How to Read Nonprofit Financial Statements (Even If You Aren’t a CPA)

A nonprofit can have money in the bank and still be in financial trouble.

That is because the most important financial questions are not limited to, “How much cash do we have?” Leaders also need to know where the money came from, what it may be used for, where it is going, and whether the organization can sustain its work over time.

Many nonprofit executives and board members carry responsibility for financial oversight without having an accounting background. The good news is that you do not need to be a CPA to ask useful questions. Financial statements are not merely reports for auditors or documents to post online. Used well, they are decision-making tools.

The three financial statements every nonprofit leader should know

Most nonprofit financial reporting centers on three statements. Each answers a different question.

1. Statement of financial position

The statement of financial position is the nonprofit equivalent of a balance sheet. It shows the organization’s financial position at a specific date.

Assets: what the organization owns or expects to collect, such as cash, investments, receivables, and property.

Liabilities: what the organization owes, such as loans, unpaid bills, and accrued expenses.

Net assets: the residual interest available to the nonprofit after liabilities are subtracted from assets.

The central question is: What do we own, what do we owe, and what remains available to support the mission?

2. Statement of activities

The statement of activities is similar to a for-profit income statement. It reports revenue, expenses, and the change in net assets over a period of time—such as a month, quarter, or year.

It helps leaders determine whether the nonprofit operated at a surplus or deficit, where revenue came from, and what it cost to run the organization’s programs and supporting functions.

3. Statement of cash flows

The statement of cash flows explains how cash moved through operating, investing, and financing activities. This matters because an organization can report a surplus and still lack enough available cash to make payroll or pay bills.

Key takeaway: Profitability and liquidity are not the same. A nonprofit needs both an economically sustainable model and enough accessible cash to meet its obligations.

What the statement of activities can tell you

The statement of activities tells the story of financial performance over a chosen period. Comparing the current month with the prior month, the current year with budget, and the current year with the prior year can reveal trends that a single column of numbers may hide.

Contributions and grants

This category may include government grants, foundation grants, individual donations, and corporate contributions. Do not stop at the total. Ask:

Is any of this funding restricted to a particular purpose or time period?

Are donations reasonably consistent from year to year?

Are we overly dependent on one donor, grantor, or funding source?

What would happen if our largest source of funding disappeared next year?

Concentration risk is easy to overlook when the largest funder is reliable. Planning before that funding changes gives the organization more options: diversify revenue, build reserves, adjust programs gradually, or develop replacement funding.

Program service revenue

Program service revenue is generally earned in exchange for goods or services connected to the mission. Depending on the organization, this might include tuition, membership dues, service fees, event registration, or other mission-related charges.

For each significant program, ask whether the revenue covers the program’s direct costs and contributes appropriately to shared organizational costs. If it does not, the nonprofit must make a deliberate choice: increase revenue, reduce costs, secure subsidy from another source, redesign the program, or accept the shortfall because the mission impact justifies it.

Other revenue

Other sources may include interest, investment income, or rental income. These sources can help diversify revenue, but leaders should understand whether they are recurring, volatile, restricted, or connected to assets the organization may need for another purpose.

Why revenue does not equal sustainability

A nonprofit can raise a large amount of money and still face financial distress. Revenue may be temporary, restricted, unpredictable, or insufficient to cover the full cost of the work it supports.

Imagine that an organization receives $250,000 for a specific youth program. The bank balance rises, but the award may not be available for unrelated payroll, rent, or technology. If unrestricted cash is low, the nonprofit can appear well funded while struggling to meet ordinary obligations.

The number to watch is not simply total cash. Leaders need to understand how much cash is unrestricted, liquid, and available for general operations.

Understanding nonprofit net assets

Net assets equal assets minus liabilities. Under current nonprofit financial statement presentation, net assets are reported in two broad classes:

Net assets without donor restrictions: resources not limited by donor-imposed restrictions and generally available for the organization’s purposes.

Net assets with donor restrictions: resources subject to donor-imposed purpose or time restrictions, or restrictions that may be perpetual.

A board may designate a portion of net assets without donor restrictions for an operating reserve, future project, or other purpose. A board designation is not the same as a donor restriction. Because the board created the designation, the board can generally modify or remove it through appropriate action.

This distinction affects decision-making. A large net asset balance does not automatically mean the nonprofit can spend that amount on current operations. Some resources may be restricted, invested in property, tied up in receivables, or otherwise unavailable as cash.

Program, management and general, and fundraising expenses

Nonprofit expenses are commonly reported by function: program services, management and general, and fundraising.

Program services directly advance the mission—for example, program staff, client services, educational materials, or program supplies.

Management and general activities support the organization as a whole—for example, accounting, human resources, insurance, governance, and organization-wide technology.

Fundraising activities generate contributions—for example, development staff, donor software, campaigns, and fundraising events.

A healthy nonprofit does not need zero administrative expense. Accounting, leadership, cybersecurity, human resources, and internal controls help programs operate reliably. The goal is not to chase an arbitrary overhead percentage; it is to spend responsibly, classify costs consistently, explain the organization’s cost structure clearly, and invest enough in infrastructure to protect the mission.

Very low overhead can even be a warning sign if it reflects underinvestment in financial systems, compliance, staff support, or technology. Strong infrastructure helps create stronger programs.

Five financial questions every nonprofit board member should ask

Board members do not need to recalculate every account. They do need to stay curious and understand the organization’s financial direction. These five questions are a strong starting point:

How much unrestricted cash is available for general operations?

Are we operating at a surplus or deficit—and what is driving the result?

Are our major programs financially sustainable?

Are we overly dependent on one donor, grantor, or revenue source?

How long could we continue operating if new revenue slowed or stopped?

Some questions should be reviewed monthly, especially unrestricted cash, cash flow, and performance against budget. Broader issues such as funding concentration, reserve targets, and program sustainability may deserve a deeper quarterly or annual discussion.

How to make financial reporting useful

A packet of numbers is not enough. To support good decisions, nonprofit financial reporting should include meaningful comparisons and explanations.

Compare actual results with the approved budget.

Compare current results with the same period in the prior year.

Explain significant variances, unusual transactions, and emerging risks.

Separate restricted activity or provide a clear schedule of restricted balances.

Include cash projections when timing or liquidity is a concern.

Track a small set of useful indicators, such as months of cash on hand and revenue concentration.

Seasonality matters. A gala, annual campaign, grant cycle, or program calendar may cause revenue and expenses to fluctuate. Trends should be interpreted in the context of how the organization actually operates.

Curiosity is part of good governance

Asking a financial question is not an accusation. It is part of a board member’s oversight responsibility. If an auditor, bookkeeper, treasurer, executive director, or CFO uses a term you do not understand, ask for a plain-language explanation.

A constructive question might sound like: “You mentioned that this grant is restricted. Can you explain what expenses it can cover and how much remains available?” Clear questions lead to clearer decisions—and they help create a culture in which financial information is understood rather than merely received.

The bottom line

Financial statements tell related but different stories. The statement of financial position shows what the organization owns and owes. The statement of activities shows financial performance over time. The statement of cash flows shows how cash is being generated and used. Net asset classifications explain which resources are available, while functional expenses show where the organization is investing its money.

When nonprofit leaders understand those stories together, they can spot risks earlier, protect restricted funds, plan for uncertainty, and make better decisions for the mission.

Need help making your nonprofit’s financial reports more useful? Juba Forensics PLLC provides nonprofit financial consulting, fractional CFO support, accounting cleanup, internal control reviews, and board training. Contact us to schedule a consultation and turn your financial statements into a practical decision-making tool.