What the balance sheet shows
The balance sheet is a snapshot of your organization's finances at a single point in time, usually the last day of your fiscal year or reporting period. It has three main sections: assets, liabilities, and net assets. The fundamental equation is simple: Assets = Liabilities + Net Assets.
Assets
Assets are what your organization owns or controls.
- Current assets: Cash, bank accounts, accounts receivable, grants receivable, prepaid expenses, and anything else that will be used or converted to cash within a year. This section tells you how much liquid resources you have on hand.
- Non-current assets: Property, equipment, vehicles, long-term investments, and endowment funds. These are resources your organization holds for longer-term purposes.
Look carefully at the composition of your assets. Strong cash and liquid reserves are a sign of financial health. A balance sheet heavy with fixed assets and thin on cash can create operational challenges.
Liabilities
Liabilities are what your organization owes to others.
- Current liabilities: Accounts payable, accrued expenses, deferred revenue, and debt due within the next year.
- Non-current liabilities: Long-term debt, lease obligations, and other obligations due beyond one year.
Deferred revenue and refundable advances are worth understanding. When someone pays you in advance for services you have not yet provided, or a funder pays you in advance on a conditional grant whose conditions you have not yet met, that payment is a liability until you earn it or meet the conditions. An unconditional grant for a future period is different: it is recorded as revenue with donor restrictions, not as a liability.
Net assets
Net assets are what is left when you subtract liabilities from assets. Under ASC 958, net assets are divided into two categories.
- Without donor restrictions: Resources available to the organization for any purpose. Healthy unrestricted net assets provide a financial cushion and operating flexibility.
- With donor restrictions: Resources that donors have designated for specific purposes or time periods. These can only be used in accordance with the donor's intent.
What to look for
A few things are worth examining each time you review your balance sheet:
- Months of liquid assets: Divide your unrestricted cash and liquid investments by your average monthly operating expenses. This tells you how many months you could operate without new revenue coming in.
- Restricted vs. unrestricted balance: If most of your net assets are restricted, you may have less operating flexibility than your total balance suggests.
- Trend over time: Are your unrestricted net assets growing, shrinking, or staying flat? This matters more than any single snapshot.
- Debt levels: Are your liabilities manageable relative to your assets? Is debt growing?
The balance sheet and the 990
The balance sheet feeds directly into Part X of the Form 990. The two should reconcile completely. If they do not, that is a problem to resolve before filing.
This guide shares general information, not tax, legal, or accounting advice for your specific situation. Rules change, so check current IRS and FASB guidance or ask me about your organization.