Exploring the Balance Sheet

Why is the Balance Sheet Important?

The balance sheet - also called the Statement of Financial Position - serves as a snapshot, providing the most comprehensive picture of an organization's financial situation. It reports an organization's assets (what is owned) and liabilities (what is owed). The net assets (also called equity, capital, retained earnings, or fund balance) represent the sum of all the annual surpluses or deficits that an organization has accumulated over its entire history. If it happened in your financial past, the balance sheet reflects it.

The balance sheet also indicates an organization's liquidity by communicating how much cash an organization has at present and what assets will soon be available in the form of cash. Assets are usually listed on a balance sheet from top to bottom by rank of liquidity (i.e. from most easily turned into cash to those assets most difficult to turn into cash.) Understanding liquidity is important to understand just how flexible and responsive an organization can be.

Six Key Measures

Using the balance sheet, a nonprofit can understand six key financial indicators:

• Days cash on hand estimates how many days of organizational expenses could be covered with current cash balances.
• The current ratio provides an indication of an organization's future cash flow.
• The working capital ratio measures how much of an organization's resources are unrestricted and available for current and future use.
• Recognizing temporarily restricted net assets is crucial so that organizational decision-makers are aware of obligations in the future.
• The change in unrestricted net assets indicates if an organization operated the most recent fiscal period at a financial gain or loss.
• The debt to equity ratio measures financial leverage.

Learn more about the Balance Sheet and these key ratios with our new resource, the Balance Sheet Cheat Sheet.

Continue reading the December 2009 issue of Nonprofits Count.