We sat in a nonprofit board meeting last year and watched something happen that occurs more often than anyone admits. The treasurer presented the financial statements. Every head in the room nodded. And when it came time for questions, there was silence.
Not the silence of understanding. The silence of people who did not want to admit they were lost.
If you serve on a nonprofit board, this is for you. No jargon. No accounting textbook language. Just the concepts you actually need to know.
Why Nonprofit Accounting Is Different
When a for-profit business receives money, it is revenue. Simple. But when a nonprofit receives money, there is almost always a catch. A donor gives $10,000 for youth programs. A foundation awards a grant specifically for administrative costs. A government contract funds a particular service.
Fund accounting exists to track those strings. It makes sure the money goes where it was promised to go.
The Three Buckets
Think of your nonprofit's money as sitting in three buckets:
Unrestricted is money you can use however you need to. This is what pays the electric bill, covers payroll during slow fundraising months, and keeps the lights on. It is your most valuable and typically your scarcest resource.
Temporarily Restricted is money with conditions attached that will eventually be met. A grant that funds a two-year program goes here. As you spend the money on that program, it moves from restricted to unrestricted.
Permanently Restricted is money where the principal cannot be touched, ever. An endowment is the most common example. You can use the investment earnings, but the original gift stays put.
What to Look for in the Financial Statements
#
The Statement of Financial Position
This is the nonprofit version of a balance sheet. Instead of looking at owner's equity, you are looking at net assets broken into those three buckets. If your unrestricted net assets are negative or declining, that is a warning sign.#
The Statement of Activities
This shows how money flowed in and out during the period, broken down by restriction category. The key question: Are you spending restricted funds appropriately, and is your unrestricted funding keeping pace with operations?#
The Statement of Functional Expenses
This shows spending by program versus administration versus fundraising. Donors and watchdog organizations look at this ratio closely. Generally, you want to see 75% or more going to programs.The Questions You Should Be Asking
You do not need to be an accountant. But you do need to ask good questions:
If you ask these four questions at every board meeting, you will be doing your fiduciary duty better than most.