How to Read Your Nonprofit Financial Statements
Most nonprofit leaders were never taught to read financial statements. This guide breaks all four down in plain language — no accounting background required.
The Four Core Nonprofit Financial Statements
Your accountant or bookkeeper should be producing four financial statements for your organization. Each one answers a different question about your finances.
Statement of Financial Position — This is the nonprofit version of a balance sheet. It shows what your organization owns (assets), what it owes (liabilities), and what's left over (net assets) at a specific point in time.
Statement of Activities — This is your income statement. It shows all the revenue your organization received and all the expenses it incurred over a period of time. It tells you whether you ran a surplus or a deficit.
Statement of Functional Expenses — This is unique to nonprofits. It breaks down your expenses into three categories: program services (the work you do), management and general (running the organization), and fundraising.
Statement of Cash Flows — This shows where cash actually came in and went out during the period. It reflects real cash movement, not just accounting entries.
What to Look For in Each Statement
You don't need to understand every line item. Here's what to focus on in each statement.
On the Statement of Financial Position: Are your assets greater than your liabilities? How much cash is on hand? Are any net assets labeled "restricted"?
On the Statement of Activities: Is total revenue higher or lower than total expenses? How does actual revenue compare to budget? Are you spending more on programs than on overhead?
On the Statement of Functional Expenses: What percentage of total expenses goes to programs? Most organizations aim for 70% or more.
On the Statement of Cash Flows: Is the ending cash balance consistent with your Statement of Financial Position? Are you regularly generating or burning cash from operations?
How the Statements Work Together
No single statement tells the complete story. Your Statement of Activities might show a surplus — but if that surplus is entirely from restricted grant revenue, your operating cash could still be tight. The Statement of Financial Position shows your restricted net assets clearly. The Statement of Cash Flows shows you whether you actually have the cash to cover next month's payroll.
When your accountant delivers monthly reports, read them in this order: start with cash flows to understand your immediate position, then check the Statement of Activities for revenue and expense trends, then review the Statement of Financial Position to see how your overall health is tracking.
If your accountant isn't providing narrative context alongside the numbers — explaining what changed and why — that's worth asking for. Numbers alone don't tell you what action to take. Context does. For guidance on what your board should be reviewing each month, see our guide on what financial reports your board should receive.
Common Questions
They're the same thing. Nonprofits use the term "statement of financial position" instead of "balance sheet," but the structure is identical.
Funders and the IRS require nonprofits to show how expenses are allocated across programs, management, and fundraising. It helps demonstrate that resources are being used for mission-related work, not just overhead. It's also required for accurate Form 990 reporting.
Yes. The format and presentation can vary by accountant and software. If you're ever unsure what you're looking at, just ask — a good accountant should be able to walk you through it.
Net assets are the nonprofit equivalent of equity — what's left after subtracting liabilities from assets. Tracking net assets over time shows whether your organization is building financial strength or eroding its foundation. A declining trend over multiple years is a warning sign worth investigating.