Understanding Nonprofit Financial Statements: A Quick Guide for Executive Directors

Running a nonprofit means wearing a lot of hats—and one of the most intimidating can be the “finance hat.” If you're not a trained accountant, financial statements can feel like a foreign language. But as an Executive Director, having a working knowledge of your organization’s financial statements isn’t optional—it’s essential.

This guide will help you break down the most important nonprofit financial reports so you can lead with confidence, communicate clearly with your board and funders, and make smart decisions that support your mission.

Why Financial Statements Matter

Financial statements aren’t just for your accountant or auditor. They provide the clearest picture of your nonprofit’s financial health—and they’re crucial for:

• Board reporting and transparency
• Grant applications and renewals
• Strategic decision-making
• Risk management and compliance
• Communicating with donors and funders

Understanding the numbers doesn’t mean you need to crunch them yourself—but you do need to know what you’re looking at, what questions to ask, and how to spot red flags.

The Core Financial Statements Every Nonprofit Should Use

1. Statement of Financial Position (Balance Sheet)

The Statement of Financial Position is a snapshot of your organization’s finances at a specific point in time. It shows:

• Assets – What your nonprofit owns (e.g., cash, grants receivable, prepaid expenses, equipment)
• Liabilities – What your nonprofit owes (e.g., unpaid vendor bills, credit cards, payroll liabilities, deferred revenue)
• Net Assets – The difference between your assets and liabilities

Net assets are further categorized as:

• Without donor restrictions – These funds can be used flexibly at the organization’s discretion
• With donor restrictions – These are funds restricted by the donor for specific uses or time periods

🔍 Why it matters: This statement helps you understand liquidity (how much cash is available), financial stability, and how donor-restricted funds are impacting your bottom line.

2. Statement of Activities (Income Statement)

This report shows your organization’s revenues and expenses over a defined period, such as a month, quarter, or year. It’s often what your board and funders focus on first.

It typically includes:

• Income broken out by source (e.g., grants, donations, program income, investment income)
• Expenses grouped by function or category (e.g., salaries, supplies, rent, travel)
• Change in net assets (your surplus or deficit)

This report may also show activity separately for restricted and unrestricted funds.

🔍 Why it matters: The Statement of Activities tells you whether you’re operating at a surplus or deficit, where your funding is coming from, and whether your spending aligns with your mission.

3. Statement of Functional Expenses

Unique to nonprofits, this statement breaks down expenses across three functions:

• Program Services – Direct costs of delivering your mission (e.g., supplies, staff time for programs)
• Management & General – Administrative costs (e.g., accounting, HR, legal, executive leadership)
• Fundraising – Costs associated with donor cultivation and events

Funders and oversight bodies use this report to assess how efficiently your nonprofit operates. Many grant applications ask for this breakdown, and it’s required on Form 990.
If you use Quickbooks Online or a similar software, this report is typically the Statement of Activities displayed by class, where the classes represent the breakdown of the funcional expense categories.

🔍 Why it matters: This report helps you demonstrate stewardship and transparency—especially around administrative and fundraising expenses.

4. Statement of Cash Flows

This report tracks how cash is moving in and out of your organization. It's divided into:

• Operating Activities – Day-to-day transactions (donations, vendor payments, payroll)
• Investing Activities – Purchases or sales of long-term assets (e.g., equipment)
• Financing Activities – Loans, lines of credit, or major donor gifts earmarked for specific purposes

Even if your income statement shows a surplus, you could still be short on cash. This report gives you insight into your real-time financial flexibility.

🔍 Why it matters: It helps ensure you can meet short-term obligations like payroll and rent—critical for planning and risk management.

Questions to Ask When Reviewing Financials

Not sure where to begin? Start by asking your accountant or financial team:

• Are we operating at a surplus or deficit? Why?
• How much of our cash is restricted?
• What’s our average monthly operating expense, and how many months of reserves do we have?
• Are our admin and fundraising costs in line with benchmarks for our size/type?
• Do we have enough liquidity to cover upcoming expenses?

Red Flags to Watch For

Keep an eye out for signs that your financial health may need attention:

• Consistent deficits year-over-year
• Increasing liabilities (especially short-term debt)
• Low or declining unrestricted net assets
• Frequent cash flow shortages
• Poor documentation of restricted funds

Even if things seem stable, don’t assume all is well—dig into the details to make sure.

Best Practices for Executive Directors

Here’s how to keep your finger on the financial pulse:

1. Hold monthly financial reviews.

Carve out time to review financials with your accountant, bookkeeper, or outsourced team—even if it’s just 30 minutes. This helps you stay proactive.

2. Look for trends, not just line items.

One month doesn’t tell the whole story. Look at year-over-year or quarter-over-quarter changes to understand patterns.

3. Use visuals to simplify the numbers.

Charts, graphs, and dashboards make it easier to spot trends and communicate financials to your board.

4. Connect your budget to your financials.

Review actuals vs. budget regularly to make sure spending aligns with expectations and funding goals.

5. Collaborate with your accountant.

Don’t just receive reports—ask questions, flag concerns, and seek guidance. Your accountant should be a partner, not just a processor.

Final Thoughts

Financial statements can feel overwhelming at first, but with a basic understanding, they become powerful tools for leadership. When you can confidently read and interpret your nonprofit’s financials, you’re not just “doing compliance”—you’re making smarter decisions, building trust with your board, and strengthening your ability to fulfill your mission.

Want financial statements that are clear, accurate, and board-ready?
At Complete Balance Accounting & Consulting, we specialize in helping Executive Directors like you clean up their books, understand their numbers, and build systems that support growth and transparency.

Let’s make your financials something you feel good about.
👉 Contact us to get started.
👉 Visit our nonprofit services page
👉 Download our Nonprofit Financial Health Checklist

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