Making Sense of the ‘Big 3’ Financial Reports for Your Organization in this #FinancialLiteracy Series

Financial literacy includes a multitude of terms to understand, so starting at the top and getting a handle on exactly what reports there are (and their purpose), will help with getting an overall ‘lay of the land’ in understanding the financials in your organization.

There are three main reports that a company produces, usually on a monthly basis, to provide a view of the financial status of the organization.  Each has its place and none can alone tell the whole story:

The Balance Sheet (or for Non-Profit Organizations, The Statement of Financial Position)

The Balance Sheet is a snapshot of:

1. What a company owns (Assets),
2. What it owes (Liabilities),
3. What is left for the investors (Owner’s Equity or Retained Earnings).  

As a non-profit organization cannot have owner’s or equity, per se, this is called Net Assets.

The Balance Sheet is a perpetual statement – meaning it begins upon formation of the organization and has no ‘end’ until the organization ends.  Dates shown at the top of this form are as of that point in time.

The formula to ensure the statement ‘balances’ is Assets = Liabilities + Owner’s Equity.

The Income Statement (or Statement of Activities)

This statement is periodic in nature – generally covering a 12 month period. 

It shows all revenues and expenses of the organization, and the ‘bottom line’ as it’s called, is the profit or loss for the period shown at the top of the report.  

The Net Income for the period is included on the Balance Sheet in the Retained Earning section.

The Statement of Cash Flows

As most financial reports are made on the accrual basis of accounting, this statement essentially walks one through all the activities of the organization that happen on the balance sheet and the income statement to tie out to the organization’s cash balances at the end of the period. 

The easiest way to think of it is:  “If my income statement shows a net income of $5,000, then why doesn’t this $5,000 show up in my checking account?”  The Statement of Cash Flows answers this question.

The Statement of Cash Flows has three main categories:

• Operating Activities (The Income Statement and some of the Balance Sheet),
• Investing Activities (money you invest in assets) and 
• Financing Activities (money you borrowed, or money invested in your organization by outside investors).

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