Nonprofit cash flow statement
Your cash flow statement summarizes where you cash flow went and where it came from.
Cash flow statements are generally required under GAAP principles.
Cash inflows for a nonprofit come from contirbutions of cash, checks, fundraising efforts, and grants.
Cash outflows might come from activities like salaries and wages, taxes, supplies, inventory and other activities.
Cash flow statements help users of your financials understand how you receive and use your cash. It can also help users understand your ability to generate positive cash flows in the future. The change in the cash flow statement can also help you understand you changes in the statement of financial position.
Direct v indirect – similar to other companies, you can choose between direct and indirect method for nonprofits.
Direct method – You use the cash basis to prepare this method. Most people are on accrual method for the rest of their books, so this might be hard to implement. Under this method you detail the net cash flow from operating activities. You report operating cash receipts and disbursements to get to the net operating activities. Cash receipts would be the money you have coming in from donors and other receipts. Disbursements would be the money you pay out employees, vendors and other operating activities.
Indirect method – This method is on an accrual basis. This is more of a balance sheet method. You basically start with the change in your balance sheet and then back out various accrual adjustments to arrive at cash.
Three components to nonprofit cash flow statement
There are 3 types of activity on a nonprofit cash flow statement.
Cash flow from operating activities – Anything that isn’t an investing activity or financing activity is an operating activity. This would include money raised by the nonprofit. This includes outflows from checks too. It doesn’t have to be only physical cash.
Cash flow from investing activities – This includes activities related to buying and selling investments like securities and assets. This would include activities in an endowment fund for nonprofits. It could also include purchases or sales of fixed assets.
Cash flow from financing activities – This includes activities relating to receiving money from creditors and paying back creditors. These activities would be posted to your debt accounts in the general ledger. You add up these three sections to get your company’s increase or decrease in cash flow. At the top of your statement you should have a beginning balance of cash for the accounting period. The beginning balance plus the activity should equal your ending cash balance.
Nonprofit Cash Flow Ratios
Operating cash flow calculates whether your organization can meet short term nonprofit cash needs. The operating cash flow ratio equation is:
operating cash flow ratio = net cash flow from operating activities / current liabilities
Free cash flow tells you how much money you have after paying your bills. The equation for free cash flow is:
Free cash flow ratio = net cash flow from operating activities – cash used for purchase of fixed assets.