What Is the Purpose of a Cash Flow Statement for a Nonprofit Organization?
Cash flow statements are important for both nonprofit and for-profit businesses, but they are used a bit differently by the two types of organizations. In addition to revenue, nonprofits also receive cash from grants, governments and individual donors. Nonprofit organizations often create separate cash flow statements that show the source and use of funds for each donor or grant. Since nonprofit businesses strive for break-even rather than net income, cash flow statements are prime indicators of successful operations.
Cash Flow Statement Information
Often confused with the profit and loss statement, cash flow reports display all cash, from any sources, that come into the business. Cash flow statements also show how all funds were used. Since these reports do not display profit or loss, they are particularly useful for nonprofit companies. These statements also show any borrowed funds and the uses they're put to. Tracking incoming cash is critical for nonprofits, as they often struggle to generate sufficient funds to pay expenses.
Donations to nonprofits often come from a wide variety of sources. Many nonprofits generate a large percentage of their income from small individual cash donations and larger contributions from individuals, groups or charitable foundations. Donations to Internal Revenue Service-qualified 501c nonprofit organizations are tax deductible for the donors. Detailed cash flow statements help organize these cash inflows and further substantiate the tax deductibility of these gifts.
Many nonprofit entities depend heavily on grant monies to survive. Most grants come with restrictions on how their cash must be used. Cash flow statements, applicable to each grant, prove that the funds were received and spent according to grant specifications. Separate cash flow statements satisfy grant requirements and verify that the nonprofit followed the spending guidelines.
Separating Cash Flows
For-profit corporations seldom need to separate cash flows, as they are free to use revenues as they see fit. Nonprofits, however, often use cash flow statements to prove they fulfilled donor wishes to use donated funds for purposes specified by each contributor. While grants typically specify how their cash is to be used, donors don't always put spending restrictions on their cash contributions. For example, some nonprofit funding drives are for specific purposes or causes, requiring creation of a separate cash flow statement totaling donations and identifying the percentage of donations given to the purpose or cause.
- Thinkstock/Comstock/Getty Images