Statement of Cash Flows: How Nonprofits Track Inflow and Outflow of Money

A Statement of Cash Flows is a detailed financial view used by nonprofit organizations to track inflows and outflows of money related to their activities during a specific time period, typically the fiscal year. 

Without a clear Statement of Cash Flows, a nonprofit organization may not be maximizing its resources or identifying areas of opportunity or concern.

Below, we provide more detail about this document and why it plays such a key role in successful financial management.

How Do Organizations Use the Statement of Cash Flows?

Nonprofits use the Statement of Cash Flows in several key ways:

• Planning and Budgeting: Forecasts cash needs and plans for future expenses.
• Monitoring Liquidity: Ensures the organization has enough cash on hand to cover essential costs, such as payroll and program expenses.
• Managing Investments and Debt: Aids in decisions about purchasing or selling assets and managing debt repayment.
• Assessing Financial Health: Provides insights into the organization’s overall financial stability and sustainability.
• Enhancing Transparency: Builds trust with donors and stakeholders by showing how financial resources are managed.

By analyzing cash flows from operating, investing, and financing activities, organizations can identify trends, manage expenses, and make strategic decisions about future initiatives.

The Statement of Cash Flows also enhances transparency and accountability, helping to ensure the organization remains on solid financial footing.

What’s Included?

The Statement of Cash Flows is divided into three sections: Operating Activities, Investing Activities, and Financing Activities.

• The Operating Activities section shows cash transactions related to the nonprofit’s core mission, such as donations, grants, and expenses for programs and services.
• The Investing Activities section details cash used or received from the purchase or sale of long-term assets, like property or equipment.
• The Financing Activities section reflects cash flows from loans, endowments, and other financing methods, including the repayment of debt.

Let’s examine each of these three sections in more detail.

Operating Activities

The Operating Activities section reflects the cash generated or used by the nonprofit’s core activities, such as receiving donations, grants, and other revenue directly related to its mission, as well as paying for salaries, supplies, and other operating expenses. It shows the net cash provided or used by the organization’s day-to-day operations.

Operating Activities Inflow Examples:

• Donations and contributions
• Grants received
• Membership fees
• Program service revenue
• Receipts from fundraising events

Operating Activities Outflow Examples:

• Payments for salaries and wages
• Rent and utilities
• Program expenses
• Office supplies and materials
• Payments for fundraising costs

Investing Activities

The Investing Activities section details cash flows related to the acquisition or disposal of long-term assets such as property, equipment, or investments. For a nonprofit, this might include buying or selling real estate, making or liquidating investments, or purchasing equipment needed for the organization’s programs.

Investing Activities Inflow Examples:

• Sale of investments (e.g., stocks or bonds)
• Dividends and interest received from investments
• Proceeds from the sale of property or equipment

Investing Activities Outflow Examples:

• Acquisition of investments
• Capital improvements or renovations
• Purchase of property or equipment

Financing Activities

The Financing Activities section reports cash flows related to borrowing, repaying loans, and other financing transactions. In a nonprofit context, this might include cash received from endowments, proceeds from issuing debt, or repayments of loans. It reflects how the organization funds its operations beyond what is generated through its mission-related activities.

Financing Activities Inflow Examples:

• Proceeds from loans or lines of credit
• Contributions restricted for long-term purposes (e.g., endowments)
• Issuance of debt or bonds

Financing Activities Outflow Examples:

• Repayment of loans or debt
• Payments on long-term leases
• Refunds to donors (if applicable)

Common Mistakes when creating a Statement of Cash Flows

When preparing or using a Statement of Cash Flows, several common mistakes can lead to inaccurate financial reporting or misinterpretation of the organization’s cash position.

• One frequent error is misclassifying cash flows among the three sections (Operating, Investing, and Financing Activities). For example, including a loan repayment under Operating Activities instead of Financing Activities can distort the true cash flow from the nonprofit’s core operations.
• Another common mistake is overlooking non-cash transactions. Non-cash items like depreciation, in-kind donations, or the conversion of debt to equity should not appear on the Statement of Cash Flows. Including these can lead to an inaccurate reflection of actual cash movement.
• Additionally, some organizations fail to reconcile the statement with the cash balances on the balance sheet. The ending cash balance on the Statement of Cash Flows should match the cash balance on the organization’s balance sheet. Discrepancies here can indicate errors in the statement’s preparation.

Avoiding these mistakes ensures that the Statement of Cash Flows accurately reflects the organization’s cash position and provides useful insights for decision-making.

Statement of Cash Flows are One of Four Main Nonprofit Financial Documents

A clear Statement of Cash Flows is a great tool for nonprofit leaders, and is one of the four core financial documents that all nonprofits should be utilizing together to ensure complete management of the organization’s finances and planning.

Take a look below to learn more about the other three financial statements:

Financial Statement	Purpose
Statement of Financial Position	A snapshot of a nonprofit’s assets, liabilities, and net assets at a given point in time, showing its overall financial health.
Statement of Activities	A report detailing a nonprofit’s revenues and expenses over a period, reflecting the changes in its net assets.
Statement of Cash Flows	A financial report that tracks the cash inflows and outflows of an organization, illustrating how cash is generated and used during a period.
Statement of Functional Expenses	A financial statement that categorizes a nonprofit’s expenses by both their function and natural classification, providing insight into how resources are allocated toward various activities.

To learn even more about nonprofit financial reporting basics, as well as other fund accounting tips, check out our Accounting Fundamentals Revisited webinar series.

FAQs

How is the Statement of Cash Flows different in the nonprofit world versus the for-profit world?

The elements and formatting of the Statement of Cash Flows are generally the same for both nonprofits and for-profits. The main difference lies in what makes up the cash flows: nonprofits focus on donations, grants, and fundraising, while for-profits emphasize sales and profitability.

How does a nonprofit prepare the Statement of Cash Flows?

Nonprofits can use two methods:

• Direct Method: Lists cash receipts and payments directly, providing a clear view of cash inflows and outflows from operating activities.
• Indirect Method: Starts with net income and adjusts for changes in non-cash items and changes in working capital to arrive at cash flows from operating activities.

Are there specific reporting requirements for nonprofits regarding the Statement of Cash Flows?

Yes, nonprofits must follow generally accepted accounting principles (GAAP) and, in many cases, specific standards set by organizations like the Financial Accounting Standards Board (FASB). They should also comply with IRS requirements for reporting on Form 990.

How often should a nonprofit prepare and review the Statement of Cash Flows?

The Statement of Cash Flows is typically prepared on an annual basis, alongside other financial statements. However, regular interim reviews (quarterly or monthly) can help with more timely financial management and planning.

Are there any industry-specific considerations for nonprofits when preparing the Statement of Cash Flows?

Yes, different types of nonprofits (e.g., charities, foundations, educational institutions) may have unique cash flow patterns and reporting requirements based on their activities and funding sources. Tailoring the cash flow statement to reflect these specifics can provide more relevant insights.