurate financial statements, tracks expenses, and automates reporting. Online platforms or portals can be used to share financial information with stakeholders, allowing them to access reports, review financial statements, and monitor progress in real-time.
- Develop and Adhere to Financial Policies: Establish clear financial policies and procedures that outline guidelines for budgeting, spending, expense reimbursement, and financial decision-making. Ensure that these policies are consistently followed by board members, staff, and volunteers. Adherence to financial policies reinforces accountability and ensures consistent financial practices throughout your nonprofit.
Frequently Asked Questions
What is the difference between a Statement of Activities and a Statement of Financial Position?
The Statement of Activities focuses on revenues, expenses, gains, and losses over a specific period, providing insights into financial performance. On the other hand, the Statement of Financial Position (also known as the Balance Sheet) provides a snapshot of your nonprofit’s financial position at a particular date, showcasing assets, liabilities, and net assets. These financial statements are interrelated — one cannot exist without the other.
How often should a nonprofit prepare a Statement of Activities?
Nonprofits typically prepare their final Statement of Activities annually as part of their audit or review and make it publicly available. However, organizations should generate it internally more often, such as monthly or quarterly, to monitor financial performance more closely.
Can I create a Statement of Activities using accounting software?
Yes, many accounting software platforms have built-in templates and features to generate financial statements automatically. These tools can streamline the process and ensure accuracy in your financial reporting. We recommend Quickbooks Online as our preferred accounting software.
Are there any specific guidelines or standards for preparing a Statement of Activities?
Yes, nonprofit organizations are required to follow generally accepted accounting principles (GAAP) or other applicable accounting frameworks, such as the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958 for nonprofits. These standards provide guidelines for proper financial reporting, including the preparation of the Statement of Activities.
What if my nonprofit has multiple programs or projects? How do I reflect them in the Statement of Activities?
If your nonprofit operates multiple programs or projects, it is important to allocate your expenses and revenues accordingly. You can include separate columns or sections in the statement to present the financial information for each program or project individually. This allows you to track and assess the financial performance of each initiative separately.
Can I include non-cash items in the Statement of Activities?
Yes, you can include non-cash items in the Statement of Activities if they are significant and have an impact on your organization’s financial operations. Non-cash items may include donated goods or services, which need to be recorded at their fair market value. Including these items provides a more comprehensive view of your nonprofit’s financial picture.
How can I interpret the surplus or deficit indicated in the Statement of Activities?
The surplus or deficit shown in the Statement of Activities represents the change in your nonprofit’s net assets over the specified period. A surplus indicates that your revenues exceeded your expenses, resulting in an increase in net assets, while a deficit implies that your expenses were higher than your revenues, leading to a decrease in net assets. It is essential to analyze the surplus or deficit in conjunction with other financial indicators and financial statements such as the Statement of Financial Position and Statement of Cash Flows to gain a holistic understanding of your organization’s financial position.
Can the Statement of Activities be useful for budgeting purposes?
Yes, the Statement of Activities can provide valuable insights for budgeting. By examining your previous financial performance, you can identify trends, assess the effectiveness of revenue sources, and make informed projections for future periods. This helps you develop realistic budgets and allocate resources strategically to achieve your nonprofit’s goals.
Is the Statement of Activities the only financial statement I need for my nonprofit?
No, the Statement of Activities is one of several essential financial statements for nonprofits. In addition to the Statement of Activities, you should also prepare a Statement of Financial Position (Balance Sheet), Statement of Cash Flows, and footnotes to the financial statements. These statements collectively provide a comprehensive overview of your nonprofit’s financial position, performance, and cash flow.
Understanding and effectively utilizing the Statement of Activities is crucial for nonprofit organizations to achieve financial stability and fulfill their mission. If you need assistance in creating a Statement of Activities tailored to your nonprofit or have any other accounting and financial concerns, book a free consultation with a Velu CPA expert today. Our dedicated team is here to support you in managing your nonprofit’s finances and achieving long-term sustainability.
Tyler Wilcox, CPA
Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses. As a fractional CFO, he goes beyond routine duties, guiding organizations with strategic insights for sound financial decisions. Velu’s services address the unique challenges faced by nonprofits and small businesses, fostering sustainable growth. Tyler places great emphasis on meticulous attention to detail in financial record-keeping, implementing efficient systems to ensure transparency and streamline operations.
Learn more about Tyler and the Velu team on our About Us page. We’re excited to connect with you!