DEVELOPING FINANCIAL STATEMENTS

Statement of Financial Position

• The Statement of Financial Position (SOFP) is the non-profit equivalent of a balance sheet for a for-profit corporation.
• The SOFP takes a snap-shot of an organization’s financial resources and obligations at one point in time, usually the end of a month, quarter or year.
• The value of assets that are receivables must be discounted by the amount that may not be fully collected (as “uncollectibles”).
• All other assets should be listed at cost except marketable securities (stocks and bonds), which should be listed at fair market value or cost, whichever is lower.
• If the non-profit sells items (e.g. magazines, T-shirts, etc.), its inventory should be included as a short-term asset, valued at the lower of its cost or market value depending on the inventory accounting method used.
• Some non-profits will have intangible assets, such as a copyright or trademark, listed on their statement of financial position as long-term assets.
• It's unwise for a non-profit to maintain significant amounts of uninvested cash; it should take advantage of different types of short-term investments to remain somewhat liquid but get a reasonable return on its funds.
• The SOFP demonstrates several key points about an organization:
  
   
 Ø Liquidity;
   Ø Indebtedness;
   Ø Store of financial reserves (or net asset).
 
• A quick measure of a non-profit’s financial stability is its ability to pay its current liabilities with its current assets. Based on that criteria, Kids for the Future, our sample non-profit, is not quite financially sound – if it had to pay off its current liabilities in the immediate future, it would be more than $5,000 short.

Statement of Activities

• The Statement of Activities and Changes in Net Assets (SOA) is the non-profit equivalent to an income statement for a for-profit corporation.
• The SOA is also sometimes called the Statement of Support, Revenues and Expenses.
• The SOA reflects the status of a non-profit’s financial activities for a specific period.
• Program expenses are all costs incurred directly to support the mission of the non-profit organization. Typical program expenses include salaries, consultant fees, books, supplies, utilities and travel.
• Administrative expenses are all costs incurred for support services for the non-profit organization. Typical administrative expenses include salaries, materials, supplies and utilities.
• Fundraising expenses are all costs incurred to support raising funds for the non-profit organization. Typical fundraising expenses include salaries, consultant fees, supplies, travel and utilities.
• Non-profits could also have an expense called cost-of-sales if they sold goods (such as magazines and T-shirts) to raise income.
• The objective of the non-profit organization is to at least break-even or run a surplus each year. Occasional deficits can be managed if the organization has an adequate fund balance to cushion it during financially difficult years.
• Like the monthly budget reports, the end of year SOA can be compared to the annual budget to identify where the organization had financial success and where it needs to improve in future years.
• The SOA can be used as a basis for the organization’s next budget.
• An organization’s SOA’s over several years can provide a clear picture of the direction the organization is going financially, illuminating where and how revenues and expenses are changing. These trends can provide valuable planning information for the non-profit manager.

General

• Potential funders will often request a copy of a non-profit’s most recent audited financial statements in addition to its budget; the budget will show how the organization hopes to operate, the statements of financial position and activities will show the organization’s actual operation.
• Financial statements are valuable tools for non-profit managers; like monthly budget reports comparing actual to budgeted expenses, financial statements can give managers warnings of impending financial difficulties and identify possible opportunities.
• Based on the size of your budget and your state laws, you may need to have your financial statements audited by a CPA; check with your non-profit’s financial advisor.

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