Tips and tricks for reading and understanding a nonprofit statement of cash flows

Many people in the business world have read a cash flow statement. These individuals tend to understand the basic difference between operating, financing and investing cash flows. However, nonprofit entities have items in each of these three categories of the cash flow statement that make reading the statement more difficult. With the proper definitions handy, and a few tips, reading the typical nonprofit entity’s cash flow statement can be much easier.

Information about an organization’s cash flows, especially from operating activities, can provide data helpful in evaluating an entity’s long-term solvency. All entities, including nonprofit organizations, must pay their debts and obligations with cash, not income. There are many items included in change in net assets (nonprofit’s net income equivalent) that do not generate or expend cash. Understanding the typical nonprofit cash flow statement depends on understanding these noncash components. There are three categories within a cash flow statement:

1. Cash flows generated from operating activities
2. Cash flows generated from investing activities
3. Cash flows generation from financing activities

Cash flows from operating activities represent cash that is coming in and going out of the entity as a result of the entity carrying out its mission, or doing what it was created to do in the form of revenue and expenses.

Cash flows from investing activities are created by acquisition and disposition of assets, such as property and equipment, or purchasing and selling investments.

Cash flows from financing activities are generated from external financing. For example, cash is generated by borrowing funds and debt repayments, and pledge collections restricted for long-term use.

There are two primary types of presentations of the statement of cash flows. The direct method essentially lists all of the ins and outs of the organization’s cash. The indirect method starts with the change in net assets and then reflects adjustments for all non-cash transactions, then adjusts further for changes in individual accrual items (receivables and payables). For example, an increase in the accounts receivable account is subtracted from the change in net assets because revenue was recorded that has yet to be collected; it is an increase in revenue that has yet to result in increased cash flows. Later, when the receivable is collected, it will be added back to the change in net assets.

In the nonprofit arena, there are unique line items in a statement of cash flows that are not seen in other types of entities’ cash flows.
Noncash contributions are one such item. They are included in the change in net assets for the entity but not in cash flows. Unless sold, they do not provide cash to the organization. These items include donated collections, fixed assets, free space that is offered for use to the entity, or any number of other items. These are often referred to as in-kind donations. Generally speaking, they include anything that is not a cash gift.

To make it even more interesting, another item you may see on the statement of cash flows relates to pledges receivable. Nonprofit organizations can record revenue once a donor has promised to contribute something at a later date, whether it is cash or something else. A pledge is an unconditional promise to give. Pledges receivable represent all of the promises to give that are outstanding to an organization. Revenue is recorded when the donor has made the promise and it is determined that there are no conditions that would prevent the donor from honoring the pledge; i.e. there is nothing the organization or others must do in order to receive the funds. Despite revenue being recorded, it is still a promise and is not a cash transaction until the pledge is paid.

Contributions made to the organization for long-term purposes, such as to an endowment are considered financing activities rather than operating activities because they cannot be used for immediate operating purposes. These will often be identified as restricted contributions, meaning the donor has imposed a restriction either on the time in which they can be used or the purpose for which they can be used.

There are more complex planned giving vehicles as well, and these items may present themselves on the statement of cash flows, but the important thing to remember regarding these items is that the revenue is often recorded at a different time than the cash is received and, as a result, it will have unique treatment on the statement of cash flows. The presentation for these items will vary, depending on the type of presentation (direct or indirect). Ultimately, the statement of cash flows shows the cash coming in and going out. For a nonprofit entity, there are various items included in revenue, which will never, or haven’t yet, involved a cash transaction.

Armed with a bit of nonprofit lingo, reading the typical statement of cash flows from your local nonprofit organization is much easier. The cash flow statement can provide valuable information about an organization that cannot be derived from the other financial statements if one knows how to read it.

Shawn Middleton is an assurance manager at PBMares LLP, providing assurance services to businesses, nonprofit organizations and government entities in Virginia. She is also a member of the Virginia Society of Certified Public Accountants can be reached by email at [email protected] or by phone at 757-229-7180