Nonprofit Financial Statements Explained: What Your Board Should Actually Be Reviewing

That does not require every director to become an accountant. It requires knowing which figures matter, what financial statements communicate, and which questions should be asked when something changes.

Start With the Statement of Financial Position

The statement of financial position provides a snapshot of the nonprofit’s financial position at a specific date. It generally presents assets, liabilities, and net assets.

Board members should pay particular attention to cash, accounts receivable, investments, accounts payable, loans, and other significant obligations. The purpose is to understand what the organization owns, what it owes, and what resources are actually available.

A nonprofit can report substantial total assets while having limited accessible cash. For this reason, the board should distinguish between assets that can be readily used to fund operations and assets subject to restrictions or other limitations.

Understand Net Assets and Restrictions

Net assets are particularly important in nonprofit financial reporting. They may be presented according to whether they are restricted or unrestricted, depending on the organization’s circumstances and applicable reporting requirements.

The board should know whether a significant portion of the organization’s net assets is unavailable for general operating purposes. A large net asset balance does not necessarily mean the organization has money available to cover upcoming payroll or expenses.

When donors or funders impose restrictions, directors should also ask whether expenditures are consistent with those restrictions and whether reporting obligations are being met. An NPO accountant can help maintain appropriate records so restricted and unrestricted resources are properly identified.

Review the Statement of Operations

The statement of operations shows financial activity over a reporting period. It typically includes revenues, expenses, and the resulting excess or deficiency.

Board members should compare actual results with the approved budget and prior periods. A variance is not automatically a problem, but significant differences deserve an explanation.

For example, revenue may be below budget because a grant was delayed, while expenses may be higher because a program expanded. The board should understand the reason behind the variance rather than simply focusing on whether the organization finished the period with a surplus or deficit.

Examine Revenue by Source

Not all nonprofit revenue carries the same financial implications. Contributions, grants, membership fees, fundraising proceeds, government funding, program fees, and investment income can have different levels of predictability and restrictions.

The board should review revenue by major source and consider its reliability. Heavy dependence on a single grant or donor can create financial risk even when current results appear strong.

Directors should also ask whether expected funding has been received on schedule and whether future funding is sufficiently committed to support planned activities.

Analyze Expenses by Function

Expenses should be reviewed in a way that helps directors understand how organizational resources are being used.

Depending on the nonprofit’s reporting approach, expenses may be presented by function, such as program services, fundraising, and administration. Reviewing these categories over time can help identify changes in operating priorities and resource allocation.

Boards should avoid relying on a single expense ratio to judge organizational effectiveness. A higher administrative expense, for example, may reflect an investment in systems, staffing, compliance, or infrastructure that supports future program delivery.

The more useful question is whether spending is reasonable, properly authorized, and consistent with the organization’s objectives.

Don’t Ignore the Cash Flow Statement

A nonprofit can report positive financial results while experiencing cash shortages. The statement of cash flows helps explain how cash changed during the period and where it came from or went.

Boards should review cash generated from operations, investment activity, and financing activity. Significant differences between reported income and operating cash flow deserve attention.

Cash flow forecasts are also valuable because financial statements describe what has already happened. A forecast helps directors assess whether the organization can meet upcoming payroll, supplier payments, loan obligations, and program commitments.

Look for Signs of Financial Stress

Board review should go beyond confirming that statements were prepared. Directors should look for warning signs, including:

• Declining cash balances
• Increasing accounts payable
• Growing receivables
• Recurring operating deficits
• Dependence on short-term financing
• Significant budget variances
• Declining unrestricted resources
• Unexpected increases in program or administrative costs
• Delayed grants or contributions

One issue may not indicate financial distress, but several occurring together can warrant deeper analysis.

Compare Current Results With the Budget

The annual budget represents the board’s financial expectations for the organization. Financial reporting should therefore allow directors to compare actual performance with those expectations.

A useful board package should highlight material variances instead of requiring directors to identify every difference themselves. Management should provide explanations for significant deviations and, where necessary, describe corrective measures.

This turns financial reporting into a management and governance tool rather than a collection of historical numbers.

Review Financial Statements in Context

Financial statements should never be evaluated in isolation. The numbers should be considered alongside membership levels, program demand, fundraising performance, staffing changes, capital projects, strategic priorities, and other operational information relevant to the organization.

For example, an increase in expenses may be reasonable if the nonprofit has launched a new program. A decrease in revenue may require attention if it reflects declining donor retention rather than a temporary timing issue.

An NPO accountant can provide additional context by helping management identify significant financial trends, explain variances, and present financial information in a format that is useful to directors.

Ask Questions Before Approving

Boards should be comfortable asking management and finance professionals direct questions about unusual results. Useful questions include:

• Why did this figure change?
• Is the change temporary or recurring?
• Are restricted funds being used according to their conditions?
• How much unrestricted cash is available?
• Are we on track against the annual budget?
• What financial risks should the board be aware of?
• Can the organization meet its obligations over the next six to twelve months?

These questions can reveal issues that may not be obvious from the financial statements alone.

Make Financial Review a Regular Governance Practice

Financial statement review should be an ongoing governance responsibility, not a year-end exercise. Regular financial reporting gives directors the opportunity to identify emerging problems, challenge assumptions, and ensure resources are being managed responsibly.

Working with an experienced NPO accountant can also help an organization establish consistent reporting procedures and give its board clearer information for decision-making. When directors regularly review financial position, operating performance, cash flow, restrictions, and budget variances, they are better equipped to provide effective oversight and protect the organization’s ability to fulfill its mission.