Cash Matters: Yes, Even for Nonprofits

In nonprofit accounting, cash from operations and change in net assets are two important and distinct financial metrics.

Change in net assets represents the difference between total revenues and total expenses, including non-cash items such as depreciation, unrealized gains or losses on investments, and in-kind contributions. This metric is reported on the statement of activities.

Cash from operations refers to the actual cash inflows and outflows resulting from the nonprofit's core activities, such as donations, grants, program service fees, and operating expenses.. This metric provides insight into the organization's liquidity and ability to fund day-to-day operations. This metric is reported on the statement of cash flows.

These two metrics can differ significantly due to accrual-based accounting rules.

Example 1: A nonprofit might recognize a $100,000 grant as revenue when awarded (increasing net assets), but if the cash is received in installments, cash from operations will reflect only the received portion.

Example 2: Depreciation reduces net assets but does not impact cash flow since it is a non-cash expense.

Example 3: A capital expenditure for new equipment would reduce cash but not immediately affect net assets, as the expenditure is depreciated over time.

Numerical Example: A nonprofit has $200,000 in total revenue, including $50,000 in pledges not yet received. The nonprofit has $180,000 in total expenses, including $10,000 in depreciation.

The change in net assets would be total revenue – total costs = $200,000 - $180,000 = $20,000.

The change in net assets is not the same as changes in cash. The $50,000 in pledges not yet received must be subtracted from the change in net assets because cash has not been received. Depreciation must be added back to the change in net assets because depreciation does not involve the movement of cash.

To calculate cash:

Change in Net Assets:                $20,000

Less Pledges not yet received:   $50,000

Plus Depreciation:                      $10,000

Cash from Operations            ($20,000)

In this example, the pledges not yet received has a major impact on the cash flow. The negative cash flow is partially offset by depreciation. The nonprofit has a positive change in net assets, but a negative cash flow. Unfortunately, pledges sometimes do not materialize or arrive too late. The nonprofit should regularly assess cash flows in addition to change in net assets to monitor liquidity.

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