The statement of cash flows tells readers how the balance of cash on hand changed from the beginning to the end of a time period, typically a month, quarter, or fiscal year. Your organization’s cash flows are broken into 3 categories:
- Cash Flows from Operating Activities: This reflects your organization’s regular operating activities, program services, and raising unrestricted and temporarily restricted funding. Operating cash flows can be presented in 2 ways – the direct method or indirect method. The direct method lists cash received from customers and donors, paid to employees and supplies, and interest received (e.g. bank savings accounts) and paid (e.g. loans you’re paying). It’s similar to a statement of activities shown on the cash basis instead of the accrual basis. The indirect method starts with your change in net assets and reconciles it to net cash flows by adding back depreciation and amortization (non-cash expenses), and adding or subtracting changes in accounts receivable, prepaid expenses, accounts payable, and unrealized gains/losses in long-term investments. When the new FASB guidance for nonprofit financial statements takes effect, you’ll be required to use the direct method for operating activities.
- Cash Flows from Investing Activities: This section tells your cash flows related to purchasing and selling long-lived assets and investments, such as land, vehicles, equipment, stocks and bonds.
- Cash Flows from Financing Activities: This includes receipts and repayments for loans and permanently restricted contributions shown in the statement of activities.
- To better understand how various transactions are reflected on the statement of cash flows, you can review pages 3 and following in this case study from the Accounting Coach.
- Under the new FASB guidance for nonprofits, some transactions will be reflected in different sections of the statement of cash flows than under current practice.
Subtotal the cash provided by (or used by) each category and the overall total should match the change in your cash balance from the start to the end of the period. Here’s an example statement of cash flows:
The statement of cash flows is useful for knowing how well you collect contributions and earned income. If donors or foundations make pledges or you invoice funders for work done on contracts, then those organizations take a long time to pay what is expected of them, that could put you in a pinch. You may have to delay payments to vendors and, in severe cases, could have trouble making payroll. On the flip side, if you consistently bring in more cash than you use, you’ll be able to establish and maintain reserves, start or expand programs, pay down debt if you have it, and save for larger capital purchases.