A nonprofit organization is an organization that uses surplus revenues to achieve its goals rather than distributing them as profits or dividends. Not-for-profit organizations differ from the nature of businesses by the following characteristics:
- Their revenues come from contributions.
- Their operating purpose doesn’t include profit, although there’s nothing to preclude the generation of a profit.
- Their ownership interests are unlike business enterprises.
While not-for-profit organizations are permitted to generate surplus revenues, they must be retained by the organization for its self-preservation, expansion or plans.
Not-for-profits have controlling members or boards. Many not-for-profits have paid staffs, including management.
Other groups employ unpaid volunteers and even executives who work with or without compensation (occasionally nominal).
Not-for-profit organizations are generally divided into four types: health care organizations, educational institutions, voluntary health and welfare organizations and other private (non-governmental) not-for-profit organizations.
Organizations defer to the Internal Revenue Service (IRS) designation section 501(c) when the IRS deems an organization eligible.
In addition, the website located at www.guidestar.org provides data about not-for-profit organizations, including organizational, financial, tax filing and other information. GuideStar offers a broad database that can be searched for information on organizations.
The financial statements of not-for-profit organizations are used to summarize the organization’s financial performance. These are used by management, the board of directors or trustees, potential donors, creditors and others who provide resources to not-for-profit organizations.
Having confidence in properly prepared financial statements is vital to not-for-profit organizations and is used by the board and management to evaluate performance, account for variances in budgets, undertake strategic planning and make day-to-day decisions.
In addition, properly prepared financial statements are presented to potential donors, contributors, creditors and government agencies.
Some of these outside parties require a certified public accountant to prepare, compile, review and even audit financial statements prior to donating, contributing, awarding or lending to not-for-profit organizations.
Having confidence in accurately prepared financial statements increases opportunities to receive funding for the organization. The level of assurance provided by CPA-reviewed or -audited financial statements increases the reliability of the financial statements. While these services are performed at a cost, the benefit of having the organization approved for funding is typically worth the investment.
Identifying who needs the information from an organization and what level of assurance they require will help in understanding the necessity and strength of relying on properly prepared financial statements.