A Beginner’s Guide to Nonprofit Financial Reporting

Effective financial management is critical for operating a nonprofit. Your organization’s ability to further its mission depends not only on successful fundraising, but also on allocating your funds so you can cover all of your expenses while setting your nonprofit up for long-term sustainability and growth.

Reporting is a key aspect of nonprofit financial management. Essentially, this term refers to the process of pulling your documented financial data and communicating it to stakeholders. Besides promoting accountability at your organization, financial reporting is legally required according to government regulations for nonprofits.

In this guide, we’ll cover the main benefits of nonprofit financial reporting, as well as the most important types of reports your organization needs to create. Let’s get started!

Benefits of Nonprofit Financial Reporting

The most obvious benefit of effective financial reporting is compliance, both with nonprofit legal requirements and with the Generally Accepted Accounting Principles (GAAP) that all organizations (both for-profit and nonprofit) are expected to follow.

However, your reports can also provide insight into your organization’s financial situation. According to Jitasa, you can use the information you glean from financial reports for:

• Data-driven decision-making. In the short term, you can make more informed decisions about how much revenue your nonprofit needs to generate each year, where that revenue comes from, and when you’ll launch certain projects and programs to effectively allocate your resources.
• Strategic planning. Knowing where your nonprofit currently stands financially can help you prepare for future growth, set overarching goals, and chart a course for upcoming multi-year initiatives.
• Risk management. By referencing detailed but understandable summaries of your organization’s financial data, you may be able to identify risks that could lead to noncompliance or accidental fraud and proactively prevent them from impacting your nonprofit.
• Transparency. Your organization’s various stakeholders—donors, board members, employees, grantmakers, and the community at large—all want to be confident that you’re using your funds as promised to further your mission, and reporting helps build that trust in your organization.

All of these advantages can eventually lead to increased supporter retention, greater fundraising success, and an improved ability for your organization to make a difference in the community.

Nonprofit Financial Reporting Essentials

Now that you know why nonprofit financial reporting is important, let’s dive into its major requirements. There are two main categories of financial reports your organization will need to compile—financial statements and tax forms—which we’ll walk through in more detail.

Financial Statements

Your nonprofit tracks a lot of financial data day to day, from bank statements to donation records to purchase receipts. NPOInfo’s guide to nonprofit data collection explains that this information “allows nonprofits to assess cash flow, maintain financial stability, and strategize budgets for future fundraising efforts.” However, this is only possible if the information is summarized and presented in a readable format, which is where financial statements come into play.

Nonprofits like yours typically compile four financial statements each year, which include the:

• Statement of activities. The nonprofit parallel to the for-profit income statement, this report breaks down your organization’s revenue, expenses, and net assets. You can compare this data to your budget from the previous year and use that information to make more accurate projections for the coming year.
• Statement of financial position. Also called a balance sheet, this statement lists your nonprofit’s assets, liabilities, and net assets to provide a snapshot of your organization’s financial health. It’s most helpful for strategic planning and risk management.
• Statement of cash flows. This report shows how cash moves in and out of your organization through operating, investing, and financing activities. It’s usually pulled monthly rather than annually like the other statements, so you can use it to stay on track with spending and fundraising throughout the year.
• Statement of functional expenses. This is the one financial statement unique to nonprofits because it helps you know how your organization’s spending is being used to further your mission. It does this by categorizing your expenses according to whether they were used for programs, administrative activities, or fundraising.

Besides using them internally for the decision-making purposes listed above, many nonprofits publish their financial statements as appendices to their annual reports. While you’ll likely include some financial information in the body of your report, attaching your statements allows readers who want to know more about how your organization handles its finances to access additional data, increasing transparency with them.

Additionally, your nonprofit’s financial statements are often extremely helpful in filling out the other major type of report you need to compile: your organization’s annual tax forms.

Tax Forms

When your nonprofit was established, its founders filed a document known as Form 1023 with the IRS. This allowed your organization to be granted 501(c)(3) status, meaning it’s exempt from paying federal income taxes. It’s likely that the state your nonprofit operates in has also recognized it as tax exempt.

However, this doesn’t mean that your nonprofit can write off tax season completely. You’ll need to file at least one additional form each year (and sometimes more than one) to maintain your tax-exempt status. Plus, as an employer, your organization needs to help its employees pay their taxes.

The three primary types of tax forms your nonprofit should be aware of are:

• IRS Form 990. This is your nonprofit’s annual federal tax return that provides an overview of its financial activities over the past year. There are four versions of Form 990, and which one your organization has to file will depend on its annual gross receipts and total assets.
• State-specific forms. Only some states require nonprofits to file additional tax forms with the state government. For example, nonprofits operating in New York must file Form CHAR500 each year to remain tax-exempt in their state. However, in Montana, nonprofits can send the state government a copy of their annual report to accomplish the same purpose. Check the IRS website to stay up-to-date on your state’s requirements.
• Employment forms. Like any other employer, your nonprofit has to file Form W-3 annually to give a detailed report of all of the compensation you provided to your employees. You’ll also need to issue Form W-2 to each individual staff member on your payroll and Form 1099 to any contractors you work with.

The filing deadlines for state-specific tax forms vary, but unless your nonprofit is approved for an extension, the Form 990 due date is always the 15th day of the fifth month after your fiscal year ends (May 15 for most organizations whose fiscal year follows the calendar year). Your nonprofit’s W-3 and all of your W-2s and 1099s need to be completed by January 31 each year. Late submissions can incur fines, so plan ahead to get all of your forms in on time!

While the information in this guide can provide your organization with a foundation for financial reporting, the best way to ensure your reports are thorough and accurate is to work with a nonprofit accountant. An accountant will not only compile your financial statements and file your tax forms for you but also help you interpret the data in those reports so you can maximize their benefits for your organization.