Reading your charity's financial statements

This guide is for board members and treasurers who are handed financial statements and aren't sure what to look at. You don't need accounting training. After reading, you'll know what each main statement tells you, what "net assets" means, how to work out how many months of cash you have, and which questions to ask when something looks off.

Keeping the money safe is a different job, covered in financial controls. Getting an accountant to check the numbers is covered in audits and reviews.

Why the board must read them

The California Attorney General's Guide for Charities says directors must make sure the charity operates in a fiscally sound manner and properly uses any restricted funds. Staff can run the day-to-day, but directors keep ultimate authority. The guide says management should produce accurate income and expense statements, balance sheets and budget status reports ahead of board meetings, and that directors should monitor the budget and investigate any sizable differences between what was expected and what actually happened.

In other words: if the board gets the numbers, the board is expected to read them.

The three statements you'll see most

Charities use slightly different names, but the main statements line up with three parts of the IRS Form 990, the yearly return many charities file. The 990 instructions describe what goes in each, which makes them a good plain guide.

What you own and owe: the balance sheet

The statement of financial position, often called the balance sheet, is a snapshot on one date, such as the last day of the month. Form 990 Part X has the same layout, with columns for the beginning and end of the year. It shows:

• Assets: what the charity owns or is owed, such as cash, savings, pledges and grants receivable (promised but not yet paid), and equipment.
• Liabilities: what the charity owes, such as unpaid bills, loans and money received in advance for work not yet done.
• Net assets: assets minus liabilities. This is what's left, and it belongs to the mission, not to anyone personally.

What came in and went out: the income statement

The statement of activities, sometimes called the income statement, covers a period, such as a month or a year. It shows revenue (money in, such as gifts, grants, program fees and event income) and expenses (money spent), and the change in net assets over the period. Form 990 Part VIII reports revenue by source.

If revenue is more than expenses, net assets go up. If expenses are more, net assets go down. One bad month isn't a crisis; a pattern is worth a conversation.

What the money was spent on: functional expenses

A statement of functional expenses sorts every expense two ways: by what it is (salaries, rent, supplies) and by what it was for. Form 990 Part IX requires 501(c)(3) and 501(c)(4) organizations that file Form 990 to split expenses into three columns:

• Program services: mainly activities that further the charity's exempt purposes, its mission.
• Management and general: the charity's overall operations and management, such as board meeting costs and general administration.
• Fundraising: the costs of asking for gifts, grants and other contributions.

The 990 instructions say that when the chief executive or other managers spend part of their time directly supervising programs or fundraising, their salaries and expenses should be split among the columns. Ask your bookkeeper how your charity makes that split, and make sure it's reasonable.

Net assets: with and without donor restrictions

The Form 990 balance sheet splits net assets into two kinds:

• Net assets without donor restrictions: money the board can use for any purpose within the mission. The 990 instructions say this includes money the board has set aside itself, such as a board-designated reserve. A board designation is a board decision, not a donor restriction, so the board can change it.
• Net assets with donor restrictions: money a donor said must be used for a specific purpose, after a certain date, or kept permanently. The instructions mention purpose restrictions, time restrictions and gifts that must be kept and invested.

Why it matters: a charity can show healthy total net assets while most of that money is restricted and can't pay the rent. Always look at the two lines separately. Our guide to restricted funds explains how to track them, and the glossary defines net assets.

Months of cash and operating reserves

An operating reserve is money set aside to keep the charity running through a shortfall, such as a late grant payment or a lost funder. The glossary defines reserves. A simple way to track it is months of cash:

1. Take the cash and savings the charity could use for any purpose. Leave out money with donor restrictions.
2. Work out average monthly spending: total expenses for the last 12 months, divided by 12. Some charities leave out large one-off or non-cash costs such as depreciation; say which you use and keep it the same each month.
3. Divide the first number by the second.

For example, if you have $30,000 of unrestricted cash and spend about $10,000 a month, you have about 3 months of cash.

There's no single right target. It depends on how steady your income is, how fast you could cut costs and what your funders expect. The board should pick a target, write it down in a short reserve policy, and track progress each month. For context, the Nonprofit Finance Fund's 2025 survey found that 52% of nonprofits that responded had 3 months or less of cash on hand, and 18% had one month or less.

Red flags to ask about

None of these proves something is wrong. Each one deserves a clear answer at the next meeting:

• Big differences from the budget without an explanation. The California guide says sizable differences in revenue or spending should be investigated until there's a full explanation.
• Months of cash falling several months in a row.
• Restricted money being used for general costs, or restricted balances dropping without matching program spending.
• Bank reconciliations not done, or done by the same person who writes checks. The California guide says directors or their designee should review bank statements, reconciliations and the books for obvious irregularities.
• Unpaid payroll taxes. The 990-EZ instructions warn that if withheld employment taxes aren't paid to the IRS, a trust fund recovery penalty may be imposed on anyone the IRS decides was responsible for paying those taxes and willfully failed to, including volunteers.
• Late or missing reports, or statements that change after the board has seen them without a note saying why.
• Large unpaid bills or loans growing on the balance sheet.
• Fundraising or management costs rising much faster than program costs, with no plan behind it.

Reading statements checklist

• Find the cash and net asset lines on the balance sheet
• Check net assets with and without donor restrictions separately
• Compare income and expenses with the budget, and ask about big differences
• Look at how expenses split between programs, management and fundraising
• Work out months of cash, and compare it with the board's target
• Confirm the bank reconciliation was done and reviewed
• Write down your questions before the meeting

Use our treasurer's report template to put all of this on one page each month, and the first-year budget template to set the numbers you'll compare against.