About 65% of Americans can’t tell you how much they spend each month, and 84% of those with budgets exceed them anyway. This kind of financial blindspot becomes dangerous when you’re managing a nonprofit statement of cash flows.
The cash flow statement shows exactly how your organization handles money by tracking cash coming in and going out, helping you determine your nonprofit’s financial health and making sure you have enough cash to cover expenses. This internal tool provides accountability by revealing precisely how your organization generates and spends funds. Most nonprofits create this report monthly because it keeps spending and revenue aligned with their annual operating budgets.
The statement of cash flows nonprofit organizations rely on serves one specific purpose – showing you where your cash comes from and where it goes. A proper cash flow statement breaks down into three sections: operating activities, investing activities, and financing activities. Many nonprofits ignore this statement in favor of other financial reports, but understanding how to prepare and use it properly can mean the difference between financial stability and running out of cash when you need it most.
This tutorial will show you exactly how to create, read, and use your nonprofit’s cash flow statement effectively. You don’t need an accounting degree to master this essential financial tool.
Table of contents
- Understanding the Nonprofit Statement of Cash Flows
- Breaking Down the Three Cash Flow Sections
- Step-by-Step: How to Prepare a Cash Flow Statement
- Using and Interpreting the Statement Effectively
- Bottom Line
- Key Takeaways
- Frequently Asked Questions (FAQs)
- How do I create a cash flow statement for my nonprofit organization?
- Why is a cash flow statement important for nonprofits?
- What are the main sections of a nonprofit cash flow statement?
- How often should a nonprofit prepare a cash flow statement?
- What are some common mistakes to avoid when preparing a cash flow statement?
- What is the difference between a cash flow statement and a statement of financial position in nonprofits?
- Can donors and grantors benefit from reviewing a nonprofit’s cash flow statement?
- How does restricted funding affect a nonprofit’s cash flow statement?
- What tools can nonprofits use to prepare accurate cash flow statements?
- How does the cash flow statement connect to a nonprofit’s budget?
Understanding the Nonprofit Statement of Cash Flows
The nonprofit statement of cash flows tracks money moving in and out of your organization over a specific period. This financial document shows you exactly how cash gets generated and spent, serving as your roadmap to staying liquid when bills come due.
What it is and why it matters
Your cash flow statement measures actual cash movements, helping you determine whether your nonprofit can cover expenses when they’re due. The statement organizes all transactions into three categories:
- Operating activities: Daily money from donations, grants, program revenue, plus expenses for salaries and services
- Investing activities: Cash spent on or received from selling long-term assets like property and equipment
- Financing activities: Money from loans, endowments, and debt payments that fund your organization
Cash flow management matters because nonprofits face irregular funding cycles. Grants arrive in chunks, donations spike during certain seasons, but your rent and payroll happen every month. A clear cash flow statement helps you plan for these ups and downs before you run short.
How it differs from other financial reports
Your cash flow statement does something your other financial reports can’t do. The statement of activities shows whether you’re profitable and the statement of financial position reveals your overall assets, but the cash flow statement focuses on liquidity. It tells you exactly how much cash you can spend today.
When nonprofits should use it
Smart nonprofits review their cash flow statements monthly to keep spending aligned with their annual budgets. You should check this report at least monthly to make sure you have enough cash for essential expenses like rent and payroll.
This statement becomes essential when you’re planning major initiatives, seeking loans, or demonstrating accountability to major donors. Unlike other financial documents that show your overall financial picture, the cash flow statement reveals the timing of cash movements. That timing can make or break your organization’s ability to operate smoothly.
Free eBook Download: How to Generate Compliant Nonprofit Reports
Breaking Down the Three Cash Flow Sections
Your nonprofit statement of cash flows organizes all cash movements into three distinct sections. Each section tells you something different about how money moves through your organization.
Cash from operating activities
Operating activities show the cash generated and spent on your nonprofit’s daily work. This section records:
- Cash coming in from donations, grants, membership fees, and program service revenue
- Cash going out for salaries, rent, utilities, program expenses, and administrative costs
These activities reflect your organization’s core function – carrying out your mission. If you receive $150,000 from contributions in a month and pay $125,000 in employee salaries, your net cash from operating activities equals $25,000.
