Published on: Jan 08, 2026 by Kirsten Houghton, CPA, MBA
Updated on: January 8, 2026
If you’ve ever opened a set of nonprofit financial statements and thought, “I can follow the headings, but I’m not sure what I’m supposed to learn from this,” you’re not alone.
Many board members and executives didn’t come up through finance, yet they’re expected to make decisions based on these reports, often under time pressure, and sometimes with very real stakes.
Nonprofit organization financial statements are not meant to be mysterious. They’re a structured way to tell the organization’s financial story: what you have, what you owe, how you performed over the year, how you spend resources to advance the mission, and what risks or constraints could be hiding behind the numbers.
Once you know what each statement is designed to communicate (and how the statements connect) you can actually use the financials as a governance tool.
What do financial statements include? You’ll typically find:
Together, they answer questions every board and leadership team should be able to talk about confidently: Are we financially stable? Are we living within our means? Do we have flexibility? Are we managing risk responsibly?
Before you dive into the numbers, read the auditor’s report.
Think of it as the cover letter that explains what level of assurance you’re getting. This report is where the auditor states their opinion about whether the financial statements are presented fairly in accordance with generally accepted accounting principles.
Most organizations receive an unmodified (often called “clean”) opinion. That’s the outcome you want: it indicates the financial statements are fairly stated in all material respects.
But the reality of nonprofit financial reporting is that not every “non-clean” opinion is an automatic crisis, and not every “clean” opinion means everything is perfect operationally. The key is understanding what the opinion is actually saying.
Here’s a quick way to interpret the main opinion types:
| Unmodified (clean) | Financials are materially correct overall. |
| Qualified | One specific area couldn’t be fully audited or supported, but the rest is fairly stated. |
| Adverse | Financials are materially misstated (serious concern). |
| Disclaimer | Auditor can’t form an opinion (often due to lack of evidence or scope limits; serious concern). |
If the opinion is anything other than unmodified, don’t panic. Now it’s time to get clarity. What’s the specific issue? Is it fixable? If it’s a recurring limitation, what does that mean for decision-making and transparency with stakeholders?
The Statement of Financial Position is your snapshot of financial health at a point in time. It’s essentially asking, “Where are we right now?” In a for-profit world, this is the balance sheet. In a nonprofit organization, it works similarly: it shows assets (what you have), liabilities (what you owe), and net assets (the nonprofit version of equity).
This statement is often the best place to start because it anchors the conversation. When you look at it, you’re trying to understand what the organization has available, what it’s committed to, and how much flexibility it realistically has.
A helpful way to scan it is to move in this order:
| Cash and Liquid Assets | How much is readily accessible? |
| Receivables (grants and pledges) | What is promised or expected, and when will it arrive? |
| Debt and Lease Obligations | What fixed commitments exist now and into the future? |
| Net Assets Categories | What’s truly available for operations versus restricted by donors? |
Net assets are generally presented as with donor restrictions and without donor restrictions. The distinction matters because it’s one of the most common sources of confusion, especially when an organization appears “cash rich” but feels financially tight.
An organization can have a strong cash balance and still be constrained if much of that cash is restricted for a purpose, a timeframe, or both. This is where boards and executives sometimes get blindsided: the bank account looks healthy, but operationally there’s little room to maneuver.
Many organizations also have board-designated funds (often within net assets without donor restrictions). These are internally set aside (commonly for reserves or future priorities) and typically require board approval to release. They’re not donor-restricted, but they still affect how much cash leadership can use day-to-day.
If the Statement of Financial Position tells you where you stand, the Statement of Activities tells you what happened over the year. It reports revenue, expenses, and the change in net assets: essentially your “surplus or deficit” for the period.
This statement is where many governance conversations should live, because it shows whether the organization is operating sustainably. But it’s also where nonprofit accounting can feel counterintuitive, especially around contributions and pledges.
For example, nonprofit accounting rules can require revenue to be recognized before the cash arrives, particularly with multi-year pledges. That means the organization may report strong revenue in the current year, even though much of the cash will be collected later. This can be confusing for boards, and it can lead to overly optimistic conclusions if you don’t read the details alongside the notes and the cash flow statement.
When reviewing the Statement of Activities, focus less on whether the bottom line is “good” or “bad” in isolation and more on whether it makes sense given your strategy and operating reality. Ask: Are there major swings? Do we have a clear explanation for them? Are we trending toward stability or toward stress?
This statement is often the most intuitive for board members once they’ve seen it explained well. It breaks down expenses not only by type (salaries, rent, supplies, etc.) but also by function:
This is the transparency statement. Donors, grantmakers, and watchdog groups pay attention to it because it shows how resources are being deployed. That said, it’s important not to reduce governance to a single ratio (“program percentage”) without context. Strong nonprofits invest in infrastructure and fundraising for a reason: those functions support mission delivery.
What you should pay attention to is whether the organization’s cost allocation practices are reasonable and consistent. Shared costs such as occupancy, certain staff time, and technology often must be allocated across functions. The right methodology varies by organization, but the standard expectations don’t: be consistent, document the approach, and avoid “managing” allocations to create a prettier narrative.
This statement is the one many people skip, which is unfortunate because it answers one of the most important questions: Did cash increase or decrease, and why?
The Statement of Cash Flows organizes cash activity into three buckets:
| Operating Activities | day-to-day inflows and outflows |
| Investing Activities | purchases/sales of long-term assets and investments |
| Financing Activities | borrowing and repaying debt |
If your organization is reporting a surplus but cash is declining, the cash flow statement helps explain the mismatch. Sometimes that story is perfectly reasonable (for example, investing in equipment or funding a planned initiative). Other times, it reveals something more concerning, like structural cash pressure or growing reliance on short-term timing differences.
Boards don’t need to memorize the mechanics of cash flow reporting. But they should be able to discuss whether operating cash flow is generally healthy and whether cash trends align with leadership’s narrative about the year.
If you only read the statements and ignore the notes, you’re missing essential context. The notes clarify how the numbers were derived, explain accounting policies, and disclose important details that can change how you interpret the totals.
A few notes that are especially valuable for boards and executives include:
| Liquidity and Availability | A practical view of what’s available to meet near-term needs, after restrictions |
| Receivables Detail | How much is expected soon vs. later, and assumptions about collectability |
| Investments and Valuation | Includes how values are determined and where estimates are involved |
| Debt/Lease Disclosures | Obligations, maturity schedules, and key terms |
| Concentrations and Uncertainties | Dependence on a limited number of funders, major risks, or potential vulnerabilities |
A great onboarding move for new board members is to read the notes with the statements side-by-side and trace key numbers back to the detail that explains them. That’s where the “aha” moments tend to happen.
Even when financial statements are well prepared, certain areas naturally carry higher risk for nonprofit organizations. These are also the areas where board oversight has the greatest value since they relate directly to stewardship, sustainability, and trust.
Pay particular attention to:
None of this is meant to imply wrongdoing; it’s simply where errors and vulnerabilities are more likely to occur, and where good governance makes a measurable difference.
If you want a review routine that’s practical and repeatable, try this:
Then discuss a short set of governance-oriented questions:
Boards aren’t expected to run an audit or manage day-to-day accounting. But boards are responsible for oversight, and that means being able to read the financial story with enough confidence to ask smart questions and spot early warning signs.
When financial statements become approachable, they stop being a packet you “get through” and start being one of the most useful tools you have for protecting mission impact and ensuring long-term stability.
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Kirsten is a Principal with SVA Certified Public Accountants and her expertise includes the nonprofit and real estate industries. In addition to providing audit, accounting, and tax services, Kirsten also provides review, compilation, and management advisory services.
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