Statement of Financial Position: Reading a Nonprofit Balance Sheet

Robust internal controls are vital for ensuring compliance and preserving the organization’s financial health. Solvency ratios provide insights into a nonprofit’s long-term financial stability and ability to meet long-term obligations. The debt-to-equity ratio, calculated by dividing total liabilities by total net assets, is a key solvency measure.

Statement of Financial Position: What are Nonprofit Net Assets?

Also it may not be desirable to sell the property and equipment your organization uses in its operations. Even if you did sell, you’ll likely get sale proceeds different than the $50,000 carrying value. Effective management of these assets ensures that nonprofits can continue to operate efficiently, expand their services, and make a lasting impact. In addition, as part of the annual audit process, auditors will validate asset classifications to ensure the organization has properly recorded all restricted contributions. They will also review https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ all releases from restrictions to ensure the organization is spending funds appropriately.

Key Financial Ratios for Nonprofit Success: A Comprehensive Guide

While both have important roles in financial management, a CPA (Certified Public Accountant) has more expertise, especially in areas like tax compliance and complex financial reporting. On the other hand, a bookkeeper usually handles day-to-day financial transactions. It’s important for nonprofits to use these roles effectively to keep their finances compliant and transparent.

7 Restricted and unrestricted funds

• The asset turnover ratio, calculated by dividing total revenue by average total assets, measures the efficiency of asset use in generating revenue.
• Net assets serve as a vital indicator of a nonprofit’s financial stability and viability.
• Identify trends and changes in sources of revenue, expenses, and changes to net assets.
• Even if you did sell, you’ll likely get sale proceeds different than the $50,000 carrying value.
• For example, donor-restricted net assets can be broken down into (1) the amount maintained in perpetuity and (2) the amount expected to be spent over time or for a particular purpose.

The asset turnover ratio, calculated by dividing total revenue by average total assets, measures the efficiency of asset use in generating revenue. Another important efficiency metric is the receivables turnover ratio, which assesses how quickly a nonprofit collects outstanding receivables. Regular analysis of efficiency ratios helps nonprofits identify operational inefficiencies and enhance overall performance. Understanding and effectively managing net assets is crucial for the health and success of nonprofit organizations.

• Similarly, “net assets with donor restrictions” is the official terminology for restricted net assets.
• For nonprofit professionals looking to deepen their understanding of financial management and improve their skills in managing net assets, a variety of resources are available.
• Understanding and adhering to these regulations is essential, as failure to comply can result in penalties or loss of tax-exempt status.
• A common misperception is that net assets equals the amount of resources the organization has immediately available to spend.
• Functional categories include fundraising and management and general, as well as individual programs that the organization has undertaken.

Your nonprofit needs to save money on a regular basis to build your reserve fund in the case of emergencies (just like individuals). Therefore, it’s best and indicates better financial health if your savings indicator ratio is greater than one. Your nonprofit finance team also leverages KPIs to define financial success, measure the health of your nonprofit, and manage your financial standing.

If you owned a house (an asset) valued at $300K, and you had an outstanding mortgage balance (a liability) of $200K, your net assets (equity) would be $100K. Likewise, your nonprofit’s net assets are the difference between your assets and liabilities. If your assets increase and your liabilities stay the same, then your net assets will also increase. But if your liabilities increase without any corresponding increase in assets, then your net assets will decrease. It’s best to hire an in-staff or freelance accountant to create these reports, but if funds are unavailable, we hope this article helps you get started.

Solvency Ratios

Often equated with a balance sheet, this statement provides a snapshot of the organization’s financial health at a specific point in time. It lists all assets, liabilities, and net assets, allowing stakeholders to understand the resources available and the obligations owed. The delineation between unrestricted, temporarily restricted, and permanently restricted net assets is clearly depicted here. The reclassification process also involves updating financial statements to reflect the change in the nature of the net assets. This ensures that stakeholders have an accurate understanding of the organization’s financial position.

Permanently restricted net assets are funds that donors have stipulated must be maintained in perpetuity. These assets are often part of an endowment, where the principal amount is preserved, and only the income generated from it can be used for specific purposes. For example, a donor might establish a scholarship fund where the principal remains intact, and only the interest or investment returns are used to award scholarships each year. The stewardship of permanently restricted net assets is a significant responsibility, as it involves balancing the need to generate income with the obligation to preserve the principal for future generations. Besides the terminology, a key difference between for-profit organizations’ equity and nonprofit net assets is that not all nonprofit net assets should be categorized the same way. In the system of fund accounting that nonprofits use, some funding has specific requirements for how you can use it.