A nonprofit’s main focus is to carry out its mission to the best of its ability yet there’s one thing that cannot be lost in the desire to do good: A fiduciary responsibility to its funding sources and the community to use those resources prudently.
In their book “The Best of Boards,” Marci Thomas and Kim Strom-Gottfried explained that executives and board members must spend time, regardless of how little joy they get from it, to obtain the necessary expertise to implement systems to ensure regulatory compliance and accurate financial reporting, among other things.
All nonprofits have at least three or four – depending on the type of organization – financial statements that they must submit to ensure compliance. These statements, which must be read together to have a complete picture of the organization, were described by Thomas and Strom-Gottfried:
- Statement of Financial Position: Also known as a balance sheet, this statement reports the organization’s assets, liabilities, and net assets at a specific point in time (usually at the end of the organization’s fiscal year).
- Statement of Activities: This statement reports the results of operations (revenues and expenses) and change in net assets for the year.
- Statement of Cash Flows: This statement provides information about the cash receipts and disbursements of the organization that result from operating activities, financing activities, and investing activities.
- Statement of Functional Expenses: This statement provides information about the organization’s expenses by function and by natural classification.