Non-profit business basics: Profit and loss statements

Cherie Trewavas, a BNZer who specialises in banking non-profit organisations, shares her insights on building the financial capabilities of NPOs.

When it comes to keeping track of income, the government has strict rules surrounding financial accountability for registered charities and non-profits, so it’s worth taking some time to understand how these rules might affect your non-profit. There’s plenty of non-profit specific information on the IRD website and they have some very useful checklists and guides that you should familiarise yourself with. However, it can all be a little overwhelming, so let us get you started in the right direction with a few pointers on the kinds of things you should be doing to ensure your organisation is getting the most from its hard-earned income.

Keeping track of everything

First up, the basics. Accounting is more than just counting the money that comes in and goes out — although that certainly forms a large part of it. Think of it instead as a way of identifying, measuring and communicating financial information to all the stakeholders in your organisation so that they can then make the best decisions toward achieving the aspirations of your entire non-profit group.

The first thing you’ll need to become familiar with is a profit and loss statement. This is one of three key financial statements prepared by non-profit groups to keep track of money (the other two being balance sheets and cash flow). Its purpose is to provide an overview of income and expenses.

What is a profit and loss statement?

Sometimes called a statement of financial performance or an income statement, a profit and loss statement provides the basis for measuring the financial performance of the organisation over the course of an accounting period. Essentially, all this document shows is the money received and the money spent. At the bottom, you’ll have either a surplus (you made more money than you spent) or a deficit (you spent more than was earned). In that respect, it’s quite simple.

Revenue and other income

Within these two broader categories of income and expense are some slightly more abstract terms that complicate things a little but nonetheless have a bearing on the final surplus/deficit figure.

For instance, money received can typically be broken down into ‘revenue’ and ‘other income’. Revenue would be money from fundraising, grants and anything else directly related to the main activity of the group. Whereas ‘other income’ is money that didn’t come from these main activities — a typical example of this would be interest made on fundraising cash sitting in a bank account.

Expenses and other outgoings

Once you have all your income listed, it’s time to deduct the outgoings. These are costs to your non-profit organisation and range from regular things such as accountancy and bank fees through to rent and power bills. Other, one-off expenses include things like repair bills and travel costs. For tax purposes, the depreciating value of equipment owned by the group (desks, computers etc) can also be included in the expense portion of the profit and loss statement. To find out more about depreciation, the IRD website  is a good place to start.

Income tax paid should also be listed as an expense.

What does it all mean?

Keeping track of all the money coming in and going out is important. Not only does it provide an accurate overview of the financial situation, but it allows you a chance to have a good look in one simple document at all the various income sources your organisation has. Likewise, it’s a good chance to examine the costs involved.

Of course, while on the whole a profit and loss statement is simple in theory, there’ll always be specific things that you’re uncertain about, that’s when you should talk to an expert such as your accountant, IRD or your bank.

In the next post, I’ll take a look at another of the key primary financial statements mentioned earlier — balance sheets.