Non Profit Statement of Cash Flows
Understanding the Statement of Cash Flows for Nonprofit Executive Directors and Board Members
The Statement of Cash Flows is a vital financial document that details the movement of cash in and out of a nonprofit organization over a specific reporting period. For executive directors and board members, comprehending this statement is essential for managing liquidity, planning strategically, and ensuring the organization’s financial stability. The indirect method, commonly used for reporting cash flows from operating activities, adjusts net income for changes in balance sheet accounts to calculate cash flow. Here’s what you need to know and understand:
Key Components of the Statement of Cash Flows:
Operating Activities:
Net Income (Change in Net Assets): The starting point for the indirect method is the change in net assets from the Statement of Activities. This figure is adjusted for non-cash items and changes in working capital accounts.
Adjustments for Non-Cash Items: Includes adding back depreciation, amortization, and other non-cash expenses, as well as adjusting for gains or losses on sales of assets. Understanding these adjustments helps clarify how much actual cash is generated from operations.
Changes in Working Capital Accounts: Adjustments for changes in accounts receivable, accounts payable, inventories, and other current assets and liabilities. These changes reflect how shifts in working capital impact cash flow.
Increase in Accounts Receivable: Subtracted from net income because it represents sales made on credit, reducing cash flow.
Decrease in Accounts Payable: Subtracted from net income because it indicates that cash was used to pay off liabilities.
Net Cash Provided (or Used) by Operating Activities: This figure indicates whether the organization’s core activities are generating sufficient cash to cover operational expenses. Positive net cash flow signifies healthy operations, while negative net cash flow may require attention and corrective action.
Investing Activities:
Cash Inflows: Proceeds from the sale of investments, property, and equipment. Understanding these inflows helps in evaluating the organization’s investment strategy and asset management.
Cash Outflows: Payments for purchasing investments, property, and equipment. Monitoring these outflows is important for assessing capital expenditure and investment in long-term assets.
Net Cash Provided (or Used) by Investing Activities: This figure shows the impact of investment activities on cash flow. It provides insights into the organization’s long-term investment decisions and asset management.
Financing Activities:
Cash Inflows: Includes proceeds from loans, lines of credit, and contributions restricted for endowments. Understanding these inflows helps in assessing the organization’s financing strategy and reliance on external funding.
Cash Outflows: Repayments of loans, payments on lines of credit, and disbursements of funds restricted for specific purposes. Monitoring these outflows is crucial for managing debt and ensuring compliance with donor restrictions.
Net Cash Provided (or Used) by Financing Activities: This figure indicates the effect of financing activities on cash flow. Positive net cash flow from financing activities can provide necessary funding, while negative net cash flow may reflect repayments and reduced external financing.
Net Increase (or Decrease) in Cash and Cash Equivalents:
This figure summarizes the overall change in cash and cash equivalents during the reporting period. It provides a comprehensive view of how the organization’s cash position has changed due to operating, investing, and financing activities.
Cash and Cash Equivalents at Beginning and End of Period:
These figures show the cash position at the start and end of the reporting period. They help in tracking cash flow trends and assessing the organization’s liquidity over time.
Why It Matters:
Managing Liquidity
The Statement of Cash Flows provides a clear picture of the organization’s liquidity by detailing cash inflows and outflows. Understanding this statement helps leaders ensure there is enough cash to meet short-term obligations and sustain operations.
Planning and Forecasting
By analyzing cash flow patterns, executive directors and board members can make informed decisions about budgeting, planning, and financial forecasting. This understanding is essential for strategic planning and long-term sustainability.
Assessing Financial Health
The Statement of Cash Flows reveals how effectively the organization generates cash from its core activities, manages its investments, and handles its financing. This assessment is crucial for evaluating overall financial health and operational efficiency.
Ensuring Transparency and Accountability
Accurate and transparent reporting of cash flows fosters trust with donors, regulators, and other stakeholders. It also ensures compliance with financial reporting standards and enhances the organization’s credibility.
Supporting Strategic Decisions
Understanding the impact of investing and financing activities on cash flow helps leaders make strategic decisions about capital expenditures, investment opportunities, and financing options.
Investing the time to understand the Statement of Cash Flows is crucial for nonprofit leaders to fulfill their fiduciary responsibilities and guide their organizations towards sustainable success.
Contact Know Your Numbers today for expert guidance and support in mastering the intricacies of financial statements. Together, we can ensure your organization's financial health and stability.