While the process can be tedious, compiling nonprofit financial statements allows your organization to evaluate its financial standing and stay accountable to stakeholders. These documents help you use resources effectively to fulfill your nonprofit’s mission.

One of the main financial statements nonprofits develop is a nonprofit balance sheet. To get you up to speed, we’ll review the basics of this report, why it’s important, and how to interpret it so your organization can maximize this data.

What is a nonprofit balance sheet?

A nonprofit balance sheet provides details about your organization’s financial health as of a specific date. Also called a Statement of Financial Position, this report summarizes your nonprofit’s liquidity and financial flexibility through its assets and liabilities.

Why is it important for nonprofits to create balance sheets?

Besides helping your organization make better financial decisions and build trust with stakeholders like donors, board members, and funders, there are instances when your organization must present a balance sheet. For instance, you’ll need an updated nonprofit balance sheet when you:

• File Form 990. All 501(c)(3) organizations must file Form 990 annually to uphold their tax-exempt status. The form requires you to provide a balance sheet to demonstrate your nonprofit’s current financial health.
• Prepare for audits. If your nonprofit undergoes a financial statement audit, presenting an updated nonprofit balance sheet is crucial. Auditors will confirm that each report is accurate and aligned with Generally Accepted Accounting Principles (GAAP).
• Apply for grants. Grant funders want to know that your organization is financially stable and sustainable before agreeing to award funds. They may require a balance sheet to verify responsible resource allocation.

Consistently updating your organization’s balance sheet allows you to stay prepared for these situations and have an accurate picture of your nonprofit’s financial standing.

Nonprofit Balance Sheet Categories

A nonprofit balance sheet has three main categories:

Assets

Assets are resources your nonprofit owns or controls. You’ll categorize these assets based on their liquidity:

• Current assets. Any item you can convert to cash quickly is a current asset. This category includes cash and cash equivalents, accounts receivable, pledges receivable, prepaid expenses, and inventory.
• Noncurrent assets. Items your nonprofit intends to keep for at least a year, such as land, buildings, and equipment, are considered noncurrent assets.
• Intangible assets. Some assets may not be physical but intellectual property like patents and copyrights. Nonprofits typically include these under noncurrent assets.

Liabilities

Liabilities are financial debts or obligations your nonprofit owes. You’ll categorize them similarly to assets:

• Current liabilities. Short-term obligations you’ll pay within the next year are current liabilities. This category includes accounts payable, accrued expenses, and deferred revenue, which you’ll record when your nonprofit has received payment but has not yet delivered the associated goods or services.
• Noncurrent liabilities. Long-term obligations you’ll pay in over a year are noncurrent liabilities. Common noncurrent liabilities include mortgages and long-term lease obligations.

Net Assets

Your net assets are the resources currently available to your organization. Calculate net assets by subtracting your liabilities from your assets. You’ll categorize them based on whether they have donor-imposed restrictions:

• Net assets without donor restrictions. Let’s say your nonprofit hosts a 5K fundraiser and collects donations at the event. These general donations would fall under net assets without donor restrictions, allowing your team to use them for any purpose that fuels your mission.
• Net assets with donor restrictions. On the other hand, you must use net assets with donor restrictions according to the associated limitations. Donors may designate funds for a particular purpose or set a time limit on fund use. Additionally, these restrictions may be permanent or temporary, potentially allowing you to use these funds for a different purpose later on.

How to Interpret a Nonprofit Balance Sheet

While your nonprofit ultimately wants to maximize its net assets, other outcomes—like low assets and high liabilities—should not always be cause for concern. To keep your team realistic and glean useful insights from your balance sheet, YPTC recommends following these tips:

• Consider each section. Reviewing balance sheet categories in isolation doesn’t tell the full story about your nonprofit’s financial health. Instead, you must consider each section equally to understand the relationship between your assets and liabilities. For example, if you only focus on your assets, you may neglect debts in the liabilities section that even your seemingly strong pool of assets can’t cover. Alternatively, suppose you only focus on your liabilities. You may worry that they’re higher than usual when, in reality, your assets may have also increased to keep up with these greater debts.
• Look into context. Even if you have low assets and high liabilities, the context behind these numbers matters. Potential scenarios that would cause lower net assets but not indicate a treacherous financial situation include major projects, seasonality, and high deferred revenue. For instance, you may develop a new program that requires a high initial investment but will ultimately power your mission in the long run. Alternatively, you might simply hit a slow giving period or generate a significant amount of deferred revenue that will eventually become assets.
• Evaluate trends. Determine your nonprofit’s baseline to assess how your organization’s current financial health differs from past performance. For instance, you may have lower net assets than other similar organizations, but if your records indicate they’ve grown over the past few years, you’re likely on the path to sustainability.

Interpreting a balance sheet requires your team to think critically about your nonprofit’s unique situation and how it contributes to financial health. After all, your organization is meant to leverage the resources at its disposal to power its mission, so a perceived dip in resources may have a large payoff down the line.

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In addition to helping your team understand your organization’s financial health and make well-informed decisions, balance sheets also function as stewardship tools. Share your balance sheet with donors to demonstrate responsible fund use and assure them that you’ll continue to leverage resources appropriately to keep your mission alive.