Cash from investing activities
Investing activities track cash used for long-term assets. This section includes:
- Purchasing or selling property, equipment, or other fixed assets
- Capital improvements to existing assets (like building renovations)
- Buying and selling investments such as stocks, bonds, or mutual funds
These transactions usually involve smaller cash amounts than operating activities, but they affect your nonprofit’s long-term financial stability.
Cash from financing activities
Financing activities record cash movements related to how you fund your organization. This section covers:
- Proceeds from loans or lines of credit
- Debt repayments
- Contributions designated for building capital (certain endowment funds)
What doesn’t appear on the statement
Not every transaction shows up on your cash flow report. In-kind donations and sponsorships don’t appear because gifts of goods, services, and other non-cash items create zero actual cash movement. Non-cash transactions like depreciation also stay off the statement, since including them would misrepresent your actual cash position.
Understanding these three sections helps you track exactly where your money comes from and where it goes.
Step-by-Step: How to Prepare a Cash Flow Statement
Preparing a nonprofit statement of cash flows requires a systematic approach, but the process is straightforward once you understand the steps. This essential financial report follows a logical sequence that builds from your existing financial data.
1. Start with net income or loss
Begin with your nonprofit’s change in net assets (net income or loss) from your Statement of Activities. This figure serves as your foundation because the cash flow statement converts your accrual-based income into actual cash movements.
2. Adjust for non-cash items
Add back all non-cash expenses that reduced net income but didn’t involve actual cash payments. These typically include:
- Depreciation expense
- Amortization
- Losses on the sale of assets
Subtract any non-cash revenues or gains that increased net income without generating actual cash.
3. Add or subtract changes in assets and liabilities
Adjust for changes in your current assets and liabilities using these rules:
- Add decreases in current assets (like accounts receivable)
- Add increases in current liabilities
- Subtract increases in current assets
- Subtract decreases in current liabilities
4. Calculate investing and financing cash flows
Record cash flows from investing activities by tracking purchases or sales of long-term assets and investments. Calculate financing activities by documenting loan receipts, repayments, and restricted contributions.
5. Determine the ending cash balance
Add the net cash from all three sections to find your total change in cash. Add this amount to your beginning cash balance to determine your ending cash position.
Schedule a FastFund Demo to see how specialized nonprofit accounting software can automate your cash flow reporting and eliminate manual calculations.
Using and Interpreting the Statement Effectively
Regular review of your nonprofit statement of cash flows shows you exactly what’s happening with your organization’s financial health. This document becomes a powerful planning tool when you know how to read it properly.
How to spot trends and patterns
Review your cash flow report every month to catch seasonal changes in your nonprofit’s finances. Look at each statement to see if your organization has positive cash flow (more money coming in than going out) or negative cash flow (more money going out than coming in). Negative cash flow isn’t always bad—it might mean you’re investing in growth or new programs.
Free cash flow and cash flow to debt metrics
Two important numbers tell you about your financial stability:
- Free cash flow: Shows how much financial flexibility your organization has for growth
- Cash flow to debt: Tells you how well you can handle debt payments, with higher numbers meaning better stability
Common mistakes to avoid
Watch out for these errors when working with your cash flow statement:
- Putting transactions in the wrong sections (operating, investing, or financing)
- Including non-cash items like depreciation or donated goods
- Forgetting to check that your statement matches the cash amounts on your balance sheet
Example of cash flow statement for nonprofits
A good nonprofit cash flow statement clearly shows operating activities (donations, program fees), investing activities (buying equipment, selling investments), and financing activities (loans, debt payments). This format tells you immediately whether your daily operations bring in enough cash to keep things running. Schedule a FastFund Demo to see how specialized software can help you create accurate, useful cash flow statements for your organization.
Schedule a FastFund Demo: Learn more about our unique software approach to nonprofit accounting, payroll and fundraising.
Bottom Line
Understanding your nonprofit’s statement of cash flows is essential for sound financial management. This statement gives you exactly what other financial reports can’t – a clear picture of your actual cash position right now.
Nonprofits face unique challenges with irregular funding from grants and seasonal donations. When you monitor your cash flow regularly, you prevent the kind of financial shortfalls that can shut down programs or damage your reputation with stakeholders.
The process is straightforward. Start with your net income, adjust for non-cash items, account for changes in assets and liabilities, then calculate your investing and financing flows. This gives you your ending cash balance and shows you exactly where your money comes from and where it goes.
Regular analysis reveals patterns that help you plan better. Free cash flow and cash flow-to-debt ratios tell you quickly whether your organization is financially stable and ready for growth.
Proper cash flow management serves as the foundation for your nonprofit’s sustainability. You now have the tools to create accurate cash flow statements, spot potential problems before they become crises, and demonstrate to donors and board members that you’re handling their money responsibly. This kind of financial transparency builds trust, and trust leads to more support for your mission.
Key Takeaways
Master your nonprofit’s financial health by understanding how cash flows through your organization across three critical activity areas.
- Track cash movements through operating, investing, and financing activities to maintain liquidity and prevent unexpected shortfalls
- Start with net income, adjust for non-cash items, then account for asset/liability changes to create accurate cash flow statements
- Monitor monthly patterns and calculate free cash flow metrics to identify seasonal trends and assess financial stability
- Focus on actual cash movements rather than profitability—this statement shows what’s immediately available for expenses like payroll
- Avoid common mistakes like including non-cash items or misclassifying transactions between the three activity sections
Regular cash flow analysis transforms financial data into actionable insights, helping nonprofits navigate irregular funding cycles and make informed decisions about program expansion, debt management, and operational sustainability.
Frequently Asked Questions (FAQs)
How do I create a cash flow statement for my nonprofit organization?
Start with your net income or loss, then adjust for non-cash items. Add or subtract changes in assets and liabilities, calculate cash flows from investing and financing activities, and finally determine the ending cash balance. This process helps track cash movements across operating, investing, and financing activities.
Why is a cash flow statement important for nonprofits?
A cash flow statement is crucial for nonprofits as it provides insights into the organization’s liquidity, helps prevent unexpected shortfalls, and aids in navigating irregular funding cycles. It shows exactly how much cash is available for immediate use, which is essential for covering expenses like payroll and rent.
What are the main sections of a nonprofit cash flow statement?
A nonprofit cash flow statement typically consists of three main sections: cash from operating activities (related to core mission), cash from investing activities (involving long-term assets), and cash from financing activities (related to loans and debt).
How often should a nonprofit prepare a cash flow statement?
Most nonprofits compile cash flow statements monthly. Regular monitoring helps keep spending and revenue generation aligned with annual budgets and ensures sufficient funds are available for ongoing expenses.
What are some common mistakes to avoid when preparing a cash flow statement?
Common mistakes include misclassifying transactions between operating, investing, and financing sections, including non-cash items like depreciation or in-kind donations, and failing to reconcile the statement with balance sheet cash amounts. Avoiding these errors ensures a more accurate representation of your nonprofit’s cash flow.
What is the difference between a cash flow statement and a statement of financial position in nonprofits?
A cash flow statement shows how cash moves in and out of the organization over a period of time, while the statement of financial position (balance sheet) shows the organization’s assets, liabilities, and net assets at a specific point in time.
Can donors and grantors benefit from reviewing a nonprofit’s cash flow statement?
Yes. Donors and grantors often review cash flow statements to evaluate how effectively a nonprofit manages its funding, whether it maintains sufficient liquidity, and if it can sustain programs without facing cash shortages.
How does restricted funding affect a nonprofit’s cash flow statement?
Restricted contributions are reported in the cash flow statement, but the restrictions must be reflected in how the cash is classified and used. This ensures clarity about which funds are available for general operations versus specific projects.
What tools can nonprofits use to prepare accurate cash flow statements?
Nonprofits can use accounting software designed for fund accounting, such as FastFund. These tools automate cash flow reporting and ensure transactions are categorized correctly for compliance and transparency.
How does the cash flow statement connect to a nonprofit’s budget?
The cash flow statement provides a real-time check against the budget by showing whether projected revenues and expenses align with actual cash inflows and outflows. It helps nonprofit leaders adjust spending or fundraising strategies when variances occur.
